Category: Estates and Trusts

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Buffett on Family Business: Beat the Third Generation Curse

warren buffettWarren Buffett is very good at spotting great family businesses. What does he look for? How can his filters help family businesses prosper?

For one, they can mitigate one of the greatest dangers: the third generation “curse.” This refers to how few family businesses survive beyond the third generation, let alone prosper.

An under-appreciated fact about Berkshire Hathaway, the conglomerate Buffett built: virtually all its family businesses boast second or third generation descendants who rival or outshine previous generations. That is rare among family businesses.

So while every family and business situation differs, Berkshire’s two dozen family companies are a good place to look for insight about multi-generational prosperity in the family business.

Studying Berkshire’s family businesses, I found that they are united by the following values. These values are important factors in their success, in the founding generation and subsequent ones.

Family business members, and their professional advisors, whether in law, accounting, or other fields, would do well to ponder these points.

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The 100 Year Bloom?: Wealth Inequality in the U.S.

The debates around Piketty’s analysis of wealth gaps will persist, but a recent paper by Emmanuel Saez (U.C. Berkeley) and Gabriel Zucman (London School of Economics) indicates that wealth disparity in the U.S. has hit the levels of about 100 years ago. As the Economist Espresso edition reports, the study finds that “In the late 1920s the bottom 90% held just 16% of America’s wealth; the top 0.1% had a quarter.” From the Depression until “well after” World War II, the middle class share went up. Since the go-go 1980s that tide reversed and now “The top 0.1% (160,000 families worth $73m on average) hold 22% of America’s wealth, just shy of the 1929 peak—and almost the same share as the bottom 90% of the population.” (The Economist link has a nice chart from the paper. The chart captures the trend well. I was unable to get the image from the paper, however.).

I have to wonder whether the intersection of wealth disparity, race and police tensions, health security, job prospects, lack of food, and perhaps other factors explain what seem to be larger examples of unrest and revolutionary impulses from all ranges of political interests all around the world. And, the general sense of rejecting all institutions (a millennial impulse if lack of joining a party is a signal) can still lead to the short term alliance of enough people to cause revolution (their cause is change and rage and unleashed energy against the unjust), the aftermath of which is rarely bloodless. Once the common enemy goes, the energies of the one truth turn on each other. The show Survivor is much more real: eliminate those who are strong and helped you win, for they may threaten your vision. In other words, I sense much anger out there (and it may be founded) on many fronts. I see lex talionis (eye for an eye), but that is not justice. The law is supposed to mediate our impulse to revenge, and yet the law lies behind the changing tides of wealth. The unarticulated sense of injustice and disenfranchisement can eat the system from the inside. And even those gaining the biggest benefit right now will not see that the bottom is falling out from under them.

Not all 100 year blooms are pretty or benign. Reorganizing a country or the world so that baseline well-being goes up and is shared by most, if not all, seems like a blip in historical terms (I am trying to think of an extended era, more than 100 years, when wealth disparity was not high). But it may be that if we don’t start to fix these problems, the desire for those blips will become real and travel with high costs: depressions, starvations, revolutions, and wars.

It may not take much to prevent the fall. Who knows? Maybe the Jam’s That’s Entertainment captures an odd, sad, equilibrium that barely satisfies.

Waking up at 6 A.M. on a cool warm morning
Opening the windows and breathing in petrol
An amateur band rehearsing in a nearby yard
Watching the telly and thinking ’bout your holidays

If that is gone, well…

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The Creativity Cliff: Another Reason Extended Copyright Terms Are Not About Authors

Quality of life and creative capacity at the end of life are other reasons to doubt that long copyright terms are important for authors. Ezekiel Emanuel’s “Why I Hope To Die at 75” caused a stir for his views on graceful death and quality of life. Part of his argument is that creativity, on average, diminishes late in life. Those who pursue prolonging life as if they are “immortals” “operate on the assumption that they will be … outliers” such as one of Emanuel’s colleagues who still publishes papers that change policy at 90. “But the fact is that by 75, creativity, originality, and productivity are pretty much gone for the vast, vast majority of us.” (Emanuel picks 75 because that is his trigger age for not fighting death). The article has a graph that indicates truly creative, novel ideas and work decline after the early to mid 60s for most people. Emanuel is quick to point out that there are many other ways to be productive and contribute to society after creativity slows down or goes away. Nonetheless, if he is correct that “This age-creativity relationship is a statistical association, the product of averages; … [and] The age-creativity curve—especially the decline—endures across cultures and throughout history, suggesting some deep underlying biological determinism probably related to brain plasticity”, it suggests that there is what I would call a creativity cliff.

