When Warren Buffett speaks, people listen. When he speaks about investing, that absolutely makes sense. He is, after all, a legend for his phenomenally successful investment strategies in his leadership of Berkshire Hathaway. In his annual letter to Berkshire Hathaway shareholders last month, however, Buffett revealed an element of his estate plan that might not prove to be the best strategy to emulate, reports The New York Times.
In a section of the letter that addresses succession planning for the company, the 89-year-old Buffett discusses his estate plan as relates to his interest in Berkshire Hathaway, which he states makes up 99 percent of his personal wealth. Buffett writes: “Today, my will specifically directs its executors – as well as the trustees who will succeed them in administering my estate after the will is closed – not to sell any Berkshire shares. My will also absolves both the executors and the trustees from liability for maintaining what obviously will be an extreme concentration of assets.” Buffett continues in the letter to explain that his will sets forth a plan for his trustees to transfer his shares in the company to various foundations over time and for those foundations to then benefit from the sale of the transferred shares on the market, a process he anticipates will take place over approximately 15 years.
The question that The New York Times article posed is whether it is a good idea for a person to attempt to control the decisions of their fiduciaries after they die. The answer is a resounding “no”, even if that person is Warren Buffett. In his letter, Buffett acknowledges there is some risk to his plan, as he could be wrong about Berkshire’s long-term stability as a “safe and rewarding” investment. In that statement, Buffett recognizes the problem inherent with a plan that continues to exert control over the actions of fiduciaries after a person dies: We don’t know what we don’t know, and nobody can be absolutely certain as to what the future holds.
Buffett is unquestionably a savvy investor who has done well for himself and for the company, and it is clear that he has created a plan for his shares after his death that he believes will be in the best interest of both his beneficiaries and the company. The problem? When a will or a trust dictates certain investment decisions by a fiduciary, it eliminates the fiduciary’s discretion in making those decisions and hampers the fiduciary’s ability to adjust investments if circumstances change. Instead, it requires a fiduciary to execute decisions made by a person who is no longer alive under conditions that the person who made these decisions may never have contemplated.
Five or 10 years after he dies, Buffett’s plan for his Berkshire shares may no longer be prudent or even feasible, but his trustees will be limited in their ability to adjust their management of the trust assets based on changes in circumstance. What is the alternative? Trust in the trustee. In general, a trustee with a wide degree discretion in the management of a trust’s assets will be better situated to make management decisions based on actual events, rather than restricted by a best guess of what the future holds.
Giving a trustee full discretion to make decisions means placing an enormous amount of trust in this individual. For a successful person, the idea of giving up control can be scary. Ultimately, however, a plan that provides direction to a trustee, but hands over control to that trustee, will be more flexible and less likely to topple if the trustee encounters an unanticipated shake-up in circumstances.
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.