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Estate Planning Done Backwards

Structure should come last in estate planning.  What should come first, and what is actually much harder, is thinking deeply about what values, capabilities, skills, and ways of thinking the trust creator wants her heirs to develop.

bantam inc jack duval financial and estate planning backwards - cart before horse image

Don't do your estate planning this way.

Over the past few decades, estate planning has evolved from focusing on tax-efficient transfers, to asset protection, and is now set to evolve again.  This is my first post in a series looking at how estate planning is evolving to focus on the beneficiaries.

Why Most Estate Planning is Done Backwards

Creating an estate plan that results in no estate taxes is a fairly trivial exercise.  Any good estate planning attorney can do it.

However, solving for estate tax minimization is a mistake because it puts the focus on the assets and structures instead of the beneficiaries.  Indeed, it is usually a recipe for disaster.  Why?  Because the heirs will inherit an estate plan, instead of a beneficiary plan.

In my experience advising ultra-high net worth investors, most families undertake estate planning with a tax and structure focus.  This is backwards.

Structure should come last in estate planning.  What should come first, and what is actually much harder, is thinking deeply about what values, capabilities, skills, and ways of thinking the trust creator wants her heirs to develop.  The second question is how the estate plan will facilitate the cultivation of those values and capabilities.

Only after these questions have been deeply thought through should the transfer mechanics and tax strategies come into the picture.

Regency

In medieval times, a regent was one who stood in for the king and queen if they were dead, off at war, or otherwise unavailable.  One of their primary duties of the regent was to raise the heirs in the king and queen’s stead.  In the trust context, the trustees serve as the regent and the estate plan should facilitate regency for heirs who are minors and into adulthood.

In their excellent book, Family Trusts, Goldstone et. al. write: [1]

But in the context of trusts, regency comes down to a less grand but very important point: that the trustee shall manage the trust relationship in such a way that when the beneficiary comes to maturity the trustee could dissolve the trust and hand over the assets in full faith that the beneficiary would use them well.

Seems simple and obvious.  However, as the old saying of “shirtsleeves to shirtsleeves in three generations” attests, successful outcomes are not so plentiful.[2]

If an estate plan solves for tax efficiency, the non-tax outcomes will be random.  If done correctly, an estate plan should give a high degree of confidence that the trustee could dissolve the trust without blowing up the beneficiaries lives.

Growth of the Beneficiaries Instead of Growth of the Assets

If the estate plan focuses on the growth and support of the beneficiaries, positive outcomes are much more likely.  Goldstone et. al. write about this as a qualitative goal:[3]

Regency aims at a qualitative goal: the beneficiary’s maturity and independence. The regent’s goal is not to grow the trust assets to be as large as possible. It is to help grow the lives of the beneficiaries, so that they become mature human beings, able to integrate the trust assets into a flourishing life.  (Emphasis added)

Achieving the growth, maturity, and independence of the beneficiaries takes significant thought, time, and resources.  However, it does not require the foregoing of the traditional estate planning goal of tax-efficient transfers.

Questions for Trust Creators

A few simple questions can be asked to start thinking about the goals of an estate plan.  Some of these include:

  • What is the single most important reason for the estate plan?
  • Working backwards: if the Ghost of Christmas Future showed you your adult children and their families being happy and successful, how would your estate plan have helped them accomplish this?
  • What three core values do you want your heirs to develop?
  • What three core capabilities do to you want your heirs to develop?

Each spouse (or trust creator) should answer these questions independent of the other and then discuss.

Trust as a Relationship

The received view is that a trust is something like a box with assets in it and a set of rules about what comes out of the box stapled to its side.  In mechanical terms, this is correct.

In less flattering terms, but often times more accurate, a trust is viewed as a bank, the beneficiaries as bank robbers, and the trustee as the guard.  Of course, this is a description of a dysfunctional trust and is frequently the result of tax- and structure-first estate planning.

However, in the spirit of regency, a trust should be a relationship between its creator, the trustees, and the beneficiaries.[4]

In my next post, I’ll explore some ways a trust can maximize the relational aspects.

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Notes:

[1]      Hartley Goldstone, James E. Hughes, Jr., and Keith Whitaker; Family Trusts: A Guide for Beneficiaries, Trustees, Trust Protectors, and Trust Creators; John Wiley & Sons, Inc.; Hoboken; 2016; 6.

[2]      This is actually an archetypal pattern.  A version of this saying exists in almost every culture on earth.

[3]      Supra note 1.

[4]      Supra note 1.  Goldstone et. al. write about transforming a trust from a legal relationship into a human relationship.

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