If the creativity cliff is real, it suggests that giving more incentives to create late in life is unwise. As I argue in The Life and Death of Copyright, the idea that authors need copyright after death to provide for heirs is absurd and unsupported. When I presented the paper, many asked but what if I am old and want to leave something to my children, isn’t copyright an incentive? It may be an incentive, but it is not sound, in part because of the creativity cliff. In general, as Hal Varian has noted, very few works ever generate a steady income stream. That is true regardless of when one creates. Copyrighted works are part of winner-take-all markets and “Such markets end up fostering over-entry into the field because too many people believe they will be the one to sit at the top of the market when only a few or arguably one can do so.” As Emanuel points out, many of us hope to be outliers and “immortals” who have excellent quality of life and tremendous creativity late in life, but by definition that can’t be true. Thus those who say they need copyright as an incentive to write as they see death approaching labor under the illusion that they are the outliers. I laud the effort and probably will write until I die, but that is not a sound basis for policy.

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Reconciling Ehrlich and Macool (Or, What’s In a Signature Anyway?)

Recently I wrote about In re Ehrlich, 47 A.3d 12 (2012), a trusts and estates case pending before the New Jersey Supreme Court that will serve as a bellwether of what can be probated in harmless error jurisdictions.  Under the Uniform Probate Code’s harmless error rule, a defective document can be probated if there is clear and convincing evidence that the decedent intended it to be a will.

As I previously explained, the proponent in Ehrlich wants to probate an unsigned and unattested document that otherwise reads like the usual formal will.  The decedent had noted in one corner of the document that he mailed “the original” to his executor.  I suggested that the dissenting appellate division judge, who wanted to deny probate, was applying a substantial compliance standard instead of the harmless error rule, which New Jersey adopted in 2004.

But another possibility is that the dissent and majority have different understandings of testamentary intent.  This would help reconcile Ehrlich with In re Macool, 3 A.3d 1258 (2010), another important harmless error case.

In Macool, the dissenting judge in Ehrlich voted with the majority to hold that probate under the harmless error rule requires proof that the decedent (1) actually reviewed the document and (2) gave final assent to it.  The Macool court refused to probate a document that a lawyer had dictated while Macool was in his office; although the lawyer’s secretary had typed up the document, Macool never saw it because she died just an hour after leaving the lawyer’s office.   The court explained that in the absence of review and final assent, it could not be certain the document reflected Macool’s final testamentary wishes.

Similarly, the dissenting judge in Ehrlich may not see adequate evidence of testamentary intent.  Perhaps from the dissent’s perspective, all we have is an unsigned and unwitnessed document.  The other evidence—the handwritten notation; the fact that the decedent drew up the document just before he had life-threatening surgery; and that he executed health care directives on the same day that the document is dated—all of this is simply not enough to convince the judge that Ehrlich gave final assent to the document.  In other words, the dissenting judge may not be sufficiently certain about Ehrlich’s testamentary intent.

The dissent in Ehrlich writes that he now believes Macool “gives too expansive an interpretation” to the harmless error rule.  Perhaps the dissent fears that Macool opened the barnyard door to the probate of documents that will fall short of what the dissent believes is necessary to establish testamentary intent.  In particular, the dissent appears reluctant to find testamentary intent without a decedent signature.

I, for one, have never been concerned about Macool throwing open the barnyard door.  In fact, I have argued that Macool partially closed it.  I’ve written more about that here.

