Ultra-high-net-worth (UHNW) individuals, those individuals with a net worth over $5 million, are now more at risk than they have been in decades. The economic, environmental, social and political situations are, and will remain, uncertain. The federal estate tax reverts back to $5 million after 2025. States and the federal government are increasing income tax rates, and inflation erodes accumulated wealth. If you are an advisor to UHNW individuals, you should ask, will their estate plans work in the face of these uncertainties?
Most estate plans are based on your clients' needs and wants, usually focusing on protecting assets and saving estate and income taxes. These plans assume that the estate planner can accurately predict that a specific course of action, such as funding a trust, will have the same result tomorrow as it will have today. Since tax laws are changing, the value of assets is varying from day to day, and social and political turmoil are sending shock waves globally, accurate predictions are harder and harder to come by. Assuming that what is true today will be true tomorrow is not now valid, meaning that your clients' estate plan may be based on false assumptions. What clients need is a plan that is tied closely to their goals and objectives, and one that can be validated. In other words, a strategic estate plan.
To create a valid strategic estate plan, you first must clearly articulate your client's Common Goal. Next, you need to define the objectives necessary to achieve that Common Goal that are now blocked. Next, you need to define your strategy to achieve the objectives that are being blocked. Then, you need to uncover any underlying assumptions on which your strategy is based and validate that these assumptions are true. Next you need to define your tactics, and the needs and wants of stakeholders that dictate the course of action — that is the tactics now used to implement your strategy. Finally, as you develop the Plan, you need to uncover and validate the overall assumptions that this strategic estate plan will indeed create the needed changes to unblock your client's objective and achieve the Common Goal.
What Is the Common Goal?
Your client's Common Goal is a Statement with which your client and every other stakeholder, including their family, employees, vendors and service providers, customers and community can agree.
Examples:
- Our Common Goal is to make money now and into the future.
- Our Common Goal is to have greater financial security.
- Our Common Goal is to have family control of our family business now and into the future.
- Our Common Goal is to make a profit from our great idea.
What Are Your Objectives?
An Objective is a necessary aspect of your client's Common Goal. There are some objectives that are explicit in the Common Goal, such as profiting from a great idea; and there are also implicit objectives, such as security, satisfaction and growth at the personal, group and organizational levels. The Objective completes the statement: "We achieve our goal of [Goal] by [Objective]."
Examples:
- We achieve our business goal of making money now, and into the future, by growing sales by 15% each quarter over the same quarter last year.
- We achieve our personal goal of financial security by saving 10% of our gross income annually.
- We achieve our goal of controlling our family business now, and into the future, by gifting stock to our children.
- We achieve our goal of profiting from our great idea by starting a business and successfully taking it public in five to seven years.
What Is Your Strategy?
The Strategy is integral to achieve your client's Objective. It is an articulation of why you are doing something. There is, at any one time, only one strategy that is the best for achieving the Objective, though what is the best strategy may change due to changes in circumstances. The Strategy completes the following statement: "Only by using [the Strategy] can we achieve [the Objective]."
Examples:
- Only by using a SEO-optimized website, we can achieve sales growth of 15% each quarter over the same quarter last year.
- Only by using a Qualified Deferred Income Strategy can we achieve savings of 10% of our gross income annually.
- Only by using a Strategy of annual gifting of equal amounts of stock to each child, can we achieve the transfer of the business to our children.
- Only by using a Strategy of attracting Venture Capital can we achieve going public in five to seven years.
The underlying assumption that the Objective can only be achieved through this Strategy must be made explicit, then tested as to whether this is a valid assumption to make in the present circumstances. To determine if this is a valid assumption, answer the following questions:
- Is this Strategy absolutely necessary to achieve the Objective, or are there other viable Strategies?
- Is this Strategy, by itself, sufficient to achieve the Objective, or are there other actions required?
- Is this Strategy taking into account the possible risks along the way and is not just wishful thinking ?
- What is the tactic needed to implement the Strategy? Can that tactic possibly be implemented in the current situation?
What Are Your Client's Tactics, Needs and Wants?
Tactics, Needs and Wants determine which actions are required, and which are barred, to Implement the Strategy. If the Strategy can be considered the "what" of the plan, tactics are the "how." The Tactic completes this sentence: "We will take [the following actions] to implement a course of action, based on our [Strategy] to achieve our [Objective].”
Example:
- We will fire our existing technology staff, hire a social media marketing firm, and outsource our sales and marketing efforts to them and implement an SEO-optimized website to increase sales 15%.
Underlying Assumptions of Any Course of Action
Like strategies, tactics have underlying assumptions; primarily, that this course of action is the best way to implement the strategy. This assumption can be based on your client's, or other people’s, needs and wants, which may be unrelated to achieving their Objectives. These underlying assumptions, needs and wants, must be made explicit and examined to determine whether they are valid assumptions to make in the circumstances.
To validate these assumptions, ask:
- Is this course of action absolutely necessary to implement the Strategy, or are there other viable Tactics?
- Is this course of action, by itself, sufficient to implement the strategy fully, or are there other actions required?
- Is this course of action taking into account the possible risks along the way to the Objective, or is it just wishful thinking?
- Under which scenarios will this course of action fail, and what are the viable alternatives?
Conclusion
By following these steps, you will have a clearly articulated Common Goal that everyone agrees upon; identified the objectives that are necessary to achieve your Common Goal; a valid strategy for achieving your objectives and a course of action, not based on what people feel they need or want, that is both realistic and achievable: That is the result of having a defined Strategic Estate Plan.
Matthew Erskine is managing partner at Erskine & Erskine.