Although it was more than a decade ago, I still remember vividly how I felt while watching “The Perfect Storm,” a film about a tragic confluence of events off the North Atlantic in 1991. Like many others, I found myself gripping the edge of my seat and repeating, “no, don’t do it,” as the crew members made decision after decision that led them closer to the monumental storm that would be their ultimate undoing. While the level of drama might not be as intense, I have long felt the same way about certain developments in estate planning for families in the United States and around the world. And, while I’m often a party to the process, as opposed to a mere observer, I still feel the same impotence to stop the fate that comes closer with every step taken by clients and advisors alike. Although it might be melodramatic to make the comparison, this column focuses on the estate planning “Perfect Storm” that’s brewing on the horizon, in the hopes that it might encourage all advisors to think about the direction that their advice and decisions will lead their clients and themselves. Here’s what I see, step by step.
Step One: Fearful Client Meets With Wealth Manager
A new, or existing, client arrives for a meeting with his wealth manager. Having read about an impending increase in taxes (and this started long before 2012), the client is fearful about his family fortune being dissipated at his death. Further, he’s worried about how his family might handle the wealth and how all his hard work may be for naught. Even if the client didn’t already have these fears, the wealth manager instills them within minutes of the client’s arrival. They agree to do something about it.
[Already, the client and advisor have headed down a potentially dangerous path. The greatest risks to inter-generational wealth aren’t necessarily taxes or poor financial returns. Rather, they are lack of preparation, lack of trust and poor communication among family members.1 However, the die has been cast.]
Step 2: Wealth Manager Runs the Numbers
The wealth manager has his analyst run some numbers that verify the risks to the client’s wealth. He sends an email with lots of data and calls the client to share the dire predictions, as well as a solution. The solution might come in various forms, but will generally include a trust, or two or three. The client is intrigued and wants to get things in place soon.
[At this point, it’s possible that the client hasn’t shared all of the relevant information with his advisor. His family relationships might be challenged, and/or his family members might not have the skills to fulfill roles that will soon be assigned to them. The numbers don’t take this into account.]
Step 3: Call to Action
The wealth manager, client and the client’s lawyer meet together. They all agree that this problem must be solved. They agree that the client must set up the recommended trusts and perhaps a limited liability company or two, as well. When asked, the client provides the lawyer with a couple of names for persons or institutions to fulfill trustee, company and related roles. Likely candidates include the wealth management firm (if it has trust powers), the client’s spouse and children. The client’s trusted friend may be given a role as well.
[This is when the storm clouds get ominous, although they are unlikely to be visible to those in the meeting. The spouse may not have financial skills; the friend may not have legal knowledge; the children may have difficult relationships with each other. There may be little communication among the parties. These realities are not taken into account and could pose a greater risk to the assets than anything else.]
Step Four: Client Signs Documents
The client has a brief meeting at the lawyer’s office and signs a stack of papers. They make arrangements for any parties who must sign to do so as well. The client returns to his life, and the planning process is left behind.
[By now, the storm of the future is “getting organized,” as the weather reporters would say. It may not hit for a long time and the intensity will depend on how long the client lives and what kind of innate knowledge, skills and relationships the other parties might have. But all the factors are in place.]
Now, of course, this scenario doesn’t reflect every planning process. Indeed, leading edge families are busily working together to develop the knowledge, skills and relationships that will help them navigate potentially rocky waters ahead. However, the number of times this scenario plays out—each day—is what instills fear in me for the future of most families and the industry. Unprepared heirs who will now become trust beneficiaries. Wealth managers who must grapple with complicated legal duties. Legal and beneficial ownership split in ways that aren’t fully understood. Relationships tested as roles and authority shift among family members. The number of seemingly dormant trusts already in existence is far greater than anyone yet realizes, and the magnitude of the potential storms of the future is hard to comprehend.
We may be able to change the ending of this drama, but that will take a different approach by clients and advisors alike every step of the way. I, for one, hope we can all work with clients to try to create a happier ending to their stories, so we can leave the white-knuckle experience for the movie theater.
1. Roy Williams and Vic Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values (Robert Reed Publishers, 2010).