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The Relationship Between Substantial Compliance and Harmless Error

Estates and trusts junkies are watching what the New Jersey Supreme Court will do with the harmless error doctrine in In re Ehrlich, 47 A.3d 12 (2012), a case it has recently agreed to review.  The New Jersey appellate court and most legal reporters framed Ehrlich as determining the scope of In re Macool, 3 A.3d 1258 (2010), which held the harmless error rule can only be applied when the decedent actually reviewed the document in question and gave final assent to it.  But really the central question in Ehrlich is about the relationship between harmless error and substantial compliance.  Because New Jersey is generally a progressive jurisdiction on estates and trusts issues, Ehrlich may reveal much about how intent-oriented courts are inclined to be.

After Ehrlich’s death, a fourteen-page document labeled “Last Will and Testament” was found in his home.  Ehrlich was an attorney and the document was typed on legal paper with Ehrlich’s name and law office address printed in the margin of each page.  The document was not signed or witnessed, but Ehrlich handwrote on the cover page, “Original mailed to H.W. Van Sciver,” whom Ehrlich had named executor. Ehrlich prepared the document just before he had life-threatening surgery and on the same day he executed a power of attorney and living will.  The document left the bulk of Ehrlich’s estate to his nephew, Jonathan.  Under intestacy, the estate would be split between Jonathan and another nephew and niece.  Ehrlich had not talked to the other nephew and niece for more than 20 years.

You all know where this story is heading.  Sciver died in 2005 and the original will could not be located.  Nothing suggests that the original was ever returned to Ehrlich.  This means the usual rules governing lost wills, which contemplate the will last being in the possession of the testator, cannot neatly resolve the case.  To get the bulk of Ehrlich’s estate, Jonathan must convince the New Jersey Supreme Court to allow probate of the document found in Ehrlich’s home.  Because the document is neither signed nor witnessed, everything turns on how the Court interprets the harmless error rule, which the New Jersey legislature adopted a few years ago.

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The Old Illegitimacy Part II: Facilitating Societal Discrimination

In a prior post, I demonstrated that the law makes explicit distinctions between marital and nonmarital children and denies the latter benefits automatically granted to its marital counterparts.  The harms resulting from the law’s continued distinctions on the basis of birth status are significant.  For example, these distinctions impair nonmarital children’s ability to acquire property and wealth.  While individuals often use part of their inheritance for a down payment on a home, to start a business, or to fund their own children’s education, nonmarital children are denied the same access to intergenerational wealth.

These legal distinctions may also stigmatize nonmarital children. Denying nonmarital children access to post-secondary educational support that is granted to marital children suggests that the former are less deserving of support.  It also signals that fathers’ responsibilities to their children differ depending on whether they are marital or nonmarital.  Denying U.S. citizenship to the children of unmarried fathers unless their fathers expressly agreed to support them similarly signals that nonmarital children are not automatically entitled to support.

These legal distinctions also facilitate societal discrimination by encouraging individuals (either intentionally or otherwise)  to make negative assumptions about unmarried parents and their children.  Many Americans (not just former Gov. Mike Huckabee) believe that it is wrong for unmarried persons to have children.  Seventy-one percent of participants in a recent Pew Research Center study indicated that the increase in nonmarital births is a “big problem” for society and 44% believe that it is always or almost always morally wrong for an unmarried woman to have a child.  Some people assume that unmarried mothers are sexually irresponsible and that their children will be burdens on the public purse.  They also expect nonmarital children to underachieve academically, economically, and socially.

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Harmless Error (The Estates and Trusts Kind)

As I’ve previously discussed on this site, Uniform Probate Code 2-503 allows courts to probate documents that were improperly executed upon clear and convincing evidence that the decedent intended the document to be a will.  New Jersey, which codified this harmless error rule several years ago, finally has a published appellate decision interpreting it.  The case, In re Will of Macool (2010 WL 3608686 (N.J. Super. A.D.)) is notable because it may provide a counterweight to In Re Kuralt, in which a Montana court arguably extended 2-503 to probate a document that indicated how the decedent wanted to dispose of his property but was not intended to be a will. 

