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Classic Issues in Family Succession Planning
By G. Warren Whitaker
Let’s choose executors and talk of wills.
— Richard II , Act III, Scene ii
Because estate planners spend hours immersed in document drafting, legal research, and keeping up with the latest Tax Reform Act, they can lose sight of the fact that they are involved on a daily basis with the deepest psychological issues that confront human beings. The same issues that clients routinely bring to the planner’s office have been explored for thousands of years in mythology, religion, art, and literature. This article will examine some of these great human issues as they have been portrayed over the centuries and will consider how estate planners could have helped resolve the conflicts they reflect.
The first of these timeless issues is the relationship between parents and children. The parent-child relationship evokes the strongest of all emotional bonds and is recognized as paramount by all cultures. Scientists like Richard Dawkins tell us that this bond is an inherent evolutionary trait that is essential to ensure the perpetuation of the individual’s genes via his or her progeny. Richard Dawkins, The Selfish Gene (1976).
Nevertheless, the parent-child relationship can also be a source of great conflict. A classic exploration of this subject is King Lear (1608) by William Shakespeare. Lear, the aging King of Britain, decides to divide his kingdom among his three daughters. He plans to spend the remainder of his days alternately visiting with each. At the last moment he disinherits his youngest daughter because she is not sufficiently demonstrative in showing her gratitude.
After he has made the gifts, Lear discovers that his daughters no longer show him the appreciation he had expected. Instead, they regard him as a bothersome old man. They eject him from their castles, forcing him to wander the heath on foot, vainly seeking refuge from a howling storm. Lear realizes too late that the daughter he has disinherited is the only one who remains loyal to him. She is killed, and Lear is brought to the brink of madness. Alone and abandoned, he too dies.
From an estate planner’s perspective, Lear made some wise and brave decisions. First, he recognized that he was too old to run the kingdom of Britain. Rather than cling to power, he sought to provide for an orderly transition to younger hands. Second, he sensed that his daughters could not work together to keep the kingdom intact and would fight among themselves over its division after his death. He therefore chose to divide the kingdom among them as he saw fit during his lifetime.
Unfortunately, Lear went too far by making irrevocable outright gifts of the entire kingdom. Instead, he should have been advised to give each daughter’s share to a separate revocable trust for that daughter’s benefit. Each daughter could have selected a trustee to manage her share of the kingdom, but Lear would have retained the power to revoke the trusts and take back the assets if he needed them or if he found that his daughters were not sufficiently grateful to him. (The mere existence of this power to revoke would likely have ensured their eternal gratitude.)
It appears that Lear lived in a jurisdiction that imposed no estate or gift taxes (or perhaps, because he made the laws of the jurisdiction, he exempted his own estate from those taxes). If he had lived in the modern United States and wanted to make completed gifts for transfer tax purposes, he might have transferred the interests in the kingdom to irrevocable discretionary trusts for the benefit of his daughters. (He would thus incur a gift tax but could claim a substantial discount for the minority, noncontrolling interest in the kingdom he gave to each trust.) He could have allowed each daughter to participate in the selection of her trustee, but he could have also incorporated in the trust agreements a power to remove and replace the trustee, exercisable by an independent protector loyal to Lear or possibly by Lear himself. See Estate of Wall v. Commissioner, 101 T.C. 21 (1993). If he had created the trusts in a state such as Delaware or Alaska, Lear could even have remained a permissible beneficiary of these trusts in the trustee’s discretion without pulling the kingdom back into his gross estate at his death.
Lear should have retained the assets that he would need to provide for himself during his lifetime. Among these assets would have been a cottage on the heath in which to reside. (Lear was probably too old to consider putting the cottage into a qualified personal residence trust.) He would have wanted to retain his favorite means of transportation (presumably his Learjet) and sufficient liquid assets to provide for their maintenance and for his other needs.
The delicate issue of incapacity should have been raised with Lear. This can be an awkward subject to broach, particularly with older clients, but because Lear had already shown signs of erratic behavior it should have been addressed. Lear should have been encouraged to put the assets he would retain in a separate revocable trust for his lifetime benefit, with a trustee selected by him who could manage the assets and see that his needs were met if he became incompetent.
Lear, like many clients, might have suggested then that one or more of his daughters be named as trustee of his revocable trust; clients often prefer naming a family member to look after them during incompetence. Lear’s estate planner should have alerted him to the conflicts over management of his assets that might arise in the future among his daughters or between him and his daughters. The estate planner should have encouraged him to consider appointing an institution or an independent person, such as the loyal and devoted Earl of Kent, to be trustee instead.
