Protect Yourself Against Yourself

Everybody in my business has encountered many tough human situations like the two I am about to describe. They are situations most of us could face some day.

Old Mr. Appleton, a peppery octogenarian, had prospered in his trade of distributing building materials. He found good, reliable suppliers and was trusted by his retailer customers. In his middle 70s he became less active. By the time he turned 80, he dropped into his office once or twice a week to check on things but had essentially turned things over to the younger men. He had trouble keeping his investments straight, mislaid papers and found that people were paying less attention to what he said. Did he panic? No, he was a stouthearted and realistic old gentleman. “Everyone gets his run, and I’ve had a good one,” he said.

But what should he do about his personal affairs when he could no longer look after them? His banker suggested a power of attorney to his son. No. Appleton’s daughter-in-law made him uneasy, and he didn’t like being under anyone else’s control.

His lawyer came up with another alternative. When he thought he was losing his grip, he could sign himself into a conservatorship, which was subject to court review, and which he could not cast off without court approval. His conservators, typically family members, would in essence take over his affairs.

The worst idea would be to do nothing. Should his mind fail, his family would have to seek a court-appointed committee, and he would have to be certified incompetent, a humiliating procedure.

Few of us realize how common this situation is in an age when life expectancy continues to increase and when the specter of the nursing home lies at the end of the road for so many of us.

Eventually, Mr. Appleton and his lawyer determined on a standby trust. One was set up, with just $1,000 in it, and with persons in whom Mr. Appleton had confidence as trustees.

If his physician certifies to the trustees that Mr. Appleton can no longer run his affairs, then his personal property goes into the trust under the exercise of a durable power of attorney held by the trustees, who take over and run things for his benefit. Until then, there is no continuing expense. With this arrangement in place, Mr. Appleton feels confident. So what if he’s a bit forgetful? He’s enjoying life.

Professor Greenby had a different problem at the opposite end of the age spectrum. His 20-year-old daughter, Emily, was bright but hopelessly improvident. Money slipped like sand through her fingers. She couldn’t refuse a touch from a friend or acquaintance.

She bought dresses that after a month she never wore again. She “invested” in paintings that belonged in a motel. She traveled to Europe with a group and was amply provisioned with traveler’s checks, but twice ran dry and had to cable for additional funds. Emily’s grandmother had left a trust that distributed capital to Emily’s generation as they turned 21, and the Greenbys (who were both teachers and had little capital of their own) had gloomy forebodings over what a quarter of a million dollars in one lump sum would do to Emily. A couple of smoothies had started making an investment of their own in Emily, taking her to nightclubs and turning her head with tales of jetting from Gstaad to Acapulco.

What to do?

One day the professor confided over lunch at the Faculty Club to the provost of the university, an experienced man. A week later the provost introduced the professor to his old family lawyer. A few months before Emily turned 21, she, Professor Greenby and the lawyer had a couple of good talks. Emily agreed that she did not want to be burdened with business decisions. She didn’t understand business or investments and didn’t want to. She knew she would be an easy mark.

So she readily agreed to put her inheritance, when it arrived, into a trust to be managed for her benefit.

The instrument that the lawyer prepared for Emily, along with a one-page summary, provided that her trustees (her father and a trusted family adviser) were to invest and could make distributions of capital. Emily received all income. She could revoke the trust, but only with the consent of the family adviser.

Such a trust has no tax effect. She would pay the income and capital gains taxes in her own bracket, exactly as though she owned the money outright. But she couldn’t spend more than the income the trustees agreed on.

On the morning Emily turned 21, her father arrived at the breakfast table with the document. Emily signed without hesitation.

Both of these problems, or variations on them, are likely to be faced by anyone prosperous enough to be reading Forbesmagazine. The human dimension of the problem must be handled with tact and consideration. The legal and financial solutions are simple enough and readily available. ■