By Mark Wendell
Wealth is not necessarily only a matter of money. Sometimes it’s about freedom, love, the attainment of long-held aspirations, sentimental asset ownership, or simply continuity, the sense of security that a change or a loss, inevitable and natural events along the long road of life, won’t set off an out-of-control cascade of sometimes avoidable disruptions and losses.
We have no control over earthquakes and tornadoes, hostilities in distant parts of the world, breakthroughs in technology that render one industry obsolete and give birth to another. And death will come to each of us, one day, though it’s natural to avoid thinking about it and concentrate on living. We can’t control specific disruptions in the unforeseeable future, but we can think about general categories of risks and put in place strategies for managing predictable outcomes.
The loss of the head of a family or a business can be hugely disruptive, but prudent planning for the inevitable can prevent many avoidable setbacks or provide options for coping with those that can’t be avoided. If you own a business, identifying a suitable successor is a crucial step in ensuring the continuity of the enterprise and the security of those dependent on its ongoing success. If you’re a service professional such as a medical doctor, litigation need not end your practice or take away your security with proper asset-protection trust structures and retirement fund planning. If you’re the head of a family, trusts, contingent powers of attorney, and up-to-date insurance coverage can do much to ease the burden on close loved-ones and preserve a legacy for future generations.
“Plans are worthless,” said Dwight Eisenhower, “but planning is everything.” As the Supreme Commander of the Normandy invasion, he knew that the only thing guaranteed about D-Day was that the unexpected would happen. He knew the value of rehearsals: stepping through real-world scenarios and developing an array of alternatives for dealing with the unexpected.
On the scale of a family, financial planning isn’t just about working out monthly budgets. Sitting down together and asking, “What will you do if…?” can not only pinpoint gaps in financial arrangements, it can often expose subtle family-dynamics issues that might affect the selection of trustees or the naming of beneficiaries, or bring to light the need for alternative structures to accommodate specific family legacy wishes.
A typical response among family members to the topic of contingency planning is that many potential risks are too abstract and extreme to be worth the time spent planning a course of action for something that may never happen. The truth, however, is that even modern investment portfolio oversight, a familiar part of institutional wealth-management strategies, involves constant, complex calculations to identify risk parameters, weighing even impossible-to-predict future events, and then applying proactive measures to cover alternatives and proceed down the paths most likely to produce the best outcomes. If that degree of risk-anticipation is possible with investments, why should it be any less desirable when it comes to reviewing paperwork about estate planning – trusts, wills, or taxes?
Thinking through various possible scenarios and rehearsing responses to head-off future problems is simply a smart and caring part of assuring your heirs enjoy the kind of freedom from worry that money alone can’t buy.
Some real-world scenarios worth considering:
- Tax audits – There are horror stories of families or businesses, after the death of a key individual, enduring endless IRS audits perhaps intended to turn up irregularities so funds can be extracted from an estate. Since the owner or manager is no longer able to defend himself/herself, the successors might be left oblivious to facts and figures necessary to bring an audit to a expeditious close. The solution is simply to impose a strict transparency discipline involving multiple family members and professional advisors to assure a distributed awareness of financial activities and applicable tax laws. Ignoring the need to share information can amount to selfishness, setting up beneficiaries of an estate for potentially severe consequences that could have been easily avoided with a more generous attitude.
- Family dynamics – In every family there are unique dynamics, some minor and manageable, but also some potentially major issues that might be lurking behind the curtain pulled aside by a death. Whether we’re speaking of a single family member who has failed to make contingency estate plans or friction arising among multiple family members, the prescription is the same: think through and rehearse potential scenarios in advance and be willing to address complications arising out of relationships and personalities. Sometimes the solution will be simply a matter of making concrete plans to handle an obvious situation, such as taking care of a special-needs person or planning care for a late-in-life incapacity, or funding trusts designated for a specific purpose such as charitable donations, or the education of a minor, or multi-generational asset protection. Also, allow for the possible incapacity or inability of a trustee who might need to be replaced with someone more capable.
- Business ownership – Frequently a business owner will not establish realistic succession arrangements, causing family members to commence a feud following the passing of an undisputed leader. Succession planning should include scenario rehearsals covering even the short-term incapacity of the business owner. Even with a succession team identified in advance, there can be insufficient attention given to insurance or credit arrangements necessary to preserve monetization of the business and to assure its continuity. If these issues are successfully addressed with a contingency structure, however, an unanticipated event need not be stressful or result in a tragic outcome.
- Trust/will structures and their on-going management – An excellent method of ensuring some degree of certainty following your death is by unselfishly imagining the future without you. Understandably, many families choose not to communicate fully or to share personal goals around the time of a loved-one’s death, so it’s useful to invite communication long before that moment arrives. A scenario rehearsal can uncover possible pitfalls in the trust structures and beneficiary arrangements identified in your documents. This is most effective by making use of the many professionals available who can collaborate with you on: conducting family meetings, preparing documents, trust structures tax planning, risk and insurance planning, assisting in issues resolution, investment alternatives analysis, and providing creative strategies to express family heritage wishes.
When a family’s values include security and fulfillment, rather than just the accumulation of money, wealth management ought to address the many risks that can threaten stability. While uncertainty can never be entirely eliminated, it’s often useful to envision how future events might play out. Once family wealth is considered broadly, beyond typical investments, there are numerous pitfalls that may trip-up not just the accumulation of assets, but also their transfer to next generations. By using a scenario-rehearsal strategy to identify potential risks, in collaboration with appropriate professionals, fewer complications are likely to erode or destroy a lifetime family heritage.