What’s Wrong with Traditional Estate Planning and What to Do About It
By David R. York, Esq. CPA and Andrew L. Howell, Esq.
The Changing Marketplace
In the last 20 years, Americans have experienced unprecedented change in virtually every aspect of their lives, from technology and social issues to demographics and the economy. For example, in 1997 it is estimated that there were 77 million email users sending 246 million email messages a day and spending, on average, 30 minutes a month online. Today, it is estimated that there are 4.3 billion people using email, sending 205 billion emails per day and spending, on average, more than 30 hours a month online.
Estate planning has also experienced tremendous change. In 1997 the Estate Tax Exemption was $600,000 with a 55% top Estate Tax rate. Estate planning was primarily done by the Greatest/Silent Generation who were, at the time, between the ages of 52 and 70. More than three-quarters of them viewed wealth transfer as very important, with more than one in five believing that they owed their children an inheritance. [1] In general, they were willing to sacrifice lifestyle to maximize wealth transfer and they were willing to add legal complexity and cost to do so. They were the generation of family limited partnerships, irrevocable insurance trusts, and annual gifting.
Fast forward 20 years and both the tax environment and views on wealth have dramatically shifted. The Estate Tax Exemption in 2017 has ballooned to $5.49 million and that increase, along with the creation of portability, has eliminated estate tax concern for more than ninety-nine percent (99%) of the population. Beyond the tax law changes, the Baby Boomer Generation (now themselves between the ages of 52 and 70) think that wealth transfer is not nearly as important as their parents and feel much less obligated to leave an inheritance or sacrifice lifestyle to do so. Less than one-half of Baby Boomers think wealth transfer is important and only three percent (3%) believe they have any obligation to leave their children anything. Fewer Baby Boomers are implementing wealth transfer during their lifetime when compared to the Greatest Generation (34% versus 9%) and seventy-two percent (72%) of Baby Boomers plan on doing their own estate planning differently than their parents.
All this is not to say that Baby Boomers do not care about the next generation. Baby Boomers are far more concerned about legacy (75% compared to 53% of Greatest Generation), how their children can and should use inherited funds (32% versus 9%), and preserving family history (86% versus 74%). These numbers represent a huge and ongoing shift in the views of wealth transfer that continues to widen with successive generations.
Among affluent families, the disconnect between what their current estate planning does, and what they want their planning to do, is staggering. While seventy five percent (75%) of wealthy parents say it is important to leave an inheritance to the next generation, only twenty percent (20%) agree strongly that their children will be prepared to handle the wealth they receive. Although fifty-four percent (54%) of the wealthy believe their family would benefit from developing a formal set of principles to guide the purpose and meaning of their wealth, only ten percent (10%) of them have done so. And while the affluent are looking for customized solutions, fully one-half of them think that their current estate plan is too complicated.
The Problem with Traditional Estate Planning
Traditionally, estate planning has been asset focused and, as a result, it rarely considers the individuals, personalities, and unique dynamics of each family. It’s based on a linear way of thinking; that is, if transferring some wealth is good, it follows that transferring more wealth is better.
Traditional estate planning also tends to be tool driven, which leads most planners to jump to strategies that pass along economic capital without considering the individual’s or family’s human capital. Not taking human capital into consideration when planning the transfer of wealth would be like asking a contractor to build your vacation home, only to have her start by telling you how many 2x4s will be needed, how many shingles, and how many windows. It makes no sense to start building something without first knowing what you are building and why.
In addition to being asset focused and tool driven, traditional estate planning is too often generic. Many estate plans are written in third person, with the only personal information being an inclusion of the person’s name and sometimes the names of their children. The plans tend to be focused exclusively on financial assets and taxes. Estate-planning software has only increased the generic nature of planning.
Finally, because many people have learned to think of estate planning as a transaction rather than a relationship, they believe their estate plans are done and yet, most of us would never say that our family is done. We’re constantly and consistently trying to educate and empower our family members. Families are constantly growing, learning, adapting, and developing, as is the ever-changing tax code. Estate planning should reflect that state of continual evolution, but traditional estate planning all too often remains static as most estate plans go unreviewed for years. The problem with this static model is that there is no room for it to adapt and evolve into new and better paradigms.
