IRS Gives a Second Chance to Claim a Potentially Valuable Estate Tax Benefit for Surviving Spouses 

Rarely do estates get a “second look” at tax decisions.  However, this summer the IRS provided some executors, trustees, and surviving spouses an opportunity to revisit an important estate tax planning decision made years ago.

Background:   As you probably know, the IRS assesses an estate tax on large estates.  The estate tax rate is 40%.  Each U.S. citizen and resident has a combined estate and gift tax exemption of $5 million, adjusted by inflation (in 2017 equal to $5.49 million).  Most estates are not subject to the estate tax, because of the marital deduction for gifts to (or for the benefit of) surviving spouses, charitable deductions, and the application of the decedent’s estate tax exemption.  As a result, the deceased spouse’s estate tax exemption often is not fully used.

For individuals dying in 2011 or after, a decision was made in many cases not to file a federal estate tax return if the combined estate of the decedent and the surviving spouse was less than a single individual’s $5 million (inflation-adjusted) estate tax exemption — no return was required, and it was expected that there would never be an estate tax at the survivor’s death.

Portability:  For deaths of the first spouse to die in 2011 and after, federal tax law allows the estate to make the “DSUE” (Deceased Spouse’s Unused Exemption) election, also known as the “portability election.”  The DSUE election allows the surviving spouse to use the deceased spouse’s unused estate tax exemption (in addition to his or her own exemption).  As you can imagine, the DSUE election can be very useful if the surviving spouse’s estate grows beyond his or her estate tax exemption.

A Second Chance:  Recently, some surviving spouses (or their estates) have been surprised by significant increases in asset value and now expect an estate tax liability on the death of the surviving spouse. Thankfully, the IRS recently issued Revenue Procedure 2017-34, which provides a second chance to file a federal estate tax return to elect portability even though the time for filing the federal estate tax return has passed.  In other words, there is an opportunity to take a “second look” at earlier planning decisions and claim a significant estate tax benefit.

The portability election must be made on a federal estate tax return filed by January 2, 2018 or the second anniversary of the decedent’s date of death, whichever is later.

Does this affect you?  If you administered the estate of a married U.S. citizen or resident who died after 2010 and did not file an estate tax return (and no return was required under the regular filing requirements), you should first check the surviving spouse’s current estate asset values.  Remember to include life insurance policies and retirement plans owned by the surviving spouse and the value of any “marital deduction” trusts created for the survivor’s benefit by the first spouse (such as “QTIP” trusts).  Do not include the value of tax “bypass” or “exemption” trusts designed to be excluded from the survivor’s taxable estate.

If it is foreseeable that the surviving spouse’s taxable estate will exceed his or her remaining estate tax exemption, then estate taxes are a possibility.  Consider also whether a future Congress might reduce the estate tax exemption to an amount less than $5 million (inflation-adjusted).

If you think estate tax on the surviving spouse’s death is a possibility, consider filing a simplified estate tax return to claim the decedent’s unused estate tax exemption, even if the filing would require additional effort and expense.

Estate tax returns take time to prepare, especially when appraisals of real property and business interests are required.  Now is the time to act if you want to take advantage of this second chance to claim a significant estate tax benefit.

(Thank you to fellow estate planning attorney Tim Maximoff for this post.)



Starting the Philanthropic Conversation

One of my favorite quotes regarding charitable giving is this statement by Bill and Melinda Gates in their Giving Pledge letter:

We have been blessed with good fortune beyond our wildest expectations, and we are profoundly grateful.  But just as these gifts are great, so we feel a great responsibility to use them well. . . . Both of us were fortunate to grow up with parents who taught us some tremendously important values.  Work hard.  Show respect.  Have a sense of humor.  And if life happens to bless you with talent or treasure, you have a responsibility to use those gifts as wisely as you possibly can. Now we hope to pass this example on to our own children.

To me, this statement reflects some of the deeply personal reasons why individuals make charitable gifts: as an act of gratitude, to communicate personal values, to transfer those personal values to their children, to use their wealth to solve problems.  As an estate planning attorney, I have the opportunity to help clients integrate philanthropy in their estate plans.  What I have learned from my clients is how important it is to start the conversation with the “why” (the clients’ passions and values) and to follow, at the appropriate time, with the “how” (tax planning strategies and charitable vehicles).

