Unexpected wealth and the history of estate planning

I want to talk about a subject called estate planning. I know, the words alone make people's eyes glaze over. Stay with me, because this is one of those subjects that does not matter at all right up until the day it is the only thing that matters.

Here is why I care about it. When we started American Power and Gas, there was no grand design. We wanted to work. We had to make money. So we worked, and we worked, and damn, we just worked. Then one day I look up and somebody tells me the company is worth more money than I had ever thought about in my life. How the hell did that happen? No intention in the world. It just exploded.

That is the thing about unexpected wealth. Nobody plans on it, so nobody plans for it. And if you do not have a plan for what you have built, I promise you somebody else does.

A lord, a war, and a broken trust

This whole subject goes back a long, long way. Picture a gentleman in old England who gets called away to a military campaign far from home, and he disappears for three or four years. Before he leaves, he entrusts everything he owns to somebody he thinks he can count on. Watch the property, run the land, hold it all together until I get back.

A lot of times, you know what happened when he came home? The guy had robbed him. Taken his whole materialistic world and decided, this is mine now. And that is pretty much how it all started. People needed a legal way to put their property in someone else's hands without losing it.

What you own, and who wants a piece

First, definitions. Your estate is the stuff you personally own. Your cars, your house, your jewelry, the money in the bank, the stocks you hold, your shares in a company. The things you and your wife own between you. That is the estate.

Now I am going to step into the realm of opinion, but I believe it is a highly demonstrable opinion. Go back to the men who built this country. The ones who laid the railroads, opened the shipping lanes, dug the great canals, industrialized America. The Carnegies, the Mellons, the Rockefellers. Those guys made more money than you could shake a stick at. At a certain point they had more money than the government itself.

And a government is an entity like any other. Once it exists, it wants to survive, and it wants to sit at the top. So, in my opinion, that is where this thing called the estate tax came from. The inheritance tax. When you die, if your estate is worth more than a certain amount, the government takes its cut.

Today the exemption is about thirteen million dollars per person. Your wife gets one too, so between the two of you roughly twenty six million can pass without a problem. If you are not up in the top slice of earners, you will probably never feel this. But keep reading, because the next part is about how ordinary people land in the top slice without ever meaning to.

The math nobody is ready for

Run some pretend numbers with me. Say you built a company and one day your share of it is worth seventy five million dollars on paper. Take off the thirteen million exemption and you are left with about sixty two. Then the government says, good, now give me half.

Half. It is not like you have thirty one million dollars sitting in a checking account waiting to pay that bill. Your wealth is in the business, the property, the assets. And oh, by the way, you are dead now. That is the whole point. You are not here anymore to work the problem, to hustle, to make things happen. The one person who could always figure it out is gone.

It does not take a company to get caught, either. You are out in the middle of Ohio and grandpa has twenty thousand acres of farmland he worked his whole life, bought back when land went for a hundred dollars an acre. All said and done, maybe it is worth a couple million bucks. Then urban sprawl starts pushing past the city limits. The city gets bigger and bigger, and one day somebody builds a two billion dollar data center right next to the property. Land that was worth a couple hundred an acre is suddenly worth twenty thousand an acre.

On paper the family is rich. In reality, if something happens to grandpa, they may have to sell everything, liquidate the whole legacy, just to pay the tax on wealth nobody asked for. And the way it works, the assets pass to your wife first, and when she dies they land on your kids, and your kids get the bill. That is the horrible part.

The tool is called a trust

So what do you do about it? You do this thing called estate planning, and the main tool is a legal entity called a trust. There are about twenty different types of trusts. There is a whole school you could go through just on the varieties, and I am not trying to make your head spin with all of them.

But here is one example that shows you how flexible this world is. Say you have a child with special needs. There is a specific kind of trust built to take care of a child with a disability, to make sure that child is provided for no matter what happens to you. And that trust can sit as one element inside your overall trust, one piece of the bigger plan.

That gentleman heading off to war had the right instinct: settle who holds what you own before you are gone, not after. He just did not have the tools. You do. The trusts exist, the planning exists, and the only mistake left is waiting until you are the one who is not here anymore to make things happen.