With this structure in place, Lear could have provided for his own security while facilitating the orderly transfer of the kingdom to the next generation. Shakespeare’s dark tragedy is transformed by competent estate planning into a cheerful comedy or maybe even a TV sitcom about a dotty old monarch and his mischievous but lovable daughters.
Traditionally the relationship between mother and son has been particularly celebrated and revered. Bruno Bettelheim has called this bond the most positive and unambiguous relationship that can exist between two human beings. Bruno Bettelheim, A Good Enough Parent (1987). Nevertheless, conflicts can arise here as well, particularly when the father dies and the mother remarries.
The greatest exploration of this theme is another play by Shakespeare, Hamlet (1603) . At the outset of the play, the King of Denmark has died. His son, Hamlet, assumes that he will inherit the family business, the State of Denmark. But the King has devised Denmark outright to his wife, who has remarried with unseemly alacrity, and her new husband has become Denmark’s king. Hamlet is angry, frustrated, and resentful. Five acts later, everyone is dead.
What could the King have done to avoid this situation? The answer should be apparent: he could have left Denmark in trust. This is the precise situation for which the legal relationship known as the trust was developed in the Middle Ages. At that time the Crusades and the Black Death were carrying off men in their prime, leaving behind both young children and still-marriageable widows. The trust was designed to ensure the proper maintenance of the widow, protect the inheritance of the children, and provide competent management of the property by a loyal and experienced retainer.
The King could have designated the Queen as the sole beneficiary of the trust with the right to reside in the castle at Elsinore for life (thus making the castle eligible for the marital deduction if a qualified terminable interest property election is made). The Queen would have had no right to convey the principal, which would pass on her death to Hamlet.
The major issue to be resolved then would have been who should be given the authority to manage the primary asset of the trust, namely the State of Denmark. Because Denmark was a closely held country, the King would probably not have wanted to give this power to an institutional trustee. He would not have wanted to give management power to his wife if he wanted to avoid influence by a second husband. One possibility would have been for the King to give Hamlet this authority, but Hamlet had shown a tendency to be indecisive, and he may have been too young and inexperienced to effectively wield this power.
The King could have given management power to his Lord Chamberlain, Polonius. As the King’s principal advisor (in effect the CEO of Denmark), he may have at first seemed the logical choice. The estate planner, however, should have had certain concerns about Polonius. First, because of his advanced age, the King would have had to appoint someone of a younger generation as Polonius’s successor (perhaps one of the junior court attendants, Rosencrantz or Guildenstern). Second, because Polonius has known Hamlet since childhood, he would probably always have regarded Hamlet as a child and tended to infantalize him. Placing Polonius in the role of surrogate father may have evoked resentment in Hamlet over his lack of empowerment instead of encouraging him to mature into the role of king.
Perhaps the best solution would have been to delegate investment responsibility for Denmark to a Management Committee that had both Polonius and Hamlet as members. Hamlet would have benefited from Polonius’s experience, and Polonius would have been compelled to recognize Hamlet as having an equal voice on the committee. The King could have named an independent outside party, such as an institutional trustee or the family attorney or accountant, as the third member of the committee to avoid deadlocks and bring in a neutral voice. In this way, the King could have ensured that things did not become unduly rotten in the State of Denmark.
Sibling Rivalry I
Another traditional arena of psychological conflict is in the relationship between siblings. Biologically, siblings are the closest relatives that exist, being products of the same gene pool. Terms such as “brotherhood,” “band of brothers,” and “brotherly love” acknowledge that the relation between siblings can produce the highest form of loyalty.
But the sibling relationship can also produce great rivalry and competition. A classic example occurs in the Biblical story of Cain and Abel, the sons of Adam and Eve. Genesis 4:1–14. Abel was a herdsman who tended animals, but Cain was a farmer who tilled the land. According to the story, God asked Cain and Abel to offer a sacrifice to receive a blessing. Abel went to his herds and sacrificed a great ox and a mighty ram. Cain went to his fields and offered as his sacrifice a medley of seasonal vegetables, perhaps accompanied by a green salad. This was not satisfactory; only animal sacrifices were acceptable. Cain did not receive a blessing, and he became angry, frustrated, and jealous of Abel. In a rage, Cain killed Abel, and God then cursed Cain and his descendants.
This story illustrates the perils of the incentive trust. The concept of the incentive trust was devised for wealthy parents who were concerned that their children would not be motivated to become productive members of society but would instead become “trust-fund babies,” living off their parents’ success and failing to use or develop their own abilities. An incentive trust might provide that a child receive a dollar from the trust for each dollar that he or she earns or that distributions are increased by a stated percentage for every degree that a child earns or for other stated achievements.
