Four key drivers of change.
I turned 40 this past January. In a time of enhanced longevity and aphoristic sayings about age, feeling and youth, I don’t know if turning 40 continues to be a significant personal milestone in today’s cultural zeitgeist. But, it has been to me, and so this year has been, appropriately enough for my birth month, a Janus-faced one: looking both forward and backward.
I’m also a trusts and estates lawyer. In
December 2017, the Tax Cuts and Jobs Act (the Act), which is the most consequential tax legislation since 1986, was signed into law. With respect to transfer taxes (that is, estate, gift and generation-skipping), the Act’s changes are temporary: Absent further legislative action, they sunset on Jan. 1, 2026. In light, though, of what happened with the Bush tax cuts in 2010 and 2012, along with Congress’ general unwillingness to let temporary tax cuts expire, I’m agnostic as to whether the temporariness of the Act’s changes has any meaning. As was the case in the aughts, we practitioners have to prepare and brace ourselves for more uncertainty. What’s just as important by my lights, and what may be overlooked in the immediate aftermath of the Act, is what I believe it signifies: greater political traction for the full repeal of the estate tax. Once again, the ground is clearly shifting underneath our feet.
Now, I had nothing to do with turning 40 or the enactment of the Act. I’m simply floating on the river of history. The coincidental near intersection of these two events has, however, made me expand my reflective pose to include both the personal and the professional, in particular, as a self-indulgent 40-year-old, where I specifically stand in the profession and what the future of the trusts and estates practice looks like from my vantage point.
Specifically, I’ll consider the following, each of which I think will deeply influence the practice and be the key drivers of change: (1) the trend of higher exemption amounts and lower top marginal rates; (2) artificial intelligence (AI); (3) the aging Baby Boomer population; and (4) the rising Millennial generation.
Whither Estate Tax Planning?
From 2001, which was the first year of the Bush tax cuts, to today, the exemption amount has increased from $675,000 to $11.18 million, and the top marginal rate has decreased from 55 percent to 40 percent. In 2017, the U.S. Census Bureau released the wealth and ownership tables for 2013.1 A quick scroll through the various tables2 will confirm what I believe is our collective intuition: Except for an extremely narrow slice of the populace, the estate tax—and planning for it—is a non-issue. Granted, the numbers are from 2013, so just four or five years from the depths of the Great Recession, but even if we were to project forward using reasonable growth rates, our conclusion would still be the same: Planning for the estate tax is irrelevant for the overwhelming majority of people.
The by and large irrelevancy of estate tax planning isn’t a new phenomenon inaugurated by the Act. According to a 2015 paper by the Joint Committee on Taxation, in 2013, there were 2,596,993 deaths in the United States and 4,687 estate tax returns filed reporting some estate tax liability, meaning taxable estates in 2013 represented approximately 0.18 percent of 2013 U.S. deaths.3 Based on their projections, which as a reminder were done before the enactment of the Act, the number of taxable estates each year from 2015 through 2024 would range between 5,400 and 5,500, and they’d represent 0.2 percent of the deaths in such year.4
If you enjoy gallows humor, there are other grim numbers: “The number of estate tax returns declined over 67% from about 38,000 in 2007 to 12,411 in 2016 primarily due to the increase in the filing threshold from $2.0 million in 2007 to $5.45 million in 2016.”5
As others have written and said, estate planning is still needed even when the estate tax isn’t a concern: There are non-tax reasons to do estate planning. All of which is very true. But, the lack of necessity in most instances for estate tax planning both reduces the opportunities for our more sophisticated service offerings and puts a crimp on the premium we can generally charge for our services.
Some practitioners have responded by pivoting to cross-border planning, income tax planning, fiduciary litigation and other areas. Other than through anecdotes, though, I don’t know to what extent they’ve been able to adequately replace the diminished need for estate tax planning.
For over 100 years, the United States has had an estate tax. There clearly isn’t any sentimentality from politicians, though, especially over the last 18 years, about retaining it in any particular robust form. Although the Act didn’t strike the knock-out blow, it did drop it to its knees, albeit temporarily. Addressing wealth inequality may revive the estate tax, but there’s a long-term trend, and accompanying narrative, to overcome. Until then, for those of us who haven’t pivoted into other areas, it may be advisable to take a cue from our brethren.
