The Alchemia Group

As I think about the number of “gift” trusts that were created in the final quarter of 2012 I wonder about what seeds were actually planted.

The consequences of rushing to complete a complicated, long-range tax strategy rarely manifest themselves in the short term. I witnessed my first implosion of family and financial assets as I was walking through New York City on a cold December day in the early 1980s. Up ahead I saw people with signs protesting something. As I got closer I saw there were about two dozen all in their late fifties to early sixties. All were dressed very nicely, including some in fur coats. The handwritten signs they carried called the bank they were marching in front an unfair trustee. All I could think was that something had gone horribly wrong in a relationship around what had to be a significant amount of financial wealth.

Now that the “race” is over I suggest taking a moment to consider how the new trust can be used to actually enhance the lives of the beneficiaries rather than reflect on how well is shelters financial wealth.

Too often the terms Legacy Plan and Estate Plan are used interchangeably. Your Estate Plan is part of the way you bring Your Legacy to life. Let’s start with defining Your Legacy as what someone (and you define who those someones are) will feel, think and say when they hear your name. Ergo, if you have a well-crafted Estate Plan you will be remembered as thoughtful and organized, making an unpleasant time a little easier. The Estate Plan is ‘How’ of Your Legacy. It handles the distribution of your assets to family, friends, charities etc. This distribution plan should further what you hope someone will feel, think and say about you.

The Estate Plan is only part of Your Legacy. You are creating Your Legacy everyday by how you act and speak. The Estate Plan is only one part of it. So before you rush to take advantage of the latest idea presented by an advisor ask the question “How does this assist in the creation of My Legacy?”

Take a minute and think about your current Estate Plan. How does it reflect Your Legacy?

The fear of ‘missing out’ on the opportunity to make a substantial ‘gift’ before the tax law was scheduled to change had families and their advisers scrambling to meet the then imposed December 31st 2012 deadline. (The scheduled change has since been eliminated and the ability to make that gift is now ‘permanent’)

Unfortunately the biology of many of these gifts looks like this. They were made to:

•  Avoid or Reduce potential estate/gift taxes
• Protect against Creditors and
• Safeguard assets against future divorcing spouses.

In addition these ‘gifts’ (actually pure transfers) were made into complex structures that most beneficiaries cannot understand or begin to know how to operate.

So the question is how will these ‘gifts’ actually enhance the lives of the recipients? To paraphrase Maimonides, the highest level of giving is one where the gift strengthens the recipient’s ability to be independent and not dependent upon others. While we all may be saying ‘Phew, we got it done!’ the actual work, if we want the transaction to be a real gift, is just beginning.

If you google Family Governance you get 107,000,000 hits (with quotes 88,700). No wonder it is considered complicated, particularly when you add in all the expert opinions on how it should be done. In my view it is about one thing – having a way for family members to interact with each other in a positive way around what can be difficult topics and decisions. It begins with stating some Basic Principles for Conversation/Discussion such as compassion and respect for each other. It then moves to a critical point – Role Clarity. This is where I see more problems than almost anywhere else. When you sit at the table you have to keep two things in mind – what role are you speaking from and what role are you listening from. If the family is discussing the future of any family asset then both the speaking and listening roles should be that of Stakeholder. Not Mom or Dad or son or daughter or brother or sister. Sounds pretty straight forward but it can be very challenging when, for example, Dad has 30 plus years of “knowledge” of what his son “is like.” At every family meeting clarity of roles should be part of the opening discussion.

Supporting the ongoing evolution and practice of multigenerational family governance should be one of the roles of the family’s Legacy and Estate Plan. Trusts in particular can be designed to nurture and facilitate successful Family Governance across generations. Keeping the family “in healthy positive conversation” will create the best chance for the family’s financial assets to remain intact and growing.

As 2012 and the significant gift and estate planning opportunities look to be coming to a close, there is a deluge of newsletters, emails, articles etc. talking about what ‘smart’ wealth holders ‘should do’. All this does is add to the confusion and noise.

While the opportunities are real, they just aren’t right for everyone. What we recommend is a conversation about accomplishment first, then weigh if the 2012 planning opportunities are a fit.

What does this conversation look like? It begins with a small set of questions that have nothing to do with the numbers on your personal balance sheet.

1. What do you want your estate plan to accomplish for you and your family?
2. What do you feel when you think about the relationship between your children and your financial assets?
3. What do you want your financial assets to say about you and your family?
4. What opportunities do you hope your children and grandchildren will have?
5.  If you define legacy as what someone thinks, feels and says when they hear your name what do you want your legacy to be?

Each of these will (and should) lead to other questions which ultimately will give you a picture that you can use to ‘success test’ your current plan. Opportunities to create better alignment will become clearer and a personal assessment of the 2012 planning opportunities is now possible.

As my friend Scott Fithian (1961 – 2006) always said ‘Focus on what you value rather than on the value of what you own and the plans you create will have true meaning.’