The flaw in this approach is that it is impossible to measure empirically all of the ways a child can become productive and lead a worthwhile life. A son may choose to forgo college to become a successful musician or artist. A daughter may choose to become a social worker or a teacher or devote her life to caring for the poor in another country. A child may find satisfaction making pottery or raising afamily. These children may be just as industrious and productive in their own ways as their siblings who become doctors, lawyers, andinvestment bankers, but they arenot rewarded by the incentive trust because the trust formula doesnot give due credit to theirachievements.
This is what happened with Cain and Abel. Cain was a successful, hard-working, and productive farmer, but he was confronted by a system that measured productivity according to one standard alone: the number of dead animals one could produce. Cain was not employed in an industry that provided him ready access to dead animals, as Abel was. Therefore, Cain was not rewarded despite his hard work and achievements, and he felt slighted and became envious of his brother.
The creation of discretionary trusts for the benefit of children can be a wise and farsighted plan and is generally preferable to paying large sums to children outright. Careful selection of the trustees, a thoughtful mechanism for picking their successors, and general guidelines for the exercise of their discretion are essential ingredients of such a trust. Any effort to reduce life to a mathematical formula, however, inevitably will fail.
Sibling Rivalry II
Another Biblical story about sibling rivalry, brimming with issues of family succession, is that of Jacob and Esau, the sons of Isaac and Rebekah. Genesis 25:24–34; 27:1–46.
(Remember that Isaac is the same person who, as a boy, was taken to a mountain by Abraham, his father, to be sacrificed. At the last moment, Abraham found a ram in a thicket and sacrificed it instead. This raises the issue of the effect of childhood psychological trauma upon a person’s behavior as an adult, an issue that will not be explored here.)
Esau was the oldest son of Isaac and Rebekah. He was big, strong, and handsome and was a brave hunter. Intellectual prowess and business judgment, however, were not Esau’s forte. Jacob, the younger son, was not as big, strong, or handsome as Esau. He liked to cook with his mother while Esau was hunting. But Jacob was clever.
One day when Esau returned from a long hunt he found Jacob cooking a pot of lentils and asked for a portion. Jacob proposed that in return for the lentils Esau renounce his birthright. (Under the inheritance laws of the jurisdiction in which they resided Esau, as the first-born son, would inherit all the lands and property of their father.) Esau, never the businessman, concluded that this was a fair deal, executed an acknowledged instrument of renunciation, and atethe lentils.
Already this story raises several succession issues. Was Esau’s renunciation of his forced heirship share binding even though it was executed before his father’s death? (Such a pre-death renunciation is ineffective in some countries that have forced heirship laws, such as France. French Civil Code Art. 791.) Is the renunciation invalid because Esau did not file an affidavit disclosing that he had received consideration (lentils) from a person whose interest was accelerated by the renunciation, as required in New York and some other states? N.Y. Est. Powers & Trusts Law § 2–1.11(b)(2). Was the renunciation obtained under duress? (This probably depends on how hungry Esau was.) Finally, would Esau be a prime candidate for a spendthrift trust?
The story continues. Years later, Isaac is old and blind. He tells Rebekah that he believes himself to be near death and wishes to give Esau his blessing before he dies. (Blessing causa mortis?) Rebekah, however, has always favored Jacob (no doubt a result of all the cooking they did together), and she instead tells Jacob to go to his father, claim that he is Esau, and obtain his father’s blessing. Jacob is concerned that his father, though blind, will touch Jacob’s arms and notice that they are not hairy, as Esau’s are. Rebekah tells Jacob to wrap his arms in goatskins, to make them feel hairy. Jacob does this, and Isaac, though suspicious, is convinced by the hairy arms that he is giving Esau his blessing, when in fact Jacob receives it.
This story presents additional succession issues. Significant problems can arise when a father and mother each has a favorite child. When the father is at the pinnacle of his power, one child benefits from his preferred status. As the father ages and becomes physically impaired, his wife, who has heretofore remained in the background, assumes a more influential role and is able to promote the interests of the other child, who has quietly simmered in his number two status over the years.
Finally, this tale raises a concern that is always lurking in the background of an estate planner’s practice, a concern that our testamentary formalities are designed to combat—the issue of forgery. In this case, the forgery was not of a will or a trust agreement, but of a pair of arms. As a result of this deception, Jacob must flee for his life from Esau, and Isaac sees his family torn apart by discord.
To deal with his family’s multitude of issues, Isaac should have considered the creation of a private trust company. Isaac’s sons have different talents that should be harnessed toward the common good of the family. Jacob and Esau did not innately hate each other, but they were thrust into a situation in which competition was unavoidable.
