Estate planning Part 2: The story of my father’s wrong-headed and destructive estate planning

 

Barbara Blouin, The Inheritance Project

Introduction

Joseph Schwartz, my father, was born in 1903 in Springfield, Massachusetts to low-income first-generation immigrant parents. He was the first person in his family to go to college. After his younger brother caught TB and was sent to a sanatorium, my father left college year in order to pay for the medical bills. I think leaving college was a loss he never really got over.

I don’t know Joe’s early history, but after surviving the Depression, he was married “above his station” to Hilda May, the only child in the second-generation of a prosperous immigrant family. Hilda’s father had founded the first supermarket in Springfield, and Father was proud of “marrying up.”

The Schwartz family—my parents, my brother, and myself—lived in a pretentious, ugly duplex mansion that my grandfather and his brother had built in the ‘twenties. We had servants: a chauffeur the two families shared, a housekeeper-cook who wore a uniform, and a part-time laundress. I don’t remember my mother doing any housework or cooking. She had weekly manicures and hairdos, went regularly informal bridge games, and sat on boards of local organizations.

Even when I was young I was aware of the gradual increase in our family’s wealth. Oldsmobiles and Buicks were replaced by Lincoln Continentals and later by Mercedes. Father took Mother to New York City to buy a mink coat, and they brought me along. I remember being ushered into a circular room surrounded by mirrors, where saleswomen brought out several minks for Mother to try on. It was very important to Father for our family to display its wealth, even though he criticized other families for being nouveau riche and “ostentatious.” About two years after the first mink coat a second one appeared, also purchased in New York.

When I was twelve the family took a trip to Washington DC. Father knew someone who worked for the Treasury Department. We were admitted to a small windowless room—a vault. A metal box was brought in and put on a table. When opened, it revealed a very large number of one-hundred-dollar bills. I was told that we were looking at a million dollars. I was supposed to be impressed. To be honest, I don’t remember what I thought at the time, but it was very clear to me even at my young age that Father worshiped money.

How Father carried out his estate planning

Around this time I remember the first of several annual announcements about the “gifts” which my parents told me they were giving to me. The tone of these announcements was always solemn and pompous. Father’s script went like this: “Barbie, your mother and I have given you a gift of ten thousand dollars.” I knew I was expected to say thank you and I obeyed, but I always felt confused and disappointed. My weekly allowance at that time was twenty-five cents, so what was this “gift” of $10,000 that I couldn’t even see or touch? It didn’t add up, and I felt uneasy about the annual announcements. What I didn’t know was that the IRS allowed people to make annual “gifts” per person of up to $10,000 without paying tax on them. Father took full advantage of this legal loophole. What was actually going on was that Father was putting money into an investment account for me that would eventually become the basis for my trust, but I didn’t understand that, and he never explained, not even when I was older. Neither of my parents prepared either my brother or me for the inheritances we would receive. I got no financial education whatsoever, although my parents also invested in some things that I appreciated, like a private school and summer camp.

When I was seventeen my family suddenly moved across the state line from Springfield to a small town in Connecticut. The reason, as I later learned, was that Massachusetts had passed a capital gains tax, which Father would not pay under any circumstances. It took this much to dislodge him from where he had lived his whole life up to that point.

Father had got rich by investing skilfully. His small business hadn’t really produced much wealth, but he was a brilliant investor.

As I see it and as I lived it, Father did just about everything wrong in his estate-planning decisions. That is the story I want to tell because it reveals the painful consequences of hanging onto wealth for its own sake, as well as for the sake of controlling others, while ignoring what would be in the best interests of his family.

After several years of annual announcements about the invisible $10,000 gifts, nothing more was said for a number of years. When I was twenty-eight, married and living in Berkeley, California .One day Father phoned me and said, “Barbie, your trust officer Jack Johnston [a pseudonym] is sending you some papers. Please sign them and send them back to him.” This was the first I knew that I had a trust officer, and I don’t think I even knew what the term meant. When the envelope arrived I didn’t even read the contents. I simply signed and mailed back the envelope. I confess my willful ignorance of all things financial, much to my own harm.

