Over the years, I have seen clients become almost mesmerized by the intricate features of complex planning structures – multiple trusts, holding companies, interlocking entities, tiered partnerships, freeze or preferred return structures. They focus on the detail but lose sight of the big picture, which is transferring family wealth in ways that will maximize the family’s long-term benefit. For families, I think that complexity can be a bit like Novocain, at least at the outset – focusing on high-tech techniques numbs nerves that are twinged by the prospect of transferring wealth, power and control. The family leader thinks, “Since I’ve hired the best minds and put in place the most sophisticated planning, then how can my plan possibly fail?”

In families’ defense, it is easy to get swept up in the benefits of complex techniques, and hard to envision exactly how the structure will operate – and what resources will be required to maintain it – in the future. Complexity brings with it potential cost in many forms:

  • First, the more complex the structure, the more moving parts it will have, and the more moving parts, the more opportunities for unforeseen glitches, conflicts and issues that will require attention (at a price) in the future. For example, just moving cash through an investment holding structure to fund a new investment or make a distribution for taxes can create tax and legal issues, particularly if the cash is needed quickly and is in the “wrong” entity.
  • Second, a complex structure is more expensive to administer, and will require greater and more sophisticated resources on an ongoing basis. Administrative staff, accountants, investment advisors, bookkeepers, other legal counsel, insurance advisors – all will need to understand the structure and its purpose, and work cooperatively to keep it operating smoothly. Families are often distressed when they see bills arising from conversations among advisors (sometimes without any family participation), yet such conversations are often essential to running a complex structure.
  • Third, even if all parties understand the structure and its purposes at inception, memories fade, advisors come and go, circumstances and laws change, and the structure that once was a perfect example of form following function can come to seem more like a Rube Goldberg creation. Family members who don’t understand the purpose and operation of a planning structure are more likely to challenge its validity in the future.

So is the answer to throw out complex, sophisticated planning? No. The answer is to recognize that the extra return derived from the complexity – in terms of increased financial return, additional control, greater flexibility, tax savings, etc. – needs to be great enough to overcome the drag of increased administrative cost and time, and the risk of future obsolescence. Families need to think carefully about their wealth transfer goals – and the resources they are willing to commit to achieve those goals – long before they instruct lawyers to draw up documents. They should talk with families who have implemented similar planning about their experiences, and to their team of trusted advisors about the long-term ramifications of the planning. The point is to utilize complexity when it adds value, but with eyes wide open.

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