Recent studies reflect the need to start the philanthropic conversation with values.  The 2016 U.S. Trust Study of High Net Worth Philanthropy, conducted in collaboration with the Indiana University Lilly Family School of Philanthropy, and surveying high net worth households’ behaviors in 2015, found that 91% of high net worth households donated to charity, but only 18% of wealthy donors gave largely because of tax benefits. In identifying the most challenging obstacles to engaging in philanthropy, only 22% reported “structuring gifts in a tax efficient manner,” whereas 67% of respondents reported their greatest obstacle to giving was identifying what causes they care about and deciding where to donate.

This is not to suggest that we should abandon tax planning in the charitable context. Instead, studies suggest we should lead with the client’s values, and then offer the client options to act on these values, which could very well include structuring a charitable vehicle to minimize tax.  Putting values first makes sense as clients seek to use their wealth to bring meaning in their lives, transfer values to their children, and create a legacy that will survive them.

California Court Says Mother’s Trust Can Fund Trustee to Fight Trust Contest after Her Death

There’s a new no-contest case in California — Doolittle v. Exchange Bank (pdf).  The twist here is the beneficiary who contested the validity of trust amendments also sought to broaden the reach of California’s no-contest statute.  Apart from its holding (a defense-of-claims provision is not the same thing as a no contest clause and therefore trust assets are currently available to the trustee to defend against a beneficiary’s contest), this case teaches some basic lessons about our succession laws in general.

Our society recognizes and protects the rights of individuals to control what happens to their property after they die (as long as they take proper measures such as setting up a revocable living trust).  This is what Stanford law professor Lawrence M. Friedman calls “freedom of testation” (Dead Hands: A Social History of Wills, Trusts and Inheritance Law).  Basically, you can leave your property to anyone you choose.

There are some limitations on the right of the deceased to control what happens to his or her property.  Some of these limitations are found in the laws governing the creation and validity of trusts. A beneficiary could file a contest in an attempt to invalidate a trust amendment for lack of capacity, undue influence, fraud, or duress.  There are also statutes that act to “modify” the trust provisions themselves — these are the sorts of things found at the back of the California Probate Code dealing with omitted spouses, attempts to create perpetual trusts, and the like.  In Doolittle, a disappointed beneficiary filed a contest against her deceased mother’s trust and, in a separate action, tried to thwart instructions from her mother to the trustee to use trust assets to defend against just such a contest.  The beneficiary tried to place limitations on her mother’s instructions by using California’s no-contest statute as a sword to prevent the trustee from having immediate access to trust funds to fight the contest.

Constance (Connie) Doolittle, a Marin County resident, died last year, survived by two daughters, Susan and Carolyn.   She established her trust in 1999 and amended it in 2000, 2004 and 2005.  Susan Doolittle has challenged the validity of her mother’s 2004 and 2005 trust amendments.  She contends her mother’s multi-million dollar trust estate should be distributed according to the terms of the 1999 trust, as amended in 2000.   If the 2004 and 2005 amendments are invalid, Susan and Carolyn will receive most of their mother’s $8.4 million estate.  If the 2004 and 2005 amendments stand, the daughters will receive much less:

In the 2005 trust, Connie made gifts upon her death to various beneficiaries, including $500,000 to Susan, $500,000 to Carolyn, and $150,000 to each of her grandchildren.  She named seven persons, not including Susan or Carolyn, as remainder beneficiaries, giving one-fourth of the remainder to Juan [her gardener] and one-eighth of the remainder to each of six beneficiaries who were Connie’s friends and caregivers.

Constance Doolittle’s 2005 amendment of her trust included a provision entitled “No Contest.”  This section of the trust instructs that a beneficiary will forfeit his or her share if the beneficiary contests the validity of the trust: “the right of that person to take any interest given to him or her by this Agreement or by Trustor’s Will shall be determined as it would have been determined had such person predeceased Trustor, without issue.”  This section of the trust also instructs the trustee “to defend, at the expense of any trust estate governed by this Agreement, any contest or other attack of any nature on this Agreement, on any of its provisions and any amendments hereto.”

The opinion in Doolittle is not about the ultimate validity of the 2004 and 2005 trust amendments.  Instead, Doolittle deals with Susan Doolittle’s attempt to use California’s no contest statute (which itself can be viewed as a limitation on the power of the deceased to force a contesting beneficiary to forfeit his or her share of the trust) to prevent the trustee from carrying out Connie Doolittle’s instructions to use trust funds to defend the trust.

