The Oracle of Omaha on Estate Planning – Part 2
Last month, I referenced recent comments by billionaire Warren Buffett about his personal estate plan. I agree with Buffett that we should disclose the key elements of the plan to our adult children during our lifetime in summary fashion, without necessarily delving into the details—that is, the legal documents or the dollar amounts. In this month’s update, I outline two areas where most of us should depart from Buffett’s estate planning suggestions; specifically, in charitable planning and in providing for grandchildren.
Charitable Planning:
First, regarding charitable planning, Buffett has pledged that most of his wealth will pass to charity at death. Buffett names his three children to manage the charitable foundations receiving his wealth. Notably, Buffett requires that his three children unanimously agree on all charitable distributions. Buffett reasons that, “When large philanthropic gifts are requested, a “no” frequently prompts would-be grantees to ponder a different approach – another friend, project, whatever…”
By requiring unanimous consent, Buffett is attempting to keep his children from being considered, in his words, “targets of opportunity.” The rule requiring unanimous consent, however, will have a chilling effect on the amount of the charitable gifts. This is not just because of the likelihood of disparate political and social views among his three children, but also for logistical barriers associated with collective agreement.
If you or your clients are seeking to incent children and grandchildren to make charitable donations, you should reduce the legal and logistical barriers to making charitable donations. A donor advised fund is a cost-effective means of earmarking assets for charitable objectives, both for lifetime charitable gifts as well as gifts made at your death. You could name one or more children to direct your donor advised fund following death. Alternatively, some of our clients direct charitable gifts not through their personal donor advised fund, but to each of donor advised funds established by each of their children.
Admittedly, managing billions in charitable foundations requires more planning than annual gifts of a few hundred dollars to your local food shelf. But regardless of one’s financial net worth, we must decide whether it is more important to encourage charitable planning among children or to simply protect our children from becoming “targets of opportunity.”
Grandchildren:
Second, regarding planning for subsequent generations, Buffett’s plans for wealth does not extend beyond the generation of his three children. Buffett states,
I’ve never wished to create a dynasty or pursue any plan that extended beyond the children. I know my three children well and trust them completely. Future generations are another matter.
In contrast to Buffett’s plans, many of my clients dedicate assets for grandchildren. Planning for second (or subsequent) generations is called “generation-skipping,” and could take the form of gifts made directly to the grandchild or to a trust for their benefit. Many of our clients have specific, achievable outcomes in mind, such as educational costs, the down payment on a house, health care costs for known chronic conditions, or even future life experiences, such as nonprofit work. While a billionaire has billions of reasons to worry about the misuse of assets, most of our clients who are of more limited means can reasonably plan that a $50,000 gift to a grandchild’s trust will ultimately be used for the laudable purposes directed in their estate plan.
When considering gifts to his own children, Buffett has been previously quoted to say that, “a very rich person should leave his kids enough to do anything, but not enough to do nothing.” Perhaps clients consider this same principle for their grandchildren, in addition to their children.
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