When Dr. Milo Tedstrom arrived in California in 1928 he had a wife, a doctor’s bag, and all his possessions in a Ford Model A. When Dr. Tedstrom retired in 1977, at age 76, he had an estate worth 3 million dollars. That is equivalent to $7 million today. No one imagined that Dr. Tedstrom would live to be 104 and end up nearly broke.
This story, as featured in an article in the January 23, 2006 edition of the Wall Street Journalentitled “Learning from a Long Life,” illustrates the many pitfalls individuals face trying to balance all of the financial issues of retirement, and points out the value of having a careful and comprehensive plan.
Dr. Tedstrom’s Story
Dr. Tedstrom was the first certified cardiologist in Orange County. In 1933, during the Depression, he accepted payment in oranges or lima beans. By the time he retired in 1977, he owned his medical office building (which he sold for about $1 million), a three-bedroom house paid for in cash, and a sizeable investment portfolio.
Dr. Tedstrom did not do any significant estate planning until 1989, at age 87. At the time, an estate of more than $600,000 was taxable (currently the limit for federal estate taxes is $2 million and the limit in Maryland is $1 million). Assuming he would not need all of his assets, he began making outright gifts to his children. In addition, he set up a “charitable remainder trust.” This was an irrevocable trust in which Dr. Tedstrom donated appreciated assets, received an income stream during his lifetime, and passed the remaining assets to his designated charity when he died. By the end of his life, when his care was costing thousands of dollars every month, his family was regretting his decision to make these gifts.
Lessons to Be Learned
- Before gifting assets, ensure that you will be able to maintain your financial security for the rest of your life. We determine how much money our clients will need to accomplish this goal using an age 100 life expectancy and building in safeguards should they live longer. Typically, attorneys do not do the same kind of sophisticated financial projections we do.
- Beginning to plan when you are still relatively young means you have more options available to you. If they had planned sooner, Dr. Tedstrom and his wife might have been able to use techniques, such as a bypass trust, that protect against estate taxes without threatening financial security.
- As part of a comprehensive plan, long-term care insurance can allow you to implement estate tax planning techniques without risking your financial security. Dr. Tedstrom purchased long-term care insurance at age 92 when the premiums were $7,000 a year and the benefit was only $100 a day. In the end, the premiums and the benefits paid out were a wash. This insurance can provide real protection, if purchased at a younger age when the premiums are substantially lower.
- Sound investment management is essential. Dr. Tedstrom continued to manage his own investments until age 92. He was trading frequently, paying commissions of $2,000 to $3,000 a month, and taking unnecessary risks. A recent study by two Notre Dame Finance professors found that “older investors’ skill deteriorates with age, earning them roughly 2% less than their younger counterparts each year – in spite of older investors’ stock picks reflecting greater knowledge about investing.” Better investment management, begun sooner, could have avoided the problems Dr. Tedstrom experienced later.
- Communicating with your family eases tensions and promotes harmony. In each case, Dr. Tedstrom did not take needed action until his family finally persuaded him to do so. In many cases, it was too little, too late. We help clients plan early and facilitate communication with family members to assure them all of these issues have been addressed.
- Planning is a dynamic process that needs to be reviewed regularly. Estate tax laws changed dramatically over Dr. Tedstrom’s life. What you put in your estate plan just a few years ago may no longer be advantageous under current law. It pays to review your plan with your advisor and adjust it as the laws and your circumstances change.
As Dr. Tedstrom’s story illustrates there is a balancing act between avoiding estate taxes and ensuring financial security. Comprehensive planning can help you balance the two so that your wealth can provide the most benefit to you and your family.