There are at least four court actions stemming from Constance Doolittle’s revocable living trust.  It’s helpful to put the claims in context:

  • The first action — filed by Susan Doolittle — alleges financial elder abuse and seeks to invalidate the 2004 and 2005 amendments
  • The second action — filed by Susan Doolittle — alleges Connie Doolittle lacked testamentary capacity to amend her trust in 2004 and 2005, and seeks to invalidate the 2004 and 2005 amendments
  • The third action — filed by the trustee Exchange Bank — is a petition for instructions to confirm that the trust authorizes the trustee to use trust assets to defend against Susan’s elder abuse suit and trust contest
  • The fourth action — filed by Susan Doolittle — is a petition for instructions that the trust’s defense-of-claims language “is actually a no-contest clause and the trustee is prohibited from defending against either action until the courts resolve the two contests on their merits”

So just how did Susan Doolittle attempt to use California’s no contest statute to prevent her mother’s instructions from being carried out?  She argues that these instructions are a part of the trust’s “no contest clause” and are therefore subject to the statutory restrictions on no contest clauses.  In California, there is a statutory prohibition against enforcing a no contest clause unless it is determined that the contest was brought without probable cause.  Susan Doolittle’s argument goes something like this:  even though her mother instructed the trustee to defend against an attack on the validity of the trust at the expense of the trust, the trustee cannot use trust assets (at least not now) to do this because the “defense-of-claims” provision is a no-contest provision and no-contest provisions cannot be enforced by law until it is known whether the beneficiary’s claims regarding the validity of the trust lack probable clause, which won’t be known until the trust contest and elder abuse claim are over.

Following its detailed analysis of the history and policy of no contest clauses, the Court held that the deceased’s instructions to defend the trust at the expense of the trust was not the same thing as a no contest clause.  As such, Susan Doolittle could not defer the trustee’s access to the trust assets.

The Court acknowledged that Connie Doolittle “obviously anticipated the possibility of a challenge after her death.”  Dead hand control is far-reaching.  In Doolittle, it extends beyond the deceased’s right to choose who receives her property to the right to fund the trustee to defend those choices.

Federal Estate Tax Exclusion Bumps Up a Bit for 2016

It’s that time when the IRS announces what you can pass on to others next year without paying federal gift or estate tax.  Revenue Procedure 2015-53 contains 27 pages of inflation-adjusted items for 2016.  Wedged between the inflation adjustments for the foreign earned income exclusion and the “tax on arrow shafts,” are the 2016 numbers for the unified credit against estate tax and the annual exclusion for gifts.

  • The estate tax exclusion gets a $20,000 inflation bump from $5.43 million per individual to $5.45 million
  • The gift tax annual exclusion stays at $14,000 for 2016

Gift tax annual exclusion:  The gift tax annual exclusion excludes the first $14,000 of a gift from tax.   In other words, you can give away $14,000 to as many friends and family members as you’d like without worrying about gift tax.  But the gift tax annual exclusion applies only to gifts of present interests.  If someone wants to make annual exclusion gifts to trusts, it is essential to draft the trusts carefully to qualify for the annual exclusion.  (More about these “Crummey” trusts in future posts.)  As can be expected, things get even more complicated if a grandparent wants to make a $14,000 gift to a trust for a grandchild and have the gift qualify for both the gift tax annual exclusion and the generation skipping transfer tax annual exclusion.  (More in future posts on the GST tax as well.)

Unified gift and estate tax exclusion:  The federal estate and gift taxes are unified, which means that the $20,000 inflation bump applies to lifetime gifts and on-death transfers.  Individuals who “maxed out” their $5,000,000 unified gift/estate tax exclusions in 2012 have the ability to make some more lifetime gifts — $450,000 more as of 2016 — thanks to annual inflation adjustments.

California Protects Personal Autonomy at End-of-Life

When Governor Brown signed the End of Life Option Act on October 5th, California became the fifth state to allow physicians to assist terminally ill individuals to end their own lives.

