Don’t Handicap Your Heirs When You Will Money To Them

Source : The Straits Times, Sunday 12 Aug 2007

If you plan to make a will or leave capital in trust for your heirs, you should probably consult your lawyer and tax consultant, and in many cases, your banker.

Always remember that these plans have aspects that touch sharply on investments.

From an investment perspective, the most important point is to leave out restrictions.

While it is only human to feel that, after you have gone, your hard-earned savings might not be invested with the success you have achieved, you should do your best to select an able administrator.

Once you have done that, don’t try to limit investment authority.

Your heirs will do far better, most of the time, making investment decisions on their own than having these decisions forced on them by tight restrictions.

Concepts change, and nothing is more disastrous than investments managed by a dead man’s hand.

Years ago, a friend of mine made a fortune in the way fortunes are usually made - owning just one stock. When he died, he left his estate in a trust. His son was to get the income; and his grandson the capital, upon the death of his son.

The real stickler in my friend’s will was the provision that either his original stock was to be retained or, if it were sold, the proceeds were to be reinvested only in bonds.

As it turned out, the stock that had done so well for him reached its peak and turned into a lacklustre holding. The son was left with two bad choices: (1) Hold a stock with poor prospects; or (2) sell and buy bonds that offered no hope of combating inflation during an inflationary period.

Provisions that leave income to a widow and, at her death, the capital to children, can also be a source of trouble. The widow wants high-income stocks; the children, lower-paying growth issues.

One solution would be to avoid precise provisions, and leave it to the trustee to distribute income and invade principal if necessary. This approach would usually provide adequately for the widow and also allow the trustee to invest in growth issues, thus satisfying the children.

Extracts from Gerald M Loeb’s The Battle For Investment Survival, published by John Wiley & Sons.