What the Market Wants – A New Kind of Planning
Estate planning that is designed and intended to meet the demands of the 21st century should look and feel different than traditional planning. First, and foremost, it should be beneficiary focused and should be more concerned with preparing future generations to maximize their own potential than about transferring financial wealth for the sake of the wealth. The planning should focus on what is needed for this to be accomplished, not implementing tools first with no cohesive end goal beyond the transfer of financial wealth.
Second, it should be based on the specific goals, values, and beliefs of the client. A multigenerational wealth plan cannot be built on outdated assumptions. Before any lasting plan can be implemented, it’s critical to first identify the values, vision, and mission of the family.
Third, it should be purpose driven and customized. Trusts, limited liability companies, charitable strategies, and other wealth-transfer devices should be seen as nothing more than tools to accomplish the family’s goals. The planning needs to recognize that families are unique and their planning should also be unique. As you read an estate plan, you should see that it is custom built and considers the specific situations, people, and resources that make up each family and its wealth. Only after you know the goals will you have the ability to know when and how to use the tools.
Finally, because a family is never done, the plan should include regular maintenance and updating to stay relevant and effective. Imagine paying someone to come in and design an award-winning backyard, put it in place, and declare it done. It wouldn’t take long for weeds to overtake it. While a plan may be up to date for any given period, it’s never completed. This means an effective plan should be consistently reviewed and updated as new family members enter the picture, people age, desires change, and Congress changes tax laws.
It’s important to note that many of the tools of modern estate planning serve important functions. Financial and medical powers of attorney, wills, and revocable living trusts are critical tools that every adult should thoughtfully implement. That type of foundational planning it’s critical to effectively provide for individuals and families in the event of disability or death. Regardless of the size of a person’s estate, this foundational planning is critical. In fact, for most families, foundational estate planning is all that’s needed from a legal standpoint. That said, the one-size-fits-all mentality of traditional estate planning can cause disastrous results as you travel along the wealth continuum. Many professional planners are either unaware of the possibilities, or uninterested in assisting their clients in developing a truly tailored and personal plan. Instead, they focus on the volume of clients and turn their practices into trust mills.
| Traditional Model | New Model |
| Asset Focused | Beneficiary Focused |
| Tool Driven | Purpose Driven |
| Generic | Customized |
| Static | Dynamic |
How to Retool
Recognizing the shifting marketplace is important, but the question then becomes: How do I, as an estate planner, adapt to this changing environment? Here are four easy steps that any estate planner could implement into her practice today.
- Expand the Team. For years, estate planners have been told about the importance of a multi-disciplinary approach to estate planning. That approach typically involves the financial advisor, attorney and accountant all working together to develop the best plan possible for a client. Although each professional comes from a different perspective and typically has different skill sets and abilities, ultimately each of them tend to be focused on financial issues and strategic solutions. In addition to these professionals, families should strongly consider adding a professional family consultant or coach. A qualified family consultant or coach can help a family identify their values, develop a family motto and mission statement, and identify non-financial issues that need to be resolved. Without an independent, trained family consultant or coach to assist, families are left on their own to try to develop a plan and accomplish something that they have likely never done before. Although an estate plan might deal with the management of financial resources, it should never be forgotten that it will involve not just individuals, but ones who are related and who have long-standing relationships. It can be difficult to step out of roles as parents, children, and potentially grandchildren to create the kind of collaborative environment necessary do develop a plan for multi-generational wealth transfer. In addition, mortality is not an easy or comfortable topic to address, and not many are comfortable with the seemingly morbid topic of discussing what happens when mom and dad die. As a result, there may be an underlying uneasiness to the discussion. The use of a family consultant or coach should diminish this discomfort and switch the atmosphere from a discussion of estate planning to a discussion of the positive objective of creating a lasting legacy.