Governor Brown issued a signing message acknowledging that physician assisted death — even though the aim is to allow terminally ill individuals to avoid great pain and suffering at the end of life — requires us to grapple with fundamental ethical and religious issues.  Disability rights advocates had raised concerns that individuals with disabilities could be vulnerable under the law.  Doctors had raised concerns that the law would change the ethical foundation of the practice of medicine.  Ultimately, Governor Brown, a former Jesuit seminarian, concluded that he would sign the bill into law to give Californians greater personal autonomy over the circumstances of their death when death is imminent:

In the end, I was left to reflect on what I would want in the face of my own death.

I do not know what I would do if I were dying in prolonged and excruciating pain.  I am certain, however, that it would be a comfort to be able to consider the options afforded by this bill.  And I wouldn’t deny that right to others.

The End of Life Option Act will be added to California’s Health and Safety Code in 2016.  The new law will allow a terminally ill California resident, who is 18 years of age or older, and who has capacity to make medical decisions, to voluntarily request and obtain a prescription for a drug to self-administer to end the individual’s life.   There are detailed, formal requirements governing what the individual must do to request the prescription (including making two oral requests — 15 days apart — and a written request to his or her attending physician).

There are numerous actions the attending physician must take before prescribing the aid-in-dying drug.  Among these, the attending physician must:

  • determine the individual has an incurable and irreversible disease that will, within reasonable medical judgment, result in death within six months
  • determine the individual has capacity to make medical decisions, is voluntarily making the request, and has followed the proper procedures under the Act to request the prescription
  • inform the individual about relevant facts about the individual’s medical diagnosis and prognosis and the aid-in-dying drug and confirm the individual is making an informed decision to obtain the drug

Numerous sections of The End of Life Option Act underscore that a terminally ill individual is to act completely voluntarily, free from the undue influence of others.  At its most basic level, the individual must “self-administer” the drug.  But there are other safeguards:

A request for a prescription for an aid-in-dying drug under this part shall be made solely and directly by the individual diagnosed with the terminal disease and shall not be made on behalf of the patient, including, but not limited to, through a power of attorney, an advance health care directive, a conservator, health care agent, surrogate, or any other legally recognized health care decisionmaker.

A provision in a contract, will, or other agreement executed on or after January 1, 2016, whether written or oral, to the extent the provision would affect whether a person may make, withdraw, or rescind a request for an aid-in-dying drug is not valid.

Knowingly coercing or exerting undue influence on an individual to request or ingest an aid-in-dying drug . . . is punishable as a felony.

The Act does not authorize a physician or any other person to end an individual’s life by lethal injection, mercy killing or active euthanasia.  The Act specifically identifies these acts as suicide, assisted suicide, homicide or elder abuse.

The dialogue surrounding the legalization of physician assisted death is intense because it raises core ethical and religious issues and highlights the need for appropriate safeguards to protect the vulnerable.  At the same time, many individuals question why the State would deny them the choice to avoid weeks of physical and emotional suffering at the end of their lives if they are dying from an incurable and irreversible disease.

California’s End of Life Option Act will allow terminally ill individuals to make choices at the end of their lives that are grounded in their own values and beliefs.

Can a Corporation Be a Philanthropist? California’s Benefit Corporations Pursue Both Profit and Purpose

What do Patagonia, Give Something Back Office Supplies, and Thinkshift Communications all have in common?  They are California "benefit corporations" — a new type of for profit corporation that is allowed — or, more precisely, required  — to put society and the environment at the center of how the company does business.  Six other states have enacted similar legislation.

Even though California’s benefit corporation law is less than three months old, mission-driven corporations are not new.  Numerous for profit companies measure their success not only by their profits but also by their social and environmental impact.  The new form of legal entity offers companies an alternative model of corporate governance, and greater freedom to pursue their social and enviromental goals.  Sandra Stewart of Thinkshift Communications writes:

‘I hope that five years from now, ten years from now, we’ll look back and say this was the start of the revolution. The existing paradigm isn’t working anymore—this is the future.’  Those were Patagonia founder and CEO Yvon Chouinard’s closing words as he led a parade of companies up the steps of the Secretary of State’s office . . . to become California’s first benefit corporations. . . . For Thinkshift, and I think for the other newly minted benefit corporations as well . . . , it felt like we took a significant first step in support of the kind of business culture that can build a sustainable, responsible and vibrant economy.

