Week 9 Flashcards
Imagine a sculptor becomes an architect. Trained only in art, his buildings collapse, but they look great before they do. Imagine a mason trained only to cut and lay stone, who is asked to design and build a cathedral. It is built to last, but is common as rain and as ugly as sin. With respect to this parable of legacy planning, what statement or statements below is (are) correct, in the light of CAP?
I. Such an architect needs such a mason
II. Such a mason need such an architect.
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. It is in the nature of parables that they are dark. Some say they are meant to be dark, so the wrong people don’t understand, but this parable is not hard to understand. And you are meant to get it, whether you are a mason by training or a sculptor by training. It starts with our recognition that we are not sufficient unto ourselves. Respect for the other may follow, when we see that the other has mastered what we ourselves have not. Planning to help a family be successful, not just rich, requires competent masons and a competent architect, too. Jay Hughes, Charles Collier, Paul Schervish, Patricia Angus, Tim Belber, Peter Karoff – when you get to know them, you will quickly see that they are highly competent in at least one planning trade, whether it be law, finance, or grantmaking, but what distinguishes their work is the element like architecture, informed by the humanities, which organizes the labor of planning to respond to the client’s highest purposes without neglecting the everyday purposes which a plan, like a house, must also serve.
As expressed in the work of, say, Huges, Angues and Collier, what is success in estate planning?
I. The family is unified and works well together, each pursuing his or her own dream.
II. The family assets are passed on in a way that helps each family member achieve his or her dream within an overall family vision and identity.
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
This approach to estate planning is the leading edge of a growing consensus among those working with very wealthy families. The challenge is in implementing these philosophies in estates where the family does not have the tolerance for paying significant fees to professionals who are trained in human dynamics and family governance.
From James Grubman, which statement or statements below is (are) correct?
I. Immigrants to great wealth need primarily independence skills.
II. Natives to great wealth need both independence and interdependence skills
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
The point is that first-generation wealth holders are independent and have what amounts to middle-class values and work ethic. They are can-do, go-getter, driven, autonomous people. Their heirs, though, need that and more. They also need to be able to work well together with respect to shared family assets, such as vacation home, a family foundation, a family business, and family trusts. They need skill at both independence and interdependence. They need to know how to own but also how to share, whether through shared ownership of business interests, beneficiary/trustee relationships, or shared responsibilities on charitable foundation boards. These skills, Grubman believes, have to be consciously fostered by families who hope to flourish for many generations.
Patricia Angus suggests which of these?
I. Family Governance requires Principles, Policies and Practices
II. Family Governance is established in three stages: Chaos, Coordination and Cohesion
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
Both statements are correct; these are her insights, based on many years of working with multi-generational families.
Why do families most often fail to transfer wealth and values across generations?
A) Lack of communication
B) Poor tax planning
C) Flawed investment plans
D) Unprepared heirs
A) Lack of communication
According to oft-cited studies by William and Preisser, 60% of legacy plans failures, as indicated by the families themselves, were due to lack of communication. 25% were due to unprepared heirs. Only 3% were due to lack of good tax and financial planning.
Dr. James Grubman, in discussing “natives” and “immigrants” to the land of great wealth, makes which of these points?
I. Generation 1 (the immigrants to great wealth) creates and owns wealth and is comfortable managing it.
II. Generation 2 (becoming natives of great wealth) often does not own the bulk of family wealth; rather, it is owned for them in trusts and other structures that require the sharing of responsibilities and roles.
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
Both statements are correct.
When it comes to counseling families about complex issues, what is the difference between a “dilemma” and a “problem”?
I. A problem requires a solution by experts
II. A dilemma may have no solution and requires a decision
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
Marty Carter, a therapist who has worked on teams with, for example, Charles Collier and James Hughes, has a deep understanding of what holds back families, like the one in our case study, The Forest Primeval. Yes, there are planning issues that require an expert, when it comes to setting up or running a foundation or other planning tools. Such problems admit of rational analysis and are the province of well trained experts. But then there are also family issues, like those that divide Meg’s son and daughter. There may be good counsel Meg could get from a family communications specialist, but in the end, this is Meg’s decision and her dilemma. Plainly put, she is in a “no-win” situation, torn, and there is no way to resolve it with a spreadsheet or a new set of documents. All the tools come later. Now, she is alone, as a mother with her own conscience. Accompanying those who are making such hard choices is part of what figures like Tracy Gary, Patricia Angus, James Hughes, Tim Belber, Grubman and Jaffee and Charles Collier are know for. Framing certain of the highest-order issues as human dilemmas rather than as intellectual problems saves the client from going down the wrong path into a maze of tools and documents, rather than moving to a place of vision, from which the best possible, but still difficult, resolution, a moral decision, may emerge, with “the wisdom of Solomon.”
Imagine that Patricia Angus is brought in by Meg in “the Forest Primeval” to help the family with its governance. What would she likely counsel as among the first steps?
I. Be clear where the family is (chaos? coordination? Cohesion?)
II. Start with shared principles, if possible, then move to policies and practices
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
While her terminology is deceptively simple, Patricia Angus is drawing on a career of experience in counseling families and facilitating the resolution of family issues. She says that the first step is to know where the family is. In The Forest Primeval, the family seems either in chaos or about to enter it. They may well have values or principles in common, though these have not been agreed upon yet. Without those guiding principles and prior agreement on them, Mag is “all at sea” in determining her next step. It would be helpful to such a family if they had already agreed on the family values and principles that unite them despite their differences. And it would be very helpful if that agreement had been reduced to writing as a “family constitution,” with principles leading into policies (legal policies, including who governs what) and practices agreed upon in advance as to how those policies will be carried out. In the absence of such structures, each big decision has to be made or improved without a clear decision-making framework. it is sad that it takes an emergency to recognize the need for family governance structures, but perhaps this situation will be a wake-up call for Meg, and she will develop a governance structure in advance of her eventual death. Unless she creates and communicates such a structure during her life, then, at her death, there may be chaos, indeed.