Isaac could have created a private trust company during his lifetime in a jurisdiction such as South Dakota, Delaware, Bermuda, or the Cayman Islands. He could have put his lands and his hunting business into a trust of which the private trust company was the trustee. (Trusts created in some of these jurisdictions are not subject to forced heirship claims arising in the country of the grantor’s domicile, such as the birthright of Isaac’s oldest son.)
Isaac could have been the CEO of the private trust company. Esau could have been vice president in charge of the hunting operation and also the marketing chief responsible for meeting and greeting clients. Jacob could have been the accountant in the back room keeping the books. Jacob could have negotiated contracts on behalf of the trust. Finally, Jacob and his mothercould have run the prepared foods division.
This structure might have enabled Jacob and Esau to continue to work together after Isaac’s death to keep the family business intact and provide opportunities for future generations. (For instance, some day Jacob’s son, Joseph, may want to start a designer outerwear line and open an outlet in Egypt.)
The third psychological issue is the most significant of all in its impact both on clients and on the profession. It is the ultimate issue, the issue of human mortality.
It has been said that man is the only animal who knows that he is mortal. At the same time, according to Sigmund Freud, “our own death is unimaginable. At bottom no one believes in his own death.” Sigmund Freud, Reflections Upon War and Death (1915). It is this tension between what we know and what we are unable to believe that causes such unpredictable and irrational behavior around the subject of death.
Therefore, it should not be surprising when a client with significant succession issues refuses to do any planning, or when a client asks his estate planner to prepare his or her will quickly and then allows it to languish unexecuted for months. As people grapple with the great existential issue that confronts all humans, the planner cannot expect them to behave as if they were selecting drapes for their living rooms.
Then there are clients who go to the other extreme, spending enormous time and energy to create intricate and detailed estate plans involving dynasty trusts and foundations that are designed to rigidly control the management and distribution of their assets for all eternity. These structures create a form of immortality by permitting the creator to exercise his will over future, unborn generations, to the exclusion of any input from those generations.
One of the earliest examples of immutable estate planning structures was the construction of the pyramids by the ancient pharaohs of Egypt. The pharaohs spent their entire lives (and the lives of their subjects) building enormous stone edifices designed to dominate their surroundings for ages to come. Because the pharaohs lived before the invention of the adage “you can’t take it with you,” they tried to do exactly that. They had entombed with them all of their jewels, silver, and gold, their valuable furnishings and chariots, their cattle and sheep, their wives, servants, and leading advisors, so as to exercise the same degree of dominion over their property after their deaths that they had during their lives.
These structures were doomed to failure because they were egocentric, designed solely to satisfy the pharaoh’s wish to rage against the night of his own death, without concern for the needs and welfare of future generations. As a result, it became difficult for an aging pharaoh to obtain cooperation from advisors and family members to create this testamentary scheme and even more difficult to find anyone who would support and defend these structures after the pharaoh’s death. Routinely, within a few years after the pharaoh died, thieves would loot his pyramid, and all the gold, silver, and precious belongings would disappear. Who committed these thefts? Many of them were carried out at the behest of a later pharaoh, who wanted the contents to adorn his own palace, to fill his own coffers, and ultimately to be deposited in his own pyramid, only to then be looted in turn by a successor. Pierre Montet, Eternal Egypt (1969). Thus we have the first recorded instances of “trust busting” by dissatisfied heirs.
To prevent this result and to ensure its long and useful life, estate plans should not be rigid and controlling. Instead, they should be flexible, organic, and capable of responding to changed circumstances, the varying needs of beneficiaries, and the recommendations of advisors. If clients want to give specific instructions to future trustees regarding the management of the trust, they should be encouraged to do so in a nonbinding, precatory letter of wishes. A letter of wishes can give detailed advice to future trustees about distributions (“pay all to Johnny at age 25, even if he is in the midst of a divorce and about to file for bankruptcy”) and investment (“hold Enron, buy Tyco”). In this way the client can satisfy his need to kibbitz and cajole from beyond the grave without robbing the fiduciary of discretion, as mandatory directions in the trust agreement would do.
Every day estate planners deal with the great issues of the human psyche, the issues that men and women have struggled with for thousands of years, the issues that define what it means to be human. The planner should not attempt to reduce these issues to mere numbers and formulas. Clients do not want glib answers and spreadsheets. They welcome professional insights, they appreciate human empathy, and they ask their advisors to acknowledge the magnitude of the issues they are facing. The estate planner owes these things to his or her clients.
G. Warren Whitaker is a partner in the New York office of the law firm of Day, Berry & Howard LLP Including Hughes and Whitaker. He is a former vice chair of the ABA Committee on International Planning for Foreign Property Owners. This article is based on a speech given at the IBA-ABA 8th Annual Conference on International Wealth Transfer Practice in London in September 2002.