Proponents of the benefit corporation say this new form of legal entity will allow socially responsible companies to thrive.  Susan Carpenter writes in a Los Angeles Times blog post titled California’s new B Corp law eyes social, environmental interplay:

Incorporating under [the benefit corporation law] allows companies greater access to social impact and venture capital investments; legal protection for directors and officers as they consider non-financial social and environmental goals; and validation of their social and environmental responsibility claims since their annual benefit report must assess their performance against a third-party standard.

The benefit corporation differs from traditional stock corporations in significant ways.

A traditional corporation can (with some exceptions) engage in any lawful business activity.  But, if a company is organized as a benefit corporation, its purpose must be to create a material positive impact on society and the environment

A director of a traditional corporation must perform his or her duties "in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders" under California law (Section 206 of the Corporations Code).  Directors of benefit corporations, on the other hand, are given explicit legal authority to consider a broader group of stakeholders and the company’s social or environmental mission when performing their duties as directors.  The new law requires directors of California benefit corporations to consider:

  • Shareholders
  • Employees
  • Customers (as beneficiaries of the public benefit purposes of the corporation)
  • Community and society
  • The local and global environment
  • The interests of the benefit corporation, including the possibility that long-term interests of the company may best be served by retaining control of the corporation (rather than selling or transferring control to another entity)
  • Ability of the benefit corporation to accomplish its public benefit purposes

Laura Arrillaga-Andreessen, founder of a venture philanthropy fund, member of Stanford University’s faculty, and author of Giving 2.0, defines a philanthropist this way:

A philanthropist is anyone who gives anything—time, money, experience, skills, and networks—in any amount to create a better world.

I like this definition and I think it gets down to the roots of what philanthropy is all about.

Philanthropists are kids who get involved through organizations like and the Jane Goodall Institute’s Roots and Shoots program, individuals who aggregate their gifts with others by donating to organizations like the Jolkona Foundation and the Acumen Fund, families who make grants through the operation of their private family foundations and donor advised funds, and people who leave portions of their estates to nonprofit organizations in their wills and trusts.

And sometimes a philanthropist is a for profit corporation on a mission to use the funding and power of business to materially benefit humanity and the environment.

(This event took place April 2011) April 19th Speaking Engagement — Incorporating Philanthropy into the Family Wealth Plan — The City Club, San Francisco

I’m excited to have the opportunity to speak with Robert Lew, president and founder of Planning & Financial Advisors, on the topic "Incorporating Philanthropy into the Family Wealth Plan:  Different Approaches from a Financial Planner and an Estate Planning Attorney."   The event is co-hosted by the Northern California Planned Giving Council and the Financial Planning Association of San Francisco.  It takes place on April 19th, from 11:30 – 1:30, at The City Club in San Francisco.  Registration is available online and at the door.

Here’s what we plan to cover:

Some wealthy families have strong charitable intent and would be receptive to charitable planned giving planning concepts.  Most families have weak or no charitable inclination so incorporating philanthropy into their wealth plan is often very difficult.  Bob Lew will share how, as a financial planner, he is able to integrate charitable concepts within wealth plans.  More importantly he will share how he has been able to foster charitable goals.

Attorneys are often uncomfortable talking about charitable giving unless the client brings it up first.  Or we reduce the conversation about charitable gifts to a simple yes/no question.  But attorneys, and other trusted advisors, are in a unique position to help the client articulate charitable goals, recognize time-sensitive opportunities, and sort through different planning strategies.  Karen Meckstroth will discuss how she and other attorneys are changing the way they practice to assist clients in making meaningful choices about charitable giving.  She will also touch on some of the ethical issues attorneys face when advising clients about charitable planning.

It is an honor to speak with Bob, and to learn from him.  Bob has dedicated enormous time and talent to enhancing the lives of his clients and the community through charitable planning.  He currently serves on the Board of the San Francisco Estate Planning Council and is a former Board member of the Northern California Planned Giving Council, the National Committee on Planned Giving, and the California State Bar Tax Specialization Committee.  Bob received the Phil Hoffmire Service Award from the Northern California Planned Giving Council in 2007 in recognition of his lifetime contribution to the charitable planned giving community. 

Connecting Children with Charity: Paper Cranes for Japan

As parents, we have the opportunity to teach our children compassion and empathy, to expand their perspective of the world, and to instill in them a sense that they have the power to make the world a better place.  Estate planning is an opportunity to continue this teaching process.  As Silicon Valley attorney John Hopkins says, when parents leave a portion of their estate to charity, when they treat the community as extended family, they pass along a powerful personal legacy to their children in addition to their wealth.