The Robots are Coming
In a 2011 essay published in the Wall Street Journal, Marc Andreessen of famed venture capital firm Andreessen Horowitz said that software was eating the world. From the number of articles published since then on the rise of software and its kin, AI6 and the socio-economic wreckage that’ll ensue, Andreessen’s thesis hasn’t just simply been accepted, but it’s also expected to lead to a dystopian future, one not to be embraced but to be feared.
Fear is an emotion or mood certainly present within the legal industry. The mot du jour to describe what’ll happen is “disruption.” Namely, AI will replace many lawyers by handling much of the work that they currently do and at a fraction of the cost. A dystopian future indeed, for practitioners at the very least.7
The idea of the legal industry being disrupted implies that the practice of law has been insulated from or immune to developments in technology or that lawyers have somehow been able to stem the technological tide that’s been lapping at the shores of other industries. That, as we know, isn’t true. The legal industry has had to deal with word processing, Westlaw, LexisNexis, LegalZoom, Rocket Lawyer and the availability of low-cost or free information on the Internet. The extent to which each of these has had a direct causal effect on the demand for lawyers’ services isn’t completely clear, but any negative consequences from a demand standpoint have arguably been circumscribed.8
AI feels, though, qualitatively or fundamentally different, sui generis as we lovers of Latin like to say. That it’s not simply another form of automation but includes learning and adaptation may explain this perception. Its widespread application across different segments and areas of legal practice may be another reason. The consensus view of its latent meteorite-like capacity to cause a mass extinction of lawyers may be part of it too.
Whatever the source of the feeling, there’s that underlying fear, an anxiety about the future. In trusts and estates, are we then looking at a moth-eaten practice, where both low-end or commodity work and high-end or sophisticated tax planning work are ravaged by AI? Speculating about the future, especially when technology is involved, can often seem uninformative, in my opinion, but I do think that the prevailing anxiety may be overdone, at least in the near to intermediate term. Presently, AI is good at work that’s structured, when a lawyer’s processes can be modeled into instructions, and at work when the universe of outcomes, or phrased differently, the number of contingencies, is limited.9 AI isn’t adept when creativity, strategy, judgment and emotional intelligence (that is, the very skills and qualities that are the sine qua nons of effective and successful practitioners) are required.10 In addition, it’s not a foregone conclusion that AI will fully and completely dominate the legal industry; there are “broader social trends outside of law” that could mitigate or dampen its effect.11
The preceding isn’t meant to minimize the potential impact AI will have on the practice of trusts and estates. The robots are indeed coming, and their arrival and presence may create a sizeable dislocation of practitioners. We have time to prepare ourselves though, in particular by continuing to hone those aforementioned skills and qualities, and, in so doing, developing and solidifying our relationships with our clients and becoming that trusted advisor.
The Golden Girls and Boys
The year 2018 is also the 50th anniversary of 1968: Tet. My Lai. The assassinations of MLK and RFK. The takeover of Columbia University. Chicago. Tommie Smith and John Carlos. The Baby Boomer generation was front and center to one of the most turbulent years—if not the most turbulent year—in modern U.S. history. They too have been remainder beneficiaries so to speak of what appears to have been a unique period in civilizational human history: post-war America, in particular the unprecedented economic prosperity of the 1950s and the emergence of the middle class.
As they enter into their golden years, the Baby Boomers are now poised to transmit wealth “estimated at over $30 trillion in financial and non-financial assets . . . .”12 With longer life expectancies, Baby Boomers may spend down some of this wealth during their lifetimes. Even so, the amount of wealth that’ll be transmitted, whatever the actual number, will be prodigious.
We’re in what I believe to be the first innings of this transmission process. Baby Boomers first began turning age 65 in 2011.13 By 2029, they’ll all have at least turned age 65.14 In 2030, the Baby Boomer population, which will range in age from 66 to 84, will be approximately 60 million.15 The population will then decrease to approximately 2.4 million in 2060.16
The role that practitioners will play in the transmission process is a story that more or less writes itself. What may not be as obvious are the secondary effects of an aging Baby Boomer population. First, their eventual decline due to mortality will result, in part, in a more racially and ethnically diverse total U.S. population.17 Second, in 2029, when they’ll all be age 65 or older, they’ll represent at least 20 percent of the U.S. population.18
As the demographics of the country change over time and the diversity of clients broadens, it’ll demand a greater sensitivity and empathy from practitioners. Our ability and capacity to connect, understand and relate will be both tested and will have to expand.
The overall graying of the population will have effects across multiple vectors of society. For practitioners, it may necessitate closer coordination with a client’s wealth manager or financial advisor to ensure that the client’s estate plan is appropriate in light of his spending needs and increased life expectancy; it may lead to expectations among clients that we’ll be able to advise on matters outside of our traditional bailiwicks; we may have to restructure our practices in response; and it’ll certainly mean that we’ll have to be more attuned to the possibility of elder abuse.
The Avocado Toasters
Millennials. There may not be another generation in U.S. history, except possibly for the Baby Boomers, who provoke as much of a visceral reaction. Loathing. Inspiration. Disgust. The best hope. The partisan divide is great, and the intensity is white hot, which likely means that my own ambivalence will be viewed with suspicion. But, I’m a Gen-Xer, and we’re a detached, somewhat cynical lot.
At this moment, the Millennial generation is the largest, even larger than the Baby Boomers, and is estimated to number 75 million.19 Generalizations are hazardous, but there are certain features Millennials broadly share or have in common with one another that function like connective tissue and are worth noting. And no, I’m not talking about a gastronomic affection for avocado toast. Namely:
• Millennials represent “nearly a quarter of the total U.S. population, 30 percent of the voting age population and almost two-fifths of the working age population.”20
• Millennials are more racially and ethnically diverse than previous generations.21
• Millennials are waiting longer to marry and have children.22 They’re “still starting relationships at the same age as their parents, but they are trading marriage for cohabitation.”23
• Millennials are more educated than previous generations, but with that, shouldering “significant student loan debt.”24“In 2013, 41 percent of young families had student debt, up from 17 percent in 1989. Not only do more young families have student debt, they are deeper in debt, too. The amount owed on student loans nearly tripled, rising from a median of $6,000 to $17,300 across the same period (in 2013 dollars).”25
• Homeownership has been delayed.26
• Although the median income of a young woman is less than the median income of a young man, young women have economically outpaced young men.27
• Millennials are leaders in the “adoption and use of technology . . . .”28
• On the whole, Millennials have a negative view of banks and financial institutions.29
Under the foregoing facts, the issues discussed in the preceding rubrics may, from a practitioner’s point of view, come to a sobering and troubling intersection with the Millennial generation and where, as a result, the most wrenching structural changes may occur in the practice, to wit: Homeownership is often thought to be a key way of accumulating wealth. With that delayed among Millennials, coupled with the student loan debt they’re carrying, there may be a knock-on effect as practitioners’ services are less needed. The reduction in demand from Millennials may be further compounded by their high comfort level with adopting new technology and their relative distrust of wealth management firms. Accordingly, even with the imminent Baby Boomer wealth transfer, practitioners may be locked out to a non-trivial extent as Millennials look to DIY it.
I have to admit, this is all disquieting to me. I may have to stop here and fix myself some avocado toast as comfort food. Even I, a Gen-Xer, can acknowledge the greatness that’s avocado toast.
A Perfect Storm
The challenges facing trusts and estates practitioners are many and appear to be gathering into a perfect storm, viz., fewer clients who need estate tax planning, the emergence of AI and the loss of confidence in institutions and concomitantly expertise. The death knell has in fact already been sounded in some corners. From my perspective, though, those predictions aren’t just simply premature but wide of the mark, too.
As a mentor once said to me, the practice of trusts and estates is built on relationships. If we can accordingly develop relationships in which we’re able to demonstrate our indispensability and our advice and counsel are both sought and deemed necessary, we can weather the forthcoming storm. That means an increased focus on the cultivation of what are sometimes derided as the softer skills and qualities.
We also need to be open to periodically rethinking and re-evaluating our business plans and, at