- Break the Silence. Although attorney-client privilege is one of the hallmarks of a client relationship with their estate planner, that confidentiality and accompanying silence often extends to the beneficiaries and too frequently causes significant problems. Eighty nine percent (89%) of beneficiaries who knew details about their parents estate planning prior to their parents passing report that they were very or extremely satisfied with the process of distribution versus sixty five percent (65%) of those who did not know the plans. In families that had one or more specific issues that need to be addressed (i.e., second marriage, family business, legacy cabin), eighty five percent (85%) of families that resolved those issues prior to parents deaths reported being very or extremely satisfied with their parents estate planning while only thirty seven percent (37%) of families with one or more unresolved issues reported that same level of satisfaction. Not dealing with sticky issues during life leads to a lack of family cohesion, broken relationships, and even litigation. It’s critical that families address these issues while parents are still living as opposed to waiting until death. This is another area where a professional family consultant or coach could provide invaluable assistance.
- Add Purpose to the Planning. Perhaps what should be most disheartening among estate planners is the fact that nine out of ten (90%) affluent families surveyed said that their estate plan did not deal with their goals, wants, and objectives. To help address this staggering disconnect, before starting to draft any estate planning documents, consider helping your client and their family draft a vision statement and a mission statement. Creating a vision statement isn’t a new concept, although the term is a more recent concoction. Originally called mottos, they have been used by families and groups for centuries to inspire, keep focused, and bind them together. Whether it’s the Rothschild family (Concordia, Integritas, Industria/Harmony, Integrity, Industry) or the United States Marine Corp (Semper Fidelis/Always Faithful), a vision statement or a motto can help to bring purpose and direction. A mission statement, on the other hand, sets out how you’re going to achieve your vision. It’s more practical and focused on what you do and how you do it. It’s the map that leads you to accomplishing your vision. Like a business, a family is a collection of diverse people with a common goal or objective. In fact, some families think of themselves collectively as a business and each member of the family is thought of as an asset of the business. Although the level of volition may not be the same since we’re born into our families, both represent a collective of diverse people with a common interest. If the collective can understand the shared core values, establish a vision and mission, not only can that help to drive the estate plan but it will also add to the ability to make a positive multi-generational impact. As a group exercise either initiated by the family or facilitated by a consultant, it can also be a great opportunity to build cohesion and connection. Finally, the vision statement and mission statement can be incorporated into a purpose of trust provision that gives guidance and direction to future trustees and beneficiaries.
- Ask Technicolor Questions. Estate planners use data sheets or other tools to gather information like names, birthdates, fiduciaries, and assets. This information is critical to putting together an effective estate plan. Unfortunately, most estate planners ask only these black and white questions and they fail to gather more valuable information. When interviewing a client about their estate planning objectives, start by getting a flavor for who they are, what they believe, and the details of their family. These questions could include asking the following: Describe your children and their passions, interests, struggles, and triumphs. What does money mean to you? If you could pass on one piece of advice to your heirs, what would it be? If you could leave one thing as a lasting legacy to the next generation, what would it be? If you could see into the future to a family gathering 30 years from now, what would you want it to look like?
Conclusion
Ideally, an estate planner’s goal should be to assist clients beyond merely doing tax planning and help their clients be able to say: “We are the Smiths. This is what we believe in, this is what we value, and this is what we do to impact future generations and the world.” Holistic wealth transfer should be the goal of estate planning. The best plan is one that is ultimately less interested helping the next generation become rich and more interested in preparing them to manage, sustain, and carry on a rich and cohesive legacy.
Information on the Authors:
David R. York and Andrew L. Howell are Attorneys and Managing Partners with the Salt Lake City law firm of York Howell & Guymon. David and Andrew practice law in the areas of estate planning, tax, business planning, and non-profit entities. In 2016, David and Andrew co-authored Entrusted: Building a Legacy That Lasts. York Howell & Guymon was recognized by Utah Business Magazine in 2016 as one of Utah’s fastest growing new companies.
[1] Survey results have been amalgamated from the following sources: The 2015 U.S. Trust Insights on Wealth and Worth® survey of HNW individuals and families, Allianz American Legacies Pulse Survey from 2012, Forbes Magazine, 3/22/16, “Why the Wealthy Do Not Implement Their Estate Plans”, CNBC Millionaire Survey, 7/22/2015, and UBS Wealth Management Survey, Fall 2014.
