A Better Way to Distribute Your Estate (or anything else)

Introduction

When considering your estate distribution following your death, there are many strategies to take. Some of the most popular include:

• Distribute the estate via an equal percentage — I’ll give John, Paul, George, and Ringo all 25%
• Distribute via a set percentage — I’ll give John 35%, Paul 35%, George 20%, and Ringo 10%
• Distribute specific amounts — I’ll give John $35,000, Paul $35,000, George $20,000, and Ringo $10,000

This post explains another option, one that I haven’t found yet after scouring the internet. This option is to distribute an estate through a calculated equitable percentage. In other words, distribute the money based on each individuals existing income. The less you have, the more you get.

Thought Process

The questions that I asked myself when distributing money were:

• What is the relative value of a dollar to each individual?
• How can I distribute funds in an equitable way?
• How can I remind my descendants I’m a nerd at heart one last time?

To accomplish this, I decided to make a formula (or more accurately, a series of formulas) to determine with an estate of x value, how would I want to distribute my funds to n number of people based on their relative wealth. I also wanted to create a system other people could use based on their own preferences.

I prioritized 2 things:

1. Equitable distribution
2. Adjustable variation

I chose not to focus on:

1. Relative familial value (child vs. cousin, first child vs. second child, etc…) — All relatives are treated the same
2. The “Protestant Work Ethic” — AKA: “Maybe someone is poor because they deserve to be, and we shouldn’t reward bad behavior with more money.”
3. How to calculate salary or wealth — I’m not sure how to do it fairly, so I’m ignoring it for now
4. The method of distributing the estate — trust funds, etc…
5. Taxes

These topics should be explored further prior to using the formula for practical application.

See Your Distributions

My Website

Use this website to input your own amounts and see the result for yourself. See the code here.

Adjust the INPUTS:

Inputs: Total Estate Amount, Fairness Adjustment, Individual Incomes

Results:

Can change the Fairness Adjustment in real time and see how it effects the calculations

Excel

Use the Excel spreadsheet found here to input your own amounts and see it for yourself.

Adjust the INPUTS:

Inputs: Persons name and Yearly Income

Inputs: Fairness Adjustment, Estate Value

Results:

Excel spreadsheet with some graphs.

Explaining the Inputs

· Fairness Adjustment: The fairness adjustment adjusts how equally distributed the funds are. The closer to 0, the more evenly distributed, the further from 0, the more equitably distributed. Here is a video showing the distribution of $1,000,000 based on different fairness adjustments —

Showing how the the Fairness Adjustment changes the distribution of the Estate.

• Estate Amount/Estate Value: The amount of money you have to distribute to your beneficiaries.

The Formula(s) — An Explanation

Let n be the number of individuals (size of the “incomes” array).

Let incomes[i] represent the income of the ith individual, where i ranges from 0 to n−1.

The total income, totalIncome, is the sum of all individual incomes:

TotalIncome formula

The income share, incomeShares[i], of the ith individual is calculated as:

incomeShares formula

Let fairnessAdjustment be a constant value used for fairness adjustment. This will range from 0-∞, with 0 being equal amounts going to every person, and the higher you go the more unequal it gets. The slider in the tool is logarithmic, to account for the more significant changes the closer to 0 you are.

The adjusted income share, adjustedIncomeShares[i], of the ith individual is calculated as:

adjustedIncomeShares formula

The sum of all adjustedIncomeShares[i] after fairnessAadjustment is:

sumAdjustedIncomeShares formula

The normalized share, normalizedShares[i], of the ith individual is calculated as:

normalizedShares formula

Let estateAmount be the total amount to be distributed among the individuals.

The individual allocation, individualAllocations[i], of the ith individual is calculated as:

individualAllocations formula

Putting it all together:

Full formula

Conclusion

This equation represents the fair distribution of the “estateAmount” among the individuals based on their incomes and the fairness adjustment applied. The normalization step ensures that the sum of individual allocations is equal to the “estateAmount,” creating a balanced distribution that takes into account income disparities and fairness considerations.