The collective sigh among lawyers, accountants and investment advisors across the United States was practically audible as Dec. 31, 2012 came to a close. This group wasn’t reacting to the drop of the ball in Times Square or merely marking the passage of time from one year to the next. Rather, there was widespread relief at the ending of an extremely busy year, for some, the busiest of their careers, especially those working with ultra-high net worth individuals. Exhaustion most likely set in on Jan. 1 and only began to lift as many in the profession headed off to Heckerling two weeks later. It would be nice to think that all is behind now, with documents having been signed, assets transferred and account titles changed. But, alas, the real hard work has only just begun. As everyone starts to recharge and look ahead, the question becomes: “Now What?” This column briefly touches on some of the consequences of the frenzy that was 2012.
Individuals who responded to the “urgent” call to transfer assets before the tax law changed might understandably be questioning whether it was really necessary after all. Despite the caveats that advisors included in conversations and publications (most notably, that it was impossible to predict what Congress would do), on the whole, the estate and gift tax laws hardly changed at all, either in exemption amount or tax rate. More than one client might ask whether their lawyers or accountants were acting like Chicken Little and wonder whether they were duped into taking a step that in other circumstances they wouldn’t have considered. In these early days of 2013, there’s a risk that memories will shorten and clients could question the advisors who led them to give away substantial assets to family members, trusts and charitable entities, because the change in law wasn’t as draconian as predicted. It would behoove members of the industry to consider how they will respond to these inquiries. The questions received and the responses given will not only reflect the strength of the client/ advisor relationship that existed before 2013, but also will profoundly affect those relationships in the years to come. Trust is earned through experience, and if transactions weren’t undertaken with a mutual understanding that the decision was ultimately the client’s own action in the face of the unknown, fractures in trust that were unseen might now come into view.
It’s all too easy to view the exercise that many undertook in 2012 as primarily a quantitative one. The numbers were too compelling not to act. The year 2012 presented an opportunity for the more technically oriented advisors to test their mettle and show their dazzling expertise. But in the end, the transactions that occurred are fundamentally human – psychological and emotional, more than technical – for the families who chose to pursue them. Significant holdings were transferred from one generation to the next. Private foundations blossomed anew or received large infusions of capital. And, perhaps more importantly, assets owned directly by individual family members were transferred into trusts and other legal entities that will fundamentally change legal ownership and control. None of these changes should be taken lightly. The families who have undertaken them will need to transform their relationships with each other, with their assets and with the notion of “ownership” itself. For those individualistic Americans (and what American is not?), the sheer magnitude of assets that they don’t directly control anymore could be especially challenging. Advisors will have to remind clients that they no longer control assets that they might still consider their own. Families will need to come to terms with the transitions that they have accelerated. In early 2000s, the term “GRAT (grantor retained annuity trust) remorse” was coined to describe the regret of those individuals who transferred assets into GRATs with the result that their children surpassed them in net worth when the GRAT assets performed well. This phenomenon may return, with a new twist and application. Not only were younger grantors making the recent gifts, but also, their life expectancy is only getting longer. Older family members will now live alongside their heirs, as inheritors, in a way that prior generations never experienced. We have a long road ahead of us. There will be much work to be done, including educational, psychological, fiduciary and financial advice and assistance, in response to these new realities.
Lessons for the Future
Simple disclaimers can only do so much to alleviate concerns that might arise among the donors of 2012. Any attempt to anticipate future changes in circumstances has its limitations and may provide small comfort for families grappling with having given away more than they now might deem prudent or comfortable. The human side of the transfers made in 2012 has only just begun. Experienced professionals often admit that it took time to learn to be careful about leading clients to take actions they might later regret. Younger members of the private wealth management industry will now have a chance to learn these lessons. On the bright side, many will now have to opportunity to work in new ways with clients – that is, beyond the technical and into the human issues that come as a result of the 2012 transfers.