Assume that Meg, in the Forest Primeval case study, is your client. She is torn between the vision of her son and her daughter as to the family philanthropies. You share with her the Rockefeller booklet. “Talking to Family about Philanthropy.” She thanks you, reads it, and then says to you, “I am not ever going to reach a consensus. I run the foundation. I must make a decision, and deliver it, as final.” In the terminology of that booklet, what is her goals in the family conversation?
A) To inform
B) To inspire
C) To engage
D) To propose
A) To inform
This is her “verdict.” She is going to lay it down as her decision.
Assume Meg decides to “inform,” rather than inspire or engage, her children in the direction of the foundation. When it comes to informing, all of these are best practices, per Rockefeller Philanthropy Advisors (“Talking to Family About Philanthropy”), EXCEPT
A) Create a formal record of the conversation (possibly video)
B) Be clear about the decision
C) Be clear whose decision it is
D) End on a high note
D) End on a high note
The pamphlet is hard-nosed and realistic about an “inform” conversation. The decider should make clear whose decision it is, what the decision is, and why the time is right to make that decision. The one deciding should anticipate a sense of loss and should acknowledge it. Because the decision may not be popular, it should be carefully documented in writing or, perhaps, in a video. It may not be possible, in a case like the Forest Primeval, for Meg to end on a high note with her son and daughter. Her decision may be met by at least one child in stony silence or with verbalized loss and frustration. Meg should anticipate this.
For what reason or reasons does family governance become increasingly important, as wealthy families go from one to two to three to four to five or six generations?
I. The family becomes a “tribe” or “clan” over time.
II. The family entities become more numerous and complex over time.
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
Over several generations the number of people considered “family” will grow to include siblings, then cousins, then branches of the family. Over time, the family business becomes a tribe or tribes. Likewise, the number of trusts, businesses, homes, vacation homes, foundations, and other assets and tools also grow. Jay Hughes likes to say that, over time, almost all the assets the family owns will be mediated by trusts, most of which will have multiple beneficiaries. This makes “planning” for any family member a complex process of coordination across entities that the family member does not necessarily own and control. To build an over-arching structure to guide and govern the family and its entities is the work of family governance.
What reason or reasons does Ronald Aucutt, a respected trust and estate attorney, give for why it is difficult for an attorney to do family governance work?
I. Bar canons make it difficult to represent more than one family member, much less an entire family.
II. Issues of confidentiality are almost certain to arise.
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
Both are correct. How is an attorney to adequately represent a whole family, whose members may end up having adverse interests or even suing each other? And how can an attorney keep confidential information shared by family members, when the attorney has a duty of loyalty to the client, presumably the one paying the fees? For example, in our case study, what would be the duty of the attorney, if the daughter says to him “Don’t tell my mother, but if I don’t get what I need here, I may well hire a litigator. Would you be interested in representing me? Or could you recommend someone?” It is for this reason that Jay Hughes left the practice of law, as has Patricia Angus.
“Family governance” addresses wealth across generations. Which practice or practices are commonly found in families whose wealth has remained intact or grown over many generations, say, five or six?
I. A Family Constitution
II. A Family council that holds regular family meetings
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
C) Both I and II
Both are best practices, as proven by the studies done by Grubman and Jaffee. What they find as universal best practices among families who have remained wealthy over six generations are these:
An exit policy for those wishing “out” of the family
Next generation education in financial literacy
A family constitution
A family council with regular family meetings
A family governing board over its complex entities
For Charles Collier (or for that matter, Tim Belber, Jay Hughes, and Patricia Angus), what best defines the purpose of estate planning?
I. To transfer assets effectively and efficiently in accordance with client intentions
II. To facilitate the transfer and transition of an appropriate inheritance to enable heirs to thrive
A) I Only
B) II Only
C) Both I and II
D) Neither I nor II
B) II Only
The thinker reference here would not disagree that an estate plan should be effective and efficient, but would not define the purpose in that narrow asset - and tax-focused way. Instead, in opposition to the narrow defination, they would assert that the goals of enlightened estate planning is to enable heirs to succeed, thrive, and lead a full and rich life. That may mean giving them the largest possible inheritance, or not. It almost certainly means leaving them an appropriate amount, along with the education, training, and mentoring needed to handle that inheritance responsibility. Yes, this does go beyond the traditional competencies brought to the planning table by financial, tax, and legal advisors. It points toward the emergence of a new discipline, often called “family governance work,” that includes both and goes beyond traditional planning.
What is the difference between “transferring” an estate to heirs and “transitioning” the estate?
A) “transfer” is a legal matter; “transition” means enabling the heirs to handle what they receive.
B) “Transition” is about assets moving; “transfer” is about building values and expertise in the next generation.
C) “Transition” means assets going to insiders; “transfer” means assets going to outsiders
D) “Transfer” planning reduces estate and income tax; “transition” planning does not.
A) “transfer” is a legal matter; “transition” means enabling the heirs to handle what they receive.
As the terminology is used by Tim Belber, JD, AEP, transfer is all about the assets, and about reducing tax and building wealth through financial and legal means. Following Hughes, Grubman and Jaffee, Patricia Angus and others, he sees transition planning as a step beyond transfer planning. It includes all the usual tax and legal move, plus also takes into account the ability of the heirs to handle the inheritance. Using the analogy from Roy Williams, if the assets are a football thrown downfield, then transfer planning is coaching the quarterback; transition planning is coaches both the quarterback and the receive, so that the ball is caught and not dropped in the face of significant challenges.
