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Discounting And Consumption Over An Uncertain Horizon: Draw-Down Plans For Family Trusts

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  • Stephen Satchell
  • Susan Thorp

Abstract

Individuals, endowments and trusts face uncertain lifetimes. When the planning horizon of an entity is stochastic and Pareto distributed, hyperbolic discounting and time-varying consumption rates are optimal. We derive expressions for the optimal rate of consumption (draw-down) from wealth for family trusts facing positive probabilities of extinction at each generation. Using birth statistics for the UK, we compute family extinction probabilities and show that they are well-approximated by a Pareto distribution, hence family trusts will discount hyperbolically. Numerically optimised consumption paths for family trusts with CRRA preferences are decreasing but always higher than for infinitely-lived trusts.

Suggested Citation

  • Stephen Satchell & Susan Thorp, 2008. "Discounting And Consumption Over An Uncertain Horizon: Draw-Down Plans For Family Trusts," CAMA Working Papers 2008-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2008-02
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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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