Take the pyramid approach to planning
Many concepts have been illustrated with a pyramid: financial planning, relationships, diet and Maslow’s hierarchy of needs are a few that come to my mind. The way you and your advisers should approach estate planning also could be illustrated with a pyramid.
• With an estate plan, you are passing down wealth and wisdom.
• Estate plans can be organized as pyramids.
• Are your goals and objectives right-side up in your pyramid?
Let’s start with a definition. Proper estate planning means: planning for yourself and those you care about without giving up control of your affairs; planning for your disability; and giving what you have to whom you want, when you want and the way you want. Proper planning should provide efficiency, reducing costs and increasing value to your family.
Wealth and wisdom
What you have to pass on actually involves two entirely different things. Think of them as your wealth and your wisdom. Wealth is easy: It is what you own in a material sense — your money and property. It provides the means of accomplishing things in the world. Wisdom is a sense of purpose, values and direction. I’ve heard it called a “moral compass.” Wisdom could be described as your beliefs about what is worth accomplishing, or an understanding of what should be done.
Some people give their heirs a lot of wealth but fail to pass on wisdom. It is a serious failure to give heirs lots of money or property while failing to instill in them the right values about what to do with it. In that instance, we enable them (by providing the financial means) to do damage to themselves and others.
On the other hand, to give our descendants tremendous wisdom but no wealth also misses the mark. We’ve probably done no harm, but we have not done all we could to maximize the impact of our lives. We gave the kids a moral compass to keep them headed in the right direction — but didn’t provide the fuel to go very far!
No estate plan will work as effectively as it could unless we consciously address both fronts: pass on the material wealth and instill wisdom in those who will become the stewards of that wealth.
However, most plans are upside-down. What do I mean by that? Let’s go back to the pyramid analogy.
The most effective approach to estate planning is like building a pyramid. Think of a pyramid with five levels.
The Planning Pyramid has you, with your hopes, fears, dreams and aspirations, as its base. We find that when given the freedom to really consider your options, you probably want to remain in control of your wealth throughout your life — you’ll still be able to “steer” your means of accomplishing things. Your goals and objectives for life and your family are the wide base of the pyramid, the foundation.
The next layer is family. You and your advisers must have a thorough understanding of your family members and family dynamics — the people you care most about and who will receive your wealth someday. You, not your advisers, are the expert on your family.
After these two layers of the pyramid are laid, we can consider the third layer, which is wealth. Farm families have a large concentration of wealth in one type of asset: farmland. Land is special, not at all like stocks, bonds and CDs. Part of your wisdom may be the desire to pass on this particular land. Preserving and protecting it seems to be more important to most people — and should be given more attention — than expanding wealth.
But that leads us to expanding wealth, the fourth layer of the pyramid. How do you treat all children fairly while preserving the farm heritage? This may involve strategically expanding your wealth. Teamwork among professionals is often necessary.
Finally, we come to the last layer of the pyramid: avoiding taxes and minimizing costs. Believe it or not, when everything else is clear, these are usually the easiest objectives to accomplish!
Notice that as you go from the bottom to the top of the Planning Pyramid, each layer gets smaller and perhaps less significant.
Reflect on your own experience with estate planning professionals and articles. Where was the focus? When I say most estate plans are upside-down, I mean most planning is focused almost solely on tax strategies instead of wisdom and family issues!
Proposed New Year’s resolution: Re-examine estate plan. Is it right-side up?
Curt Ferguson is an attorney from Salem who helps families accomplish estate-planning goals.
Go online to www.tlcplanning.com to learn more.
This article published in the January, 2010 edition of PRAIRIE FARMER.