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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

“Spread the News, Cory,” my friend told me after arriving home from a weekend skiing with his wife and friends in Colorado a few weeks ago, “the pandemic is over.”  While my friend’s exuberance may be a bit premature, I think all of us can relate to a desire to be done with the pandemic.  In this month’s update, I wish to emphasize, through two recent client illustrations the importance of creating margin for error in our estate planning decisions.

We must make important estate decisions now, assuming we will die today, leaving ourselves sufficient margin for error because critical estate planning decisions are based upon imperfect information.

In “Psychology of Money,” Morgan Housel writes about how the most important historical events that “move the needle the most” are those events for which there was no precedent—no reason to believe that we could accurately predict their occurring.  Housel writes, “The correct lesson to learn from surprises is that the world is surprising.  Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.” Housel, Psychology of Money, 128.  There is no way around the fact that we are forced to make important estate planning decisions with imperfect information.  We must therefore create “margin for error” by being ready to admit error as soon as possible and retain the right to make important changes.  We should also consider creating a narrative about our planning decisions so that, as life changes, either during or after our death, the objectives underlying our legal plan can be implemented.

Creating “Margin for Error” in Estate Planning Decisions

This past winter, I represented a widower who, over the course of the previous year, had lost not just his wife (expectedly), but also his step-daughter (unexpectedly).  This widower had worked with another attorney to create an irrevocable legal structure intended to eliminate the possibility of a so-called medical assistance “spend down.” The efficacy of this irrevocable plan was predicated on the continuing survival of the step-daughter, an aspect that in retrospect does not appear to have been communicated to my client at the time.  While the premature death of the step-daughter was not a likely outcome, it was a forseeable outcome, and should therefore have been contemplated.  The family unfortunately elevated a secondary goal of avoiding medical assistance spend-down, above a primary goal of assuring appropriate legal control.  As a result, there was no margin for error when life turned out differently than expected.

Develop a Narrative of Planning Decisions

In 2017, I represented a husband and wife create a cabin limited liability company (“LLC”) to own and manage a Minnesota cabin, and then gift minority ownership interests to their two adult children.  As he was dying of cancer, the husband penned a moving narrative to his family about the cabin and the purpose of the LLC planning.  The family was to own the cabin through the LLC so long as it was not a burden on his wife, and the property could be used amicably by his two adult children and their families.  Within the year, the husband died, and the adult son went through a difficult divorce. This spring, my widow client decided that because the cabin had become a burden to her, she would relinquish the last ownership rights of the cabin LLC.  Here, because of control retained by my client, she had “margin” to make a change to the LLC planning.  The husband’s guiding narrative provided the wife the emotional and moral support she needed to make the decision.

Amazon founder Jeff Bezos describes the difference between a “one-way door decision” and a “two-way door decision.”  If a decision is a two-way door decision, you are able to reverse course once you determine that a previous decision was wrong.  If a decision is a one-way door decision, no such reversal is possible.  As much as we try, we cannot avoid the inevitable –no, I am not speaking about our own death, I am speaking of the fact that we will be wrong.  I certainly did not predict the impact of the COVID-19, nor do most of my clients see life play out as expected.  We simply cannot predict the future.  We should therefore (i) retain sufficient margin for error in our estate planning decisions, and (ii) develop a framework, or narrative, for why you have created your plan in the manner that you have.