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California Learning How to Succeed in Personal Finances

Trying to Solve the Mystery of an Estate's Life After Death


William F. Beckman, 69, would like to leave a legacy. He's just not sure exactly how to go about it.

A retired banker and landlord, Beckman has a comfortable Tarzana home, a net worth of roughly $1.8 million and an annual income of $93,000, mostly from his investments in municipal and corporate bonds. He spends less than $35,000 a year, however, and doesn't see himself splurging much in the future.

"I like to travel, but it's not much fun to do it alone," said Beckman, who has never married. "I live a pretty modest life."

Beckman's dream is to provide some kind of trust that would pay education expenses for the offspring of his adult niece and nephews--and perhaps their descendants into perpetuity. Beckman envisioned a trust like those established by the great industrialists of the 19th century, whose money continues to enrich their descendants even today.

But Beckman would be better off enjoying his money now than trying to make it stretch much beyond the next generation, said San Francisco financial planner Margaret Gault.

"There are so many hurdles in such an idea: finding a proper and competent trustee, dealing with the expense of maintaining a trust," Gault said.

There are also legal hurdles. While a few states do allow perpetual trusts, California is not one of them. Trusts in this state must pay out their balances in a finite amount of time, typically 90 years. Beckman's legacy is likely to be too small for an out-of-state trust to make much sense, given the expenses and hassles involved, said Burton Mitchell, an estate planning attorney with Jeffer, Mangels, Butler & Marmaro in Century City. Trustee fees, yearly tax returns and other administrative expenses would eat up much of a perpetual trust.

"I'd say it's uneconomical even for estates worth $5 million or $10 million," Mitchell said. "Perpetual trusts should be for great estates, and even then I can't see why 90 years wouldn't be enough; [after that], nobody who's going to be alive is going to know you."

That doesn't mean Beckman can't benefit future generations, however.

To move some money out of his estate, Beckman can make some gifts now. Currently, estates worth more than $675,000 are assessed federal estate taxes at rates ranging from 37% to 55%. (The amount that escapes estate tax is scheduled to rise until it reaches $1 million in 2006. The House last week failed in an attempt to override President Clinton's veto of a bill to eliminate the estate tax.)

Beckman can give up to $10,000 each to as many people as he wishes each year, without having to file gift tax returns or owe future tax. The gifts would be tax-free to the recipients.

If Beckman were to pay his heirs' tuition bills directly, there would be no limit on the amount he could give. Federal gift tax rules exempt tuition payments, as long as the money is paid directly to the school and does not include amounts for other educational expenses, such as room and board.

Beckman could also open accounts in a college savings plan such as California's Golden State ScholarShare Trust. The money would grow tax-deferred and be taxed at his heirs' rate when withdrawn for education expenses. Federal gift tax rules allow college savings plan contributors to aggregate their $10,000-a-year gifts, so he could contribute as much as $50,000 per heir to a college savings plan, as long as he makes no other gifts for the next four years.

He also can make gifts to charities, which could help reduce the size of his estate while giving him tax deductions. Beckman, however, said he was not interested in charitable giving but instead wanted to benefit his heirs.

Some older people refrain from giving money away during their lifetime because of a fear they will outlive their resources. Given his frugal ways and the size of his portfolio, however, Beckman probably has more money than he will ever need, Gault said.

She would like to see him gradually increase his stock holdings to 30% from his currently minuscule 2%, to increase his diversification and make sure that his net worth keeps pace with inflation. He could accomplish that by investing the proceeds of municipal bonds that mature in his stock funds, which include Vanguard 500 Index, Fidelity Growth & Income and Vanguard Small Cap Index.

But even if he doesn't increase his stock holdings, Beckman could comfortably increase his spending, Gault said--and she would like to see him do so.

"After all these years of disciplined saving, you deserve a little self-indulgence and can safely afford it," Gault said.

Beckman said he recently spent $127,000 remodeling his home and has no other plans for big expenses. The remodeling tab was high, he said, because the home hadn't been touched in the 21 years he has lived there, and because he needed a decorator's help in deciding how to update.

"I have no taste," he joked.

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