Estate plans do have their limitations though — a testamentary gift in a will or trust will not do much to instill philanthropic values in children if parents miss the opportunity to do so during their lifetimes.  John Hopkins, Jon and Eileen Gallo and others emphasize the need to start young.  The letters posted at The Giving Pledge reveal that some of our biggest philanthropists learned the value of giving from their own parents:

Both of us were fortunate to grow up with parents who taught us some tremendously important values. Work hard. Show respect. Have a sense of humor. And if life happens to bless you with talent or treasure, you have a responsibility to use those gifts as well and as wisely as you possibly can. Now we hope to pass this example on to our own children. — Bill and Melinda Gates

The challenge for parents is to find opportunities for volunteering and charitable giving that are meaningful and age appropriate. 

StudentsRebuild, in partnership with and Architecture for Humanity, have launched Paper Cranes for Japan.  This project involves making paper cranes to represent a message of support and healing for Japan and to cause a gift to be made by the Bezos Family Foundation:

These simple yet powerful gestures will trigger a $200,000 donation from the Bezos Family Foundation – $2 for each crane received – to Architecture for Humanity’s reconstruction efforts in Japan. Once we reach our goal of 100,000 submissions, the cranes will be woven into an art installation – a symbolic gift from students around the globe to Japanese youth.

The Paper Cranes for Japan project is also an example of how philanthropy is changing — it demonstrates how technology provides the opportunity for many individuals to coordinate efforts to make a substantial impact.  Somehow I believe we’ll see more than 100,000 paper cranes.  Many more.

Making Donations to Help the People of Japan

The first thing I do each morning these days is check the Daily Beast and Huffington Post for news about Japan.  The stories break my heart.  I come from a family that has survived earthquakes.  My grandmother’s sister used to tell me stories about the 1906 earthquake — how scared and confused she and the other children were, how the family lost their business and their home, how they left San Francisco to start over in West Oakland.  I can’t imagine what families must be experiencing today in Japan. 

What I do know is that I want to help, and others here in the United States want to help, through charitable donations.

Taxgirl has posted some things to keep in mind when making charitable gifts for disaster relief in Japan such as:

Do your homework. Check out the credentials of a potential donee/charitable organization before you make a donation. Charity Navigator is a great site to gather information (that link takes you directly to the Japanese earthquake relief part of the site). You can also confirm charitable status through the IRS web site – remember that some organizations (like churches) may not be listed, so ask the organization for more information if you’re not sure.

Remember the rules. The rules for charitable giving still apply, even in a disaster of this magnitude. That means that only contributions to domestic tax-exempt charitable organizations are deductible. However, those that provide assistance to individuals in foreign countries qualify for charitable deductions (think Red Cross, etc.) so long as they otherwise meet the rules as domestic tax-exempt charities. Again, check with the IRS – or ask to see the organization’s credentials.

Private foundations wanting to make grants for Japanese earthquake relief must be careful to comply with the rules governing cross-border grant-making.  The Council on Foundations has posted resources for grant-makers.

Some additional resources for those who want to donate:

Chronicle of Philanthropy  (Responses from Charities to the Japan Earthquake and Pacific Tsunami)

Silicon Valley Community Foundation (Support Japan Earthquake and Tsunami Efforts)

Can We Create More Meaningful Estate Plans?

A big part of my practice is working with clients to pass along as much of their wealth as possible to the people they love.  If you stopped by my office, you could find me doing the types of things estate planning attorneys do to minimize tax and preserve wealth.  I might be —

  • Drafting a GRAT to transfer appreciation on assets such as pre-IPO stock.
  • Structuring a transfer that reduces the value of assets for gift or estate tax purposes, perhaps through a gift of a partial interest in real property or a gift of family limited partnership interests.  
  • Drafting a GST trust or dynasty trust to pass more and more wealth to grandchildren, great-grandchildren, great-great-grandchildren and beyond.

But wealth preservation is not an end in and of itself.  (At least not for most clients.)  I believe that clients go through the time and expense of sophisticated estate planning because what they really want is to increase the opportunities for their loved ones to live happy, fulfilling lives. 

Of course, more wealth doesn’t necessarily lead to greater happiness.  "The Joys and Dilemmas of Wealth," a new study out of Boston College’s Center on Wealth and Philanthropy, funded in part by the Bill & Melinda Gates Foundation, reveals that parents worry an awful lot that wealth has the potential to do their children more harm than good.  An article by Graeme Wood in The Atlantic, "Secret Fears of the Super Rich," previews some of the results of the study:

the overwhelming concern of the super-rich—mentioned by nearly every parent who participated in the survey—is their children. Many express relief that their kids’ education was assured, but are concerned that money might rob them of ambition. Having money ‘runs the danger of giving them a perverted view of the world,’ one respondent writes.  Another worries, ‘Money could mess them up—give them a sense of entitlement, prevent them from developing a strong sense of empathy and compassion

The study also reveals how some of the estate planning techniques used to address these fears (distributing wealth in stages, using incentive trusts) are not the answer in and of themselves, and may actually rob beneficiaries of a sense of personal autonomy or purpose:

Many wealthy parents structure their children’s inheritances such that the money arrives only in discrete packets, timed to ensure that during their formative years they have no choice but to find a vocation. But [Robert A. Kenny, one of the survey’s architects] hasn’t seen the strategy work, he says, because the children always know that the money is out there, and usually their friends do too. . . . Even if parents succeed in setting up a trust to parcel out the inheritance according to guideposts—get a degree, get a job, raise a family, etc.—they run the risk of setting up bitter intergenerational feuds. As one survey respondent from a wealthy family explains, ‘I have grown up with a father who never wanted to give up control of his business but kept taunting me with the opportunity to step into his shoes.’  His wife adds, ‘It has been difficult to feel financially independent when [my] spouse’s parents hold tight control over [our] children’s inheritance.’

So how do we create estate plans that move beyond enhancing wealth to enhancing lives?  Although wealth preservation is part of the estate planning process, the conversation between the estate planning attorney and the client needs to begin with people, not property.  Jon Gallo, a leader in the estate planning field (married to psychologist Eileen Gallo), blogs about how Eileen’s work on the psychological impact of wealth caused him to change how he approaches meetings with clients:

For most of my thirty plus years in practice, I viewed myself as a teacher, whose job consisted of four functions:

  1. Obtain and analyze the necessary financial data.
  2. Determine the techniques that can be used to transfer the client’s assets to his or her intended beneficiaries in a tax-smart manner
  3. Present the alternatives to the client in such a manner that the pros and cons of each is clearly revealed and the client is able to make an informed decision.
  4. Implement the client’s decisions . . . .

After 30 years in practice, I changed my introductory meeting into one which explores the clients’ relationships with their children and grandchildren and focuses on the values that the client wishes the estate plan to convey. Asking the clients to prepare a family mission statement accomplishes far more than extolling the virtues of exempt generation-skipping trusts.

I think Jon’s approach is correct, but that’s not to say it is easy.  As estate planners, we can get pretty uncomfortable when we leave the familiar (and technical) realm of GRATs, IDGTs and FLPs and start talking with clients about things that can feel very personal — hopes (and fears) for their children, attitudes about how wealth should (or should not) be used, charitable causes.  We may implicitly make decisions for our clients by asking closed-end questions that do not explore many possibilities ("Would you rather distribute assets to your children immediately upon your death or in stages at different ages?").  Or we may cut the conversation short through abrupt yes/no questions ("Do you want to leave a gift to charity?").

When I ask myself what I want for my own still-very-young children, I realize that my goals are more open-ended.  An attorney could not elicit them by asking narrow questions:

  • I want a safety net — I want to make sure that my children will never fall through the cracks — that they will always have the basics (a safe place to live, health care, and basic support if they can’t earn a living)
  • I want my children to pursue a meaningful education, which, depending on who they grow up to be, might mean pursuing advanced degrees, attending a conservatory, training at a culinary academy, or something else
  • I want my children to have the opportunity to start a business to make the world a better place, or engage in philanthropic activities to make the world a better place, or supplement their income from the trust if they need to so they don’t have to turn down a job that might make the world a better place
  • And, to round off the list, I want my children to be happy (in a meaningful way)

Estate planning attorneys may need to learn new communication skills.  Clients will need to accept that the planning process will be more time-consuming and more expensive.  But I think it will be worth it.  When we focus on something beyond wealth preservation — to creating opportunities for our children, promoting happiness, enhancing lives — the process of estate planning becomes more personally meaningful for our clients and the people they love.