Estate planning is the process of creating a plan to provide guidance to your family for a time when you are no longer around or are incapable of decision making. Through this mechanism, it is possible to give directions about what happens to your assets using two broad approaches. The first is a Will, which requires going through the probate process to distribute your assets.
The second and better choice is a Revocable Living Trust, or RLT, which allows you to manage your assets in a “trusted” medium while you are alive as well as after you are gone. It also serves to give guidance to Successor Trustees on how your assets should be distributed or handled.
The idea of giving such guidance can be described as the alter ego of you. The term “alter ego” has been described by some as referring to “the other I” or “a second self.” The Roman philosopher Cicero was the first person to describe someone who is the alter ego of himself, and he referred to the person who knew him as well as himself as the “second self.”
Today, we can have a “second self” in the form of various institutions such as a trusts or corporations. This can be described as the alter ego of the inventor of something such as the Ford automobile. In such cases, it could be said that Ford Motor Co. is the alter ego of Henry Ford. Similarly with a Trust, you can have an alter ego, so to speak, to handle your affairs when you are gone.
With a Trust, the person(s) who handles the affairs after you are deceased or impaired is your Successor Trustee. That may be a spouse, another person, or a trust company. Whoever the Successor Trustee(s) is, that person is going to make investments or maintain securities, and will need guidance.
In providing such guidance for the Successor Trustee(s) of a Revocable Living Trust, the idea that you, the Creator of the Trust, will know what investment strategies will be profitable in the future generally doesn’t work. For example, Al-Waz Wright was the founder of a very successful drywall company. His company, Stucco Stuff, was able to install the drywall in many large office buildings in Seattle, Washington. With the success that Al-Waz had with bonds and boards (drywall) in Seattle, he couldn’t imagine making serious mistakes with providing advice about anything in the future. So, in his RLT, he wanted to provide that the only investment his future Successor Trustees could make was in Washington state bonds, which had been a particularly good type of investment for him.
In the same manner that Napoleon and Hitler could not envision what would happen when they invaded Russia, neither can you see the future. Why? Because neither you, Napoleon or Hitler can predict the future. Al-Waz Wright thought that the only way to buy securities for his RLT was to buy only Washington state bonds. How could the state of Washington possibly default on its bonds?!
Well, they did! The state of Washington defaulted on its bonds in the 1970s, which was then an unheard-of event. Never before had any US state defaulted on a commitment to pay the bonds when they matured. Although many said that it couldn’t happen, it did. So, in the 1970s when the Washington State bond system collapsed, the people who bought those bonds lost billions in revenue bonds.
When I was doing the estate planning for Al-Waz Wright and he informed me that his Successor Trustees could only invest in Washington state bonds, I politely told him “No.” The advice was salient because I didn’t know that Washington state bonds would fail and neither did Al-Waz.
The message here is that if you are going to leave instructions for someone, such as the Personal Representative (aka the Executor) of your Will or the Successor Trustees of your Trust, it is better to refrain from the specifics of what would needlessly hamper in the future investment choices. In most instances, it is advisable to give more generic guidance; for example, to only invest in securities that satisfy the “prudent investor rule” or other guidance that is not written in stone, so to speak. While many people believe they know what will happen after they die; they don’t, and neither do you. Therefore, the guidance in your RLT or Will should be clear but flexible, so that those performing trust duties relating to your assets will have the needed discretion to act in your and your beneficiaries’ best interests.