In Macool, Louise wrote a will in 1995 and codicil in 2007.   Her husband, Elmer, was the primary beneficiary of these documents and his children (Louise’s stepchildren) were the contingent beneficiaries.   In 2008, Elmer died and Louise went to her lawyer to revise her estate plan.  The crux of her new plan was to reduce what her stepchildren were taking and to make gifts to her niece and godchild.  Louise gave her lawyer handwritten notes that summarized her new plan; these notes were a bit cryptic and it’s hard to imagine that the lawyer would have known what to do with them in the absence of oral clarification from Louise.  The lawyer dictated a complete document while Louise was in his office and a secretary typed up the dictation that same afternoon or the next morning.  Louise was supposed to come back at a later date to review the document, but she died about an hour after leaving the lawyer’s office. 

The trial court found, and the appellate court agreed, that Louise intended to alter her testamentary plan to include her niece and godchild.  In refusing to probate the document, however, the court distinguished between evidence “showing decedent’s general disposition to alter her testamentary plans” and evidence establishing that the decedent “intended the draft will prepared by [the attorney] to constitute her binding and final will.”  The court held that for the harmless error rule to apply, the proponent of a writing must prove by clear and convincing evidence that “(1) the decedent actually reviewed the document in question; and (2) thereafter gave his final assent to it.”  Read More

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Billionaire Girard’s Imperfect Legacy

GC Founder's HallIn his early-19th century will, Stephen Girard, one of the richest persons in United States history, endowed a school, Girard College, for the education of white boys who were poor and orphaned. As of the early 21st century, the Philadelphia school (whose Founder’s Hall is pictured at right and from which I was graduated in 1980), educates students of all races and both genders from families with limited financial resources headed by a single parent or guardian. Thus have the scope of race and gender radically opened and the concepts of poor and orphaned subtly shifted.

Girard’s will, which elaborately detailed all aspects of the school and dedicated his entire fortune to creating it, also prohibits clergy of any sect ever from stepping foot on campus. Despite early constitutional challenges, this provision remains unchanged and generally enforced. Though there is considerable scholarship on Girard College, in law as well as sociology and other fields, relatively little intellectual energy has been devoted to discerning how and why transformations occurred as to race, gender, poverty and family, yet not as to religion.* Read More

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Moving the Barnes, Illustrated

Alfred Barnes knew that a picture (or at least a painting) was worth a thousand words.

I’ve always had difficulty teaching the Barnes saga because doing so requires that I separate my unbridled enthusiasm for the place from a more scholarly discussion about the appropriate limits of deadhand control.  But it’s also difficult to explain to students what moving the Barnes means when most have never visited the foundation. 

This year, I’ll be helped along considerably by comparing these pictures of the current gallery 

barnes_large_view

barnes inside

with these renderings of the new facility planned for downtown Philadelphia.

 

barnes outside

barnes inside

You can see other representations of the planned gallery here, courtesy of the New York Times.

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Probating Not-Wills

This semester I began using the just-released 8th edition of Dukeminier’s Wills, Trusts, and Estates.  Five weeks into the semester, I’m pleased with this latest revision, primarily because some chapters have been reorganized in ways that are much more consistent with how I actually teach the course, which means that the students spend less time hopping between cases.  One new note, however, has needled me into reconsidering the 1990 Uniform Probate Code, particularly as amended in 2008.

In the note, the casebook authors describe Stephanie Lester’s 2007 study of more than 120 Australian cases in which the court used the dispensing power, i.e., probated a document which had not been executed in compliance with the formalities because clear and convincing evidence showed that the decedent intended the document to be a will.   The casebook authors provide this summary of Lester’s work:  “[Lester] concluded that the dispensing power has continued to fare well—with one exception.  In a troubling number of cases, the court admitted a document to probate despite evidence that the document was not intended to be a will but for which there was good evidence of whom the decedent wanted to benefit.”  (For an American case of the same stripe, see In re Estate of Kuralt, where the court probated as a holographic codicil a letter stating that the ailing Kuralt would have a “lawyer visit the hospital to be sure you inherit the rest of the place in MT.”  (emphasis by Kuralt). 

My reaction to this trend is twofold: (1) if it is troubling, it’s not surprising, and (2) is it really troubling? Read More