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.

Even though his spending is modest, Beckman likes getting as much income as possible from his investments. A close look at his bond portfolio shows that he has been taking on more risk to get higher yields.

About 15% of his municipal bond portfolio is rated BBB, which is just one step above speculative-grade junk bonds, said Mark McCray, portfolio manager of the PIMCO Funds California Intermediate Municipal Bond Fund. Beckman also has more than $100,000 invested in “high-yield” bond funds, which include low-rated bonds.

Beckman said he was surprised by how much of his portfolio was in low-rated bonds. Some of the bonds deteriorated in quality after he bought them. He also invested in high-yield funds to boost his income as interest rates declined over the last 20 years. He plans to buy only top-rated, insured bonds from now on.

Since Beckman will probably leave a sizable estate, he should consider ways to reduce the costs that follow death, Gault said. A living trust would allow Beckman’s assets to escape probate, the court process that is otherwise used to settle an estate. Probate in California tends to be lengthy and expensive, typically consuming 4% of the total estate in fees and costs. If Beckman were to die tomorrow without a living trust, probate could cost his estate $72,000. An estate plan that includes a living trust, by contrast, typically costs $2,500 to $3,500.

A living trust could also allow Beckman to name someone who could step in and manage his affairs if he should become incapacitated. If Beckman does not formally designate someone, his relatives would have to go to court to have someone appointed--a potentially difficult and expensive process.

Within the living trust, a lawyer could include wording that would give money directly to Beckman’s relatives after his death or that would establish trusts to benefit Beckman’s niece, who is 40, his nephews, 33 and 36, and their children.

But Beckman said he would prefer to give his heirs just enough to pay for their educations.

“I don’t believe much in inheritances,” he said.

Beckman’s parents paid his way through the University of Illinois; from then on, he was on his own. He built his fortune by buying and managing apartment buildings after a brief career in banking. He sold the last of his rental properties in 1979, invested the proceeds, mostly in municipal bonds, and retired.

Beckman could structure a trust that would pay education expenses for the children of his niece and nephews, with the remainder going to charity, Mitchell said. But he should think carefully about the kind of expenses he wants to fund and how the money would be distributed. If the trust is not set up carefully, older children could deplete the money before younger children reach college age. But the more restrictions he sets, the more of his legacy is likely to be spent paying trustees, accountants and lawyers to set up and manage the trust. Beckman also must consider how the money should be spent if he dies after the children have completed their college educations.

Beckman was disappointed that his idea for a perpetual trust was not feasible, because he liked the idea that his largess would have helped people yet unborn.

“I was hoping for something like the Rockefeller trust that would go on for years,” he said.

Still, he said he was pleased by the variety of other ideas the advisors offered. Though he might not increase his spending, he said, he would have an estate plan drafted and would consider adding low-cost stock mutual funds to his mix of investments.

“This has been very helpful,” he said.

*

Liz Pulliam Weston is a Times personal finance columnist. She can be reached at liz.pulliam@latimes.com.

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This Week’s Make-Over

* Investor: William F. Beckman, 69

*n Occupation: Retired banker and landlord

* Income: $93,000

Goals

To provide for the education of the descendants of his niece and nephews, set up an estate plan and better diversify his portfolio.

Assets

Home worth more than $500,000, with no mortgage.

Investment Portfolio

* $954,000 (77% of his investment assets) in individual California municipal bonds

* $157,000 (13%) in seven bond mutual funds, including Dreyfus Premier Limited Term High Income, Kemper High Yield, Federated High Income Bond, AIM High Yield, Waddell & Reed Continental Income, Vanguard High Yield and MuniYield California Insured Fund.

* $88,500 (7%) in individual corporate bonds

* $27,250, (2%) in five stock mutual funds

* $13,000 (1%) in cash

Recommendations

* Abandon the idea of setting up a perpetual trust; California rules require that the money be paid out to the children or a charity in 90 years or less.

* Establish an estate plan, including a living trust to avoid probate.

* As individually held municipal bonds mature, invest the proceeds in low-cost stock mutual funds until stock holdings equal 30% of total portfolio.

* Monitor the quality of the municipal bonds; 15% are rated BBB, which is only one step above junk bond status. The added income from higher yields may not be worth the added risk.

Meet the Advisors

Margaret Gault is a certified financial planner in San Francisco with 18 years of planning experience. She specializes in portfolio management, retirement planning, retirement distribution rules and estate planning.

Burton A. Mitchell is a tax and estate planning attorney with Jeffer, Mangels, Butler & Marmaro in Century City. He is a certified specialist in taxation.

Mark McCray is a senior vice president and portfolio manager of the PIMCO Funds California Intermediate Municipal Bond Fund.