What I had signed, as it turned out, was an irrevocable trust. I was named as the “donor,” which meant that I had created my own trust. This doesn’t make sense, but it was what happened: according to this fiction, I was giving a large amount of money to myself, and under the terms of doing so I completely disempowered myself. I suppose Father had his reasons for this trickery, though I never learned what it was.

The accumulation of Father’s annual gifts had by then amounted to—. I confess I didn’t know how much, but it was enough to allow me and my small family to live comfortably without my husband or me having to work. It may have been around $1 million, which in 1969 was worth much more than it would be today.

What I also didn’t know, because I was naive enough not to have read the document (even if I had read it, I wouldn’t have understood what it meant) I would have understood that my irrevocable trust would not end even with my death. I would always be under the control of my father’s dead hand.

My trust didn’t even allow me the “power of appointment.” If you are unfamiliar with this term, it means that I was not allowed to give the money that remained in my estate after my death to persons or organizations of my choosing. My options were radically limited: I could give bequests to my immediate family, to Wellesley College (my mother’s and my alma mater), and to Yale University (my father’s and my alma mater). There were no other options.

I started to receive quarterly disbursements, which were plenty for my modest needs and desires. I was never acquisitive, and I didn’t want my wealth to be visible to my friends. I lived far below my means. But I had no access to more than the quarterly disbursements. It was a trust under which I had virtually no control, not in life or even in death.

Not long after the trust was created, my husband suddenly left me. I felt abandoned; I was miserable. I believed that my wealth (off of which my husband was by then living) was the reason why he had left me. I know that this doesn’t make sense, but it was what I thought. At this point I had not even spoken to my trust officer, Jack Johnston, let alone met him in person. I called him and said that I wanted to give back my trust. He must have been flummoxed. Once he could find words, he said, “I’m sorry, Barbara, but you can’t give back your trust.” “Why?” I asked in bewilderment. He replied, “Because it is an irrevocable trust.” He then tried to explain to me in the simplest, most understandable terms, what an irrevocable trust was, though I still couldn’t understand.

Years later, when I was doing interviews for The Inheritance Project’s first book, The Legacy of Inherited Wealth: Interviews with Heirs, I was able to talk openly with Jack because he had retired from the company. He was able to be very frank, and I realized that he had never been the problem. Jack told me that in his long career as a trust officer, the trust Father had created was the most rigid he had ever seen.

Now I must backtrack and pick up another strand of the story. Father also created a trust for my son, although I had never even been told that such a trust existed. He created this trust under the terms of the “Uniform Gift to Minors Act” (UGMA). Under the terms of this legislation, a parent could avoid taxation by creating revocable trusts for his children or grandchildren. Those who created these trusts could give up to $10,000 a year. In that sense my son’s trust was similar to the annual “gifts” my father had put into an account for me since I was around ten. I hadn’t been told anything about the trust for my son. What I did find out much later is that under the terms of the UGMA, the gift had to be distributed, with no restrictions, to the beneficiary—my son—the day he turned eighteen. By that time it came to well over $100,000.

By then, being older and a bit wiser, I wondered what Father was up to. So a few months before my son’s eighteenth birthday I phoned Jack, who was still working for the trust company. He told me that there was, in fact, a trust for my son. I understood right away that for a young person, discovering that such a large amount of money was about to fall in his lap would be completely disorienting, confusing, even traumatic. (On this subject I recommend Dr. Dennis Pearne’s booklet, Wealth Counseling: A Guide for Therapists and Inheritors, also from The Inheritance Project. I called my son and told him what I’d learned. I had, in the meantime, decided that it would not be good for him to have free access to so much money at such a young age. He would, I told him, have to pay for his education. He was accepted at an expensive Ivy League university in and graduated four years later. I had achieved my goal: a good portion of his windfall was consumed by the cost of tuition, books, and living expenses.

My son had never been greedy and he didn’t complain. He was grateful for what he was given but did not resent my making him pay his own way. My reason for not continuing to pay my son’s expenses was simple: I feared that having so much money would undermine his work ethic just as he was stepping onto the threshold of young adulthood. My plot worked, no thanks to Father, who, in creating this trust, thought only of the money he would not have to pay to the IRS.

This story is long and detailed, and it deserves to be told in full. To include it all in this blog would risk losing the interest of some readers.

To be continued. . . soon