From the oil market to the Asian stock markets to travel, the most common description for 2022 is “uncertainty.” As the Omicron variant of the Covid-19 virus spreads and the Delta variant continues, how can you make long term plans, especially estate plans, for 2022 much less for events which may not happen for years? In such uncertain times, it is necessary to add scenario planning to the estate planning mix.
Estate planning is largely the linear extrapolation of quantifiable data, to find short term and tactical risks and opportunities, to develop a reliable forecast of the near future. However, in times of great uncertainty, extrapolation based on past events quickly becomes futile. A prime example recently is the Build Back Better Act which, after all of the sound and fury, ended up not passing and so making no changes to the provisions of the tax law. Because of the inherent uncertainties of when, or whether, the Act would be passed, estate planners were at a loss as to what to do, or not do, both for the external risks of tax and economic changes, and internal risks to loss of family wealth due to illness or incapacity of family members.
Clients have a vision of the future that is based on their principals and ambitions – a vision often blind to future risks which may become improbable, if not impossible, to obtain in times of uncertainty. Scenario Planning is a process popularized by Paul Schoemaker that reduces uncertainty without hiding risks. It does this by developing scenarios of multiple possible futures, based on both quantitative and qualitative elements, and developing appropriate strategies to cope with such situations.
Scenario planning is a supplement to, not a replacement for, forecast-based estate planning. It is best used in times like today, when forecasting and vision are not sufficient to handle the level of uncertainty associated with major internal and external disruptive events, such as the death of a family member, market shocks, or pandemics.
A framework for scenario based thinking is the “observe-orient-act” principle. This is broken down into five steps: Tracking, Analysis, Imaging, Deciding, and Acting.
- Tracking– Keep from being Blinded by the Light: Our instinct is to “look where the light is shining” rather than observe all that is going on. The result is that we lose track of risk. So a deliberate effort needs to be made to track as widely as possible all elements of news and thought, not just news-related matters of immediate concern.
- Analysis – What is really Happening? This is taking the data from tracking and trying to determine what the future consequences will be from the actions of the present, as well as a deeper digging into the creative and intuitive models and visions by repeatedly asking:
- What is happening and what seems to be happening?
- What are the necessary conditions for this to be reality?
- How tenable is this model?
- What are the points of strength and weakness?
- Imaging– Bringing Dreams to Life: Imaging is intuitive – both an intellectual understanding and the emotional meaning of the Future. The key to success is action, but the key to successful action is the imaging of that success when the action is taken.
- Deciding – Selection and Rejection: Decision is that movement between a vision and an action; between the concrete that can be tested and quantified, and the intangible which can only be envisioned. It is the difference between a leader (who can blend both the concrete and the desires), a dreamer (who has desires, but no ability to make them concrete) and a manager (who can create the concrete actions, but does not have the ability to create the desire).
- Acting – Presence and Learning: Learning, the art of integrating new information into old knowledge, requires a clear purpose to be more than academic. Signals from both the outside world and the inside world of the family and the organization need to be considered in not only learning, but in doing and acting to take control of the learning process
Scenario planning would work just as well for clients who do not own businesses, art and other unique assets, as it does for clients who do. It is not as commonly used as linear estate planning in less uncertain times because: 1) no one can say definitely “this is the future,” 2) It is complex, non-linear and counter-intuitive to the simpler, linear, and more intuitive style of the traditional specialized estate planners, 3) since the goals have both qualitative as well as quantitative elements, the answers are “soft” and subjective, and 4) each scenario planning process is unique and so tends to be both expensive and time consuming.
That said, in these uncertain times, scenario planning is the most useful type of planning for any client that values long-term control over the ownership of that asset. Scenario planning will allow clients to:
- Identify contextual challenges and opportunities,
- Use traditional short-term, forecast-based strategies, that are integrated with middle and long-term (contrasted and alternative scenarios) strategies,
- Generate strategic options for how to handle emergencies,
- Select and evaluate existing estate, tax and other strategies,
- Develop strategic vision with “stretch,”
- Provide guidance to future generations for good implementation of strategies in terms of needs, and
- Evaluate the progress and course of actions: “are we headed in the right direction, given the probable scenarios and their alternatives?”
To handle the current uncertainties, you need to have a plan. Planning has to be flexible and adaptable to the reality that, even in the very short-term, the future is unknowable. With scenario planning as part of your estate planning toolkit, you may not be able to accurately predict the future, but you will be able to accurately predict and plan for multiple futures, one of which will come true.