The Psychological Education Of An Estate Planner
by Jon J. Gallo
In her column this month, my wife Eileen introduces a three dimensional model of money relationships. This model examines our relationship with money in terms of acquisition, use and management. For the last two years, I have been using Eileen’s model in my day to day estate planning practice as a means of helping clients select planning techniques with which they are comfortable. But using the money model has been only one of the changes that have occurred in the way I have started to approach estate planning for my 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.
This all began to change when Eileen started her study of the psychological impact of sudden wealth that she described in her last column. Books and studies on the psychology of money began to fill her home-office and spread to the rest of the house. Our conversations began to revolve around the study and each conversation brought new insights.
One of the earliest insights had the greatest impact on my practice: Eileen’s use of the Holmes-Rahe scale in her study. In a famous study in 1967, Dr. Thomas H. Holmes and Dr. Richard H. Rahe created a do-it-yourself stress test. They developed the Social Readjustment Rating Scale (SRRS) which identifies and ranks key stressful life change events in five major aspects of life adjustment: health, work, family, personal, social and financial. The 1967 Holmes-Rahe life change list contained 43 events. A revised list contains 71. Each event was given a point score. You added up your cumulative score and the SRRS predicted the likelihood that you would experience a stress related illness or accident within the next two years.
And what are the top five, the five most stressful events that can happen to you? In order they were (i) death of a child; (ii) death of a spouse; (iii) death of a sibling; (iv) death of a parent; and (v) divorce. I began to think about what was typically covered at the first estate planning meeting. As part of my paradigm view of myself as a teacher, I’d provide a simplified overview of the estate, gift and generation-skipping tax systems that we had to deal with. We’d look at the various types of marital deduction arrangements (that’s No. 2, death of a spouse) and as the former chair of the American Bar Association’s committee on generation-skipping taxation, I would wax lyrical on the tax advantages of making use of their GST exemption and keeping assets in trust for the children’s lifetimes (that’s No. 1, death of a child). Of course, I’d point out how such a trust arrangement would protect the children in the event of divorce (that’s No. 5 on the list.) I probably killed off my clients and their children in the first half hour of our meeting! I realized that I was so inured to the subject that I was introducing my clients to estate planning by calmly and dispassionately discussing the most stressful events that could happen to them.
I also came to understand that life change events do not have to be negative to be stressful. Positive life changes require as much life adjustment as unpleasant events. For purposes of the SRRS, social readjustment “measures the intensity and length of time necessary to accommodate to a life event, regardless of the desirability of this event” (italics in original). Often the event that motivates a client to see an estate planner is a positive change: they have gotten married (No. 37 on the list), had a child (No. 17), the children are older and have moved out on their own (No. 41), the family business has been sold and they suddenly are more liquid than ever before (No. 27) or they have retired (No. 29).
And so, 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.
Eileen’s three dimensional paradigm of money relationships has also turned into a major practice management tool. I use it in a two stage process: first, helping the client identify his or her relationship with money, and second, providing the client with a means of characterizing the effect of various estate planning techniques.
In the first stage, I explain that the paradigm allows us to understand our relationship with money in the three dimensions of acquisition, use and management. My explanation of the paradigm follows what Eileen discusses in her column, namely that each dimension is a continuum, with extremes at either end and a broad range of normal behaviors in the center. I also point out that people almost always tend to view one of the three dimensions as more important that the others, but that which dimension it might be is highly idiosyncratic. The client is asked to rate himself or herself on each of the three dimensions and to identify the predominant dimension. Husbands and wives tend to enjoy rating each other and identifying the predominant dimension. It is extremely rare that they disagree in their ratings of each other.
As the second step, I explain that a convenient means of understanding the numerous available estate planning techniques is to categorize them in terms of the paradigm. Some techniques appeal to the client whose primary interest lies in acquisition, while other techniques may resonate with the client interested in use or management. By identifying the particular orientation of the estate planning device in terms of the paradigm, the client is able to be more proactive in selecting techniques with which he or she will be comfortable.
Acquisition
For entrepreneurial clients whose focus is on acquisition, I often suggest that they begin thinking in terms of the family’s consolidated financial statement. If they have the opportunity to start or acquire two more businesses in the near future, I will ask whether it is important to them whether the increase in net worth is reflected on their balance sheet or on a family consolidated financial statement? This question usually leads to a discussion of techniques to divert future wealth generation to younger generations through the use of partnerships and limited liability companies owned by trusts for children or grandchildren but managed by my client and funded through loans or bank guarantees.
Use
The client whose focus is on the use of family wealth is apt to respond positively to the various techniques that allow retained use of income for several years, such as the various forms of grantor retained income trusts and sales to intentionally defective grantor trusts. If the client has successfully shifted capital to children or younger generations in transactions that are now old and cold, we may get more sophisticated and look at opportunities for split interest purchases of residences that would qualify for the exception in IRC §2702(a)(3)(A)(ii) or GRATs wherein the grantor’s retained reversionary interest is sold for fair market value (not a technique for the faint of heart or those who think that Gradow, 897 F.2d 516 (Fed. Cir. 1990) was correctly decided and who disagree with the contrary decisions in Magnin, 184 F.3d 1074 (9th Cir. 1999), Wheeler, 97-2 USTC ¶60278(5th Cir. 1997), and D’Ambrosio, 101 F.3d 309 (3d Cir. 1996)).
Management
And the client whose predominant interest in family wealth is its management is likely to be quite interested in techniques that stress retained management. Examples of such techniques include family limited partnership in which the general managing interest is retained while making gifts of limited, not managing interests, and S corporation recapitalizations which create both voting and non-voting S corporation stock, with the non-voting interests given away, transferred to a grantor retained annuity trust or sold to an intentionally defective grantor trust.
As can be seen from these examples, some techniques, such as the sale of non-voting S stock to an intentionally defective grantor trust while retaining the voting stock , allows one to focus on both the management and use of the transferred asset.