Grappling with Complexity and Uncertainty
I'll never forget a conversation a few years ago with a mutual client's attorney concerning the then new phenomenon of trusts that theoretically can last forever.
I can't predict what the family, economy, business and the investment world will be like 500 years from now! How can you expect me to write an irrevocable, unchangeable trust instrument to address those kinds of uncertainties? Let's just stick with a typical trust that has to end under traditional trust law, said the attorney. Well, I asked, How long will your typical trust last? Oh, about 100 years, he replied.
Ah, so your crystal ball only goes out 100 years?
The attorney had gotten comfortable with what he (and most of his colleagues) have been doing for many years, without realizing the potential consequences to the family and the business decades in the future. It reminded me of a 1930's trust instrument that prohibited the trustee from investing in anything but Treasury bills. That may have been the norm then. But it sure proved stupid as the world changed and the trust stood still in a time long gone.
It sounds trite, but uncertainty and change are facts of life. Unfortunately, you sometimes must make irrevocable decisions that can affect your family and business for years, if not generations, to come. Successful business people learn that they must make decisions in the face of complexity and uncertainty. They base decisions upon the best available information, and then live with the results.
This may not be a problem when you are in an area you know like your business. If you make an unsuccessful decision, at least you are able to react and, hopefully, adapt to unexpected events and consequences. But, when faced with decisions outside your area of expertise, it's easy to be paralyzed. Of course, you should seek competent, compassionate, objective input from the best advisors you can find. But that may not be enough to give you the comfort to make a decision.
The 2500+ participants at the University of Miami Law School's premier Advanced Estate Planning Conference were captivated by a discussion this past January about the complexity of drafting wills in today's uncertain tax environment. As you know, Congress repealed the death tax, but not really. George W. might repeal it for good, but maybe not. In the meantime, the states are haphazardly changing their laws to respond to the feds state death tax credit phase out. Those state changes impact your will as well.
So, HOW CAN I WRITE A WILL TO DEAL WITH THOSE UNCERTAINTIES AND COMPLEXITIES?? the audience members were in virtual agony. The rarely changing world of basic estate planning now is besieged with uncertainty. Some of the country s best advisors essentially were paralyzed.
It seems easiest not make decisions when facing uncertainty. Unfortunately, inaction is a decision. Not addressing family and business issues has consequences and results. As it relates to something as mundane as your will, you can take solace because you can change it as circumstances change. Well, until the music stops. Then, your testamentary decisions become irrevocable and your last will must deal with post-death uncertainties.
When you are faced with family, business, economic and other uncertainties, what should you do? Is the best course of action to try to predict every possible variable and each resulting outcome and then decide? Perhaps, but you might need a supercomputer capable of beating a chess master to consider all the interactions of perhaps an infinite number of variables.
People, Not Documents
I don't have all the answers, but I can offer a few suggestions. My suggestions are premised on my belief that people, not documents, structures or assets, are best equipped to respond to the unpredictable results of today s decisions and future events. If you accept this notion, then your focus changes from predicting what might happen to determining whom best can handle what might happen.
The long-term irrevocable trust illustrates my point. I shuddered when so-called incentive provisions became popular a few years back. As an incentive to encourage my descendents to work hard (like I did) and benefit from the joys of hard work and productive employment (like I did), my trustee shall distribute an amount to each beneficiary to match his or her salary each year. Nice concept. But, people later discovered that they had discouraged stay-at-home parents, volunteerism, teachers and policemen, while rewarding extreme risk-taking investment bankers.
Wouldn't they have been better off expressing their objectives (and values) and then selecting trustees in whom they had confidence to implement their objectives? This philosophical question is particularly difficult for most of us control freaks. But, perhaps a straight jacket is an inferior approach compared to expressing your philosophy, identifying people on whom you can rely for implementation, and then giving those people flexibility to adapt to changing circumstances.
Here are my recommendations. First, involve the best, most trustworthy people you can find. They should share your values and core beliefs. They should be as free as possible from potential conflicts of interest.
Second, give them the flexibility to deal with change. Certainly, you can provide guidance. However, unless you can predict the future, don't tie their hands with constraints and requirements.
Next, develop ways to hold these people accountable. Most of us believe that we ultimately are accountable to a higher authority. That belief governs our actions. Those in whom you place responsibility for dealing with future uncertainties must be accountable to someone.
A classic example in the trust area is whether to anoint your attorney and bank as supreme authorities, answerable to no one absent gross malfeasance. When the attorney is 82 years old and the bank has gone through five mergers, will they necessarily be responsive to the needs of your descendents? Is that risk greater or worse than placing some confidence in your descendents by giving them the power to fire and replace the trustees? Sure, they might pick someone who will cave in to their demands for greater distributions. But, focus on the question, After you are gone, who should be the ultimate authority to oversee those in whom you place your confidence for carrying out your objectives?
Finally, provide a process for succession. When one of the people you trust to handle the future on your behalf leaves the scene, who should pick the successor? Here again, you have philosophical choices. Do you create a self-perpetuating monarchy in which your trusted person picks a successor? Or do you create accountability by allowing the beneficiaries or someone else to select the successor.
Consider the 1930's trust created by an undoubtedly conservative investor who lived through the Great Depression and limited the trust to treasury bills. Perhaps that well-meaning grantor should have expressed a desire for conservative investing and then trusted his trustees and the succession process to select appropriately conservative investments based upon the changing investment world.
So, when faced with uncertainties and the need to make decisions, place your trust in people, processes and accountability to carry on your beliefs and values. Be extremely careful of decisions that are frozen in time. Incorporate flexibility that enhances the odds that today's decisions can be implemented over time despite life's inevitable complexities and uncertainties.