500-year plan for children, grandchildren and the world
Reprinted courtesy of MarketWatch.com.
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If you’re fortunate enough to have surplus funds left when you complete your life, there is an enormous opportunity to do some things with this leftover money. It’s called estate planning.
I’ve given this topic a lot of thought over the past 25 years, and I want to share my own estate plan. I don’t expect anyone else to copy what I’ve done, but I hope I can stimulate some people to “think outside the box” about what is possible.
As a first priority I’ve made the necessary arrangements to assure that my wife will have adequate resources to live well for the rest of her life. She and I have committed to the “500-year plan” that I’m about to outline.
This plan is designed to take care of my children and grandchildren — and ultimately to provide continuing support to worthy charitable causes.
For starters, I don’t want my estate to simply write big checks to my children and grandchildren. As much as I love and treasure them, I don’t think that’s the best use of my money. And I don’t want my success in life to relieve them of the responsibility to provide for their own needs.
Fortunately, each of my children has made a good start in life and will, as far as I can tell, be able to be self-sufficient financially.
I want each of my children and grandchildren to have something like a pension fund that will provide them with a growing annual income. I’m quite risk-averse, and I want to protect the assets I leave from as many potential threats as possible, including divorce, lawsuits, poor investment decisions or short-term high living that might exhaust my bequests.
To accomplish that, my estate will create a charitable remainder trust for each of my four children, keeping the assets away, as much as possible, from financial predators.
The money in each trust will be invested with a 60/40 split of equities and fixed-income funds. Once a year, the trustee will tally up the assets in each trust and pay 5% to the beneficiary. If the size of the trust grows over time, as I believe it will, so will the annual 5% payments.
Assuming taxes and expenses can be kept to a minimum, that growth is likely to be greater than inflation, providing actual growth in real value. I intend that this growing will give my son and my daughters (and their families) a range of options they wouldn’t have otherwise.
Inevitably, at times that my wife and I hope will be far in the future, my children will pass on. Each time that happens, the assets remaining in his or her trust will go to a foundation, which in turn, will once a year pay 5% of the trust’s assets to charities that my wife and I have identified.
(The foundation will have the authority to designate an alternate or successor charity from time to time if that becomes necessary.)
This charitable part of my 500-year plan is a permanent arrangement, and there is no ending time for it. Hence, my bequests could theoretically last much longer than half a millennium.
It’s interesting to speculate on what such a bequest might be worth in the distant future.
Doing so, of course, requires making some assumptions. I have no idea how much my estate will leave to each of these trusts, but let’s assume, for example, that at my death I am able to leave $1 million for each of my children.
Assume further that after taxes, expenses, the annual payment, and inflation, the investments in each trust will grow by 2.5% a year. I believe that’s in the ballpark of what’s possible.
Assuming $1 million goes to each trust, in the first year after my death, each of my surviving children would receive a payment of $50,000. (Just how much that will be worth in today’s money is of course impossible to know.)
The trusts for all four children will be created at the same time, soon after my death, and every year each of the four will receive equal payments.
I expect my two older children could outlive me by 25 to 35 years. By 25 years after my death, they would each receive more than $90,000 a year. Two of my daughters will be younger when the payments start, and I expect they could survive me by about 50 years. Based on my assumption of 2.5% annual growth, in 40 years after my death, each of them would receive nearly $135,000; that payment would reach more than $170,000 by the 50th year after my death.
By 60 years after my death, my initial bequests of $4 million into four charitable remainder trusts would be worth about $17.6 million. By then it probably would be in the hands of the Seattle Foundation, which would make an annual payment to charities of nearly $900,000 (the combined payout from the assets that had been in four trusts).
If you project this out to 100 years after my death, the charitable payment would be $2.6 million, an annual “dividend” of 65% based on the $4 million left in my will.
By 122 years after my death, the annual payout would grow to $4 million, equal in real terms to the entire amount that my estate put into the four trusts in the first place.
Predictably, the numbers keep growing to levels that are hard to comprehend. By 500 years, the principal in the trusts would be worth $500 billion, and my initial $4 million of bequests would pay out $25 billion a year — or 6,250 times the amount of wealth I left in these trusts at my death.
Obviously this 500-year plan requires great patience, a commodity that should not pose any problem to me while I’m in the grave. Nor does it require extraordinary patience from my children, who will begin getting benefits soon after I’m gone — benefits that presumably will last as long as they do.
For each of my four grandchildren, I have made different arrangements, though some of the same themes show up.
When I first implemented this part of my plan in 1994, I had very lofty goals. I wanted to make a one-time investment of $10,000 that would never be taxed and would give my eldest grandson, Aaron, a comfortable retirement.
I also want this to eventually generate at least $20 million for charity .
My estate plan is admittedly ambitious, and unfortunately I will never know the outcome.
However, devising this plan has given me an enormous amount of satisfaction, knowing that the financial results of my lifetime of work will continue to benefit my children, my grandchildren, and the world I love for many, many years after I am gone.
Richard Buck contributed to this article.