You know how Charlie Munger talks about having a “too hard” pile into which he puts the moral and legal dilemmas that he cannot properly solve because the values that you have to prioritize over the other is too difficult to judge? “Too hard” is where I keep finding myself returning when I try to think about how the law should be *ideally* when it comes to gifts and will changes that someone makes on the brink of death.
This topic caught my attention when I was reading a June piece in The New York Times titled “When A Will Divides An Estate, And Also Divides A Family”. The narrative is told from the point of view of Kate (last name not provided in the article), who found herself in this situation: her dad died prematurely, and her grandmother intended to equally divide her estate among all her children at death (there were five children, counting Kate’s deceased father). In 2007, Kate’s grandma created a will equally dividing the estate among all five kids so that the share ascribed to Kate’s father would be divided between Kate and her siblings.
In 2012, she signed another will reaffirming what she created in 2007. Then, Kate’s grandma did something that makes life interesting, and for some people, terrible. A week before she died, she changed her will, cutting out the “share” proscribed to Kate’s father that would have gone to her and her siblings. Although she was suffering from Alzheimer’s, she passed a cognitive test shortly before altering her will (the article drops innuendo but does not explicitly define the suasion of the grandmother’s daughters in getting the will changed).
If I were handed the crown and made King of Estates & Trusts for the day, I have no idea what type of rule I’d want to see made the law of the land.
On the one hand, the right to freely dispose of your assets as you see fit is one of the most cherished and culturally ingrained traditions in the American system, which largely separates us from our European peers that have strict rules on disinheriting bloodlines. Not only does it have a strong basis in traditional, but it appeals to freedom and moral rightness as well: You earned the money, or at the very least came into possession of it, and possession/production of assets should give you a right to direct the proceeds as you see fit. If you have that right, why shouldn’t you be allowed to change your mind? And plus, wills are an uncomfortable topic—people don’t usually wake up in October and say, “Do I want to watch the World Series today or plan out the sequence of events following my death?”—and can be delayed until the last possible moment, when the prospect of death becomes more than mere contemplation.
On the other hand, you are also at your weakest emotionally and physically right before your death, oftentimes. This creates fertile soil for unclear thinking and moral persuasion from those who stand to benefit from your estate in a way that cannot be fully captured and proven by a law. Should you lucid thoughts and intentions from age 35 to 85 suddenly be cast aside by an entirely different thought you have at age 86, when you’re still meeting the threshold of lucidity but are not thinking as clearly as you once did?
My traditional impulse towards a libertarian answer to everything—you have the money, you always have the right to be the final director of it—is tempered by the practical reality that your ability to direct your assets in a way that truly reflects your lifetime intent could be lost in your final moments of life if your mind is in a deteriorated state that could still meet legal thresholds for a capacity to make a binding contract/document.
I think a lot of people could use the reminder that the best way to ensure that your money goes where you intend is to get in the habit of making gifts while you are living. By the time you are in your 60s and 70s, you are going to know where you fall on the “Less Than Enough”, “Enough”, “More Than Enough” spectrum. If you’re well into the “More Than Enough” category, then making gifts consistent with legal maximums each year could be a nice reminder that the best way to realize your intent for something is to do it yourself. Also, some states let you create a trust in which you could use the income generated to pay for, say, your health care needs before fully transitioning to a beneficiary who is not you at the time of death. Still, other states permit what amounts to irrevocable wills, in which each spouse creates a will that comes with the contractual obligation that it won’t be changed after one of them dies. That protection isn’t perfect because the surviving spouse can do a whole lot to deplete an estate after the other one dies. My guess is that the lack of truly satisfactory, ironclad solutions that don’t come with significant drawbacks, plus the unpleasant nature of the topic, is why it doesn’t get full attention in finance circles—and reinforces my impulse that the best way to take care of business is to do it yourself while you are alive because no one knows how to realize your intent than you do while you’re of sound mind.
Originally posted 2014-10-08 08:00:35.
Nice article, the selfish things I see people do in situations like this is sickening…with regard to gifts there is no legal maximum. There is an annual exclusion and anything above that goes as a partial use of your lifetime exclusion which is now above $5 million and therefore irrelevant for most folks.