Estate Planning and Accumulating Wealth

Many people believe they must accumulate wealth before they begin an estate plan. This is simply not true. The most important part of the estate planning process is providing powers of attorney which become active when you become inactive. Passing wealth is the next part of estate planning. The final part of the estate planning is passing on your values. In addition to passing your wealth, your Will names the person you desire to be Guardian of the person and Conservator of the estate of your children if you and your spouse can no longer take care of your children, whether you have died or have become incompetent. Most of us do not like to talk about becoming incompetent, but it does infrequently happen. Death is a certainty we don’t like to talk about either. We realize, however, that if you do not choose a Guardian and Conservator, the decision as to who will take care of your children will be made by a judge who will likely appoint the noisiest relative that you have and who may not be the person you believe would do the best job.

Also, if you and your spouse become incompetent, a successor trustee, chosen by you, can care for you and your estate without expense and time required for a Court-supervised guardianship and conservatorship proceeding. This process is like a probate, but has more lawyers for you to pay.

Most of us have a problem getting started on wealth accumulation. First and most importantly, pay off your debt.

The following outlines seven interesting examples of various ways my clients have accumulated wealth:

1. The Durango case. When I first met Mr. and Mrs. Durango, they were both 70 years old and had accumulated $1 million although he had never made more than $15,000 a year and she had never worked outside the home and never attended school. Mr. Durango only attended school for 16 days. He could do math but was painfully slow. The Durango’s raised 8 children and sent 7 of them to ASU. You’ll immediately say that’s impossible! I thought so too, but here’s what they did. In 1947, they were living in a crew tent in Central California picking lettuce and other crops. When Mrs. Durango was pregnant with her second child, they moved to Phoenix and bought a house for $8,000 with payments of $85 per month. Every time Mr. Durango was able to work 6 days in a week instead of 5, the wage he received for that extra day was paid against the house debt. The Durango’s paid the house off in 8 years. They then rented out this debt-free house and bought another house for $20,000. The $200 a month payment on the second house was subsidized by rental received for the first house They followed this procedure 3 more times before their children completed high school. Mr. Durango was still working, driving a truck for Bashas’ at this point. One thing the Durango’s reported to me was that they always made sure to rent their houses to good tenants and not to relatives who may not pay the rent. So, the house rental income was supporting the Durango’s and their children, and was not used to support the rest of his brothers and sisters and their families. By the time the Durango children started college, the rental income from 4 houses paid for their education. Of course, college tuition at that time was not as expensive as it is now. All of the Durango children completed their college education on time and were hired for jobs in the Phoenix area, working for City, County, or State government. In other words, they were self-supporting, and the parents did not contribute to their support after college. At that time, Mr. and Mrs. Durango purchased real estate in the Maricopa area and began to buy 5 to 20 acre parcels with nothing down and payments for 5 to 15 years. When the real estate boom started in the Maricopa area, the Durango’s started selling those parcels. They then discovered the stock market and invested the proceeds. By the time I met Mr. and Mrs. Durango, they were financially secure with Social Security income as well as income from $1 million in stock. They were ready to prepare an estate plan to pass their wealth along to their children, and I assisted them with preparing a Trust. At age 70, Mr. Durango was still loading his tools in his pickup truck 5 days a week and cruising Phoenix neighborhoods, looking for lawn mowing and tree trimming work. The Durango’s also built a dream house on 2 acres where they live and enjoy their grandchildren. All of their children are financially well off, and all of them understand that mom and dad saved money for their security, simply by working  hard, saving every day, and investing in real estate.
2. The UPS Driver. A UPS driver and his intended wife came into my office about 4 years before UPS went public. They planned to get married and wanted my help to prepare a prenuptial agreement. Their budget did not allow for a Will, Trust, or any Powers of Attorney, which I thought was not prudent; however, that was their desire at the time. The driver and his fiancée were both 32 years old, single, never married, and had no car or house. Both of them were living at home with their parents and had been since they were in high school. The driver had accumulated half a million dollars, and his fiancée had accumulated about $130,000. Their plan at that time had been to save more than 50% of their earnings, and after getting married, to continuously save more than 50% of their income, which they did. The driver’s wealth consisted of $250,000 in UPS stock and equity in 5 rental homes. He rode a bicycle to work and to his various rental homes for maintenance. After we prepared the prenuptial agreement, and during the next 4 years (before UPS went public), he sold the 5 rental homes for $250,000 and used the proceeds to purchase additional stock in UPS. This is where he got his really big break. After UPS went public, his half million dollars in UPS stock turned into $5 million. One of the things the couple had disclosed to me when preparing the prenuptial agreement was their goal was to have $5 million and then retire. They were 38 years old when they reached their retirement goal and met with me to ask advice Should they retire on the $5 million or should they set a new goal? My job was as a legal advisor, and I suggested that their new goal was a decision they would have to make. I would be there to help after their financial decision was made. At this time, estate planning was in their budget, and we prepared their Wills, Trust, and Powers of Attorney. The couple decided to make a new goal of $15 million dollars before retirement. This required continuing to save their earnings at the 50% rate, which would yield their goal by the time they were 52. The UPS driver and his wife accomplished their goal at age 52, and they retired with $15 million dollars, began living the good life, and enjoyed the fruits of their labor by buying a few exotic things like fast cars and big houses. But, they continued their lives with true discipline, and they never spent more than the income earned from their $15 million. I have no idea how much money they have accumulated now. I respect and admire that their lives were lived of their choosing no one else’s. I’m not recommending that you save 50% of your take home income, as that is a very cramped lifestyle for quite a few years. But, if you follow the Dave Ramsey rule and save 15% of your income over the years, I have no doubt you will meet your reasonable goals.
3. The Federal Government Employee. Over the years, I have met with quite a few Federal employees who worked in various places across the country. As they were transferred from location to location, which is normal for Federal Government employees, they would have 4 or 5 houses to purchase and sell along the way, usually at a nice gain. This strategy goes against the grain of real estate, but it works if a person employs a good real estate agent in the area. These were almost sure deals for real estate gains, because the agents were familiar with the circumstances and understood that discipline is important to accumulate wealth. Phoenix was often the employee’s last assignment or Federal job. Sometimes, the employee would hold onto their properties in areas they had lived, and they hired a reliable agent in the area to manage them, accumulating equity. This is not something for the faint-hearted or someone who doesn’t have a pre-built network of reliable real estate agents. (Some of these Federal employees were in the military, and many retired military or Federal employees would even earn their real estate licenses, managing and selling their own properties, as well as assisting other military and Federal employees with their properties.)
4. The Antique Pursuit. I met with a couple who purchased antiques. This enterprise did not yield them $1 million; however, they did accumulate about $250,000. It turned out to work like an annuity during their whole married life. They specialized in collecting small glass and specific items, most of which were small enough to hold in the palm of your hand. They kept detailed records of the dates the antique items were purchased and the price paid for each item. The result was a pickup truckload of glassware that had substantial value in excess of the price paid. After retirement, they started placing the glassware on consignment at various antique shops around Phoenix, and every month they would collect their checks from each of the antique shops that were selling their items. The couple kept busy in the antique business and produced income with very little effort. In addition to their Social Security and their pension income, the antique sales gave them enough money to get by nicely. When the husband died, the income did not change, as the wife continued to sell her stock of antiques. By the time she died, her daughter said only a few items remained. If you have a passion you want to turn into cash, this is a way to do it; however, this is not as certain to produce great returns as the other programs set out in this article.
5. Regular retirement by the use of growth mutual funds. Over the years, we have had many clients who have invested 15% of their take-home pay in growth mutual funds within a 401(k), IRA, or other tax-favored retirement account. They have all followed the Dave Ramsey formula of regular, consistent investing, dividing the mutual funds into four classes including growth and income, growth, aggressive growth, and international. Altogether, the mutual funds yielded 10% to 12% growth per year. They did not invest in annuities or bonds, but only in growth mutual funds, and the result was tax-free income growth. When they reached retirement and sold mutual funds for everyday living expenses, the tax due was less, as capital gains taxes are less than ordinary income taxes. Some of these clients saved up to $1 million and some did not, but combined with their pensions and Social Security checks, they all earned or saved enough to provide a fine living.
6. Military and First Responders. I often visit with military personnel and first responders to discuss their estate plans. I recall a retired Army General who, after retirement, worked at a Federal civil service job and State civil service job. All three of these employments yielded pensions. The General’s wife was also retired military and had a retirement from a Federal civil service job and City civil service job. Because of these pensions, their monthly income was huge. The issue they wanted to discuss with me was their need for long-term care insurance. I have forgotten the numbers, but they had a $2.5 million estate, lived in a fine, mortgage-free home in Sun City West, and were spending about half of their retirement income each month. The clients needed long-term care insurance that would cover any amount over 50% of their retirement income. They were concerned about losing everything through retirement disaster. I worked with them for quite a while and we could never arrive at a consensus as to what they were going to do. In my opinion, they had plenty of income to live without long-term care insurance, and they were a bit late to take advantage of the best time to buy long-term care insurance by getting older.

In addition to this couple, I have met with many local police, fire, and other first responders who retired from one agency or another, either county or city, and had built wealth by going to work for another agency while drawing pension income from their first job, earning
wages at a subsequent job, and vesting in additional pensions.

Government pensions tend to work this way when you retire. You get 60% of what you were getting when you were working; thus, if you have two pensions, you’re now making 120%. With three pensions, you would earn 180% of what you were earned while working. If you
additionally had savings, which is really possible with that kind of income and kind of control, you would typically have quite a great life when retired.

I would be happy to help you with your estate plan! Give me a call at Durfee Law Group, 480324.8000. I am not in the business of providing financial advice, but I do enjoy talking with folks about how they have accumulated wealth and will be glad to let you bounce your experiences and strategies off of me and will share what I have witnessed over many years of working with so many interesting people and learning about their success.

Please don’t forget the Boy Scouts of America, Grand Canyon Council. We can explore a bequest from your Trust to support the Boy Scouts. Boy Scouts are not supported by the government and rely on donations from generous people who are interested in promoting leadership training and future success for our youth. Please click below to make donation to the Friends of Scouting:

Friends of Scouting Donation Opportunities

Thanks for reading this article, and I look forward to hearing from you. Next time, I plan to talk about helping you prepare your estate plan, and maybe we’ll talk a bit about bike riding.

Samuel Kelsall IV
Senior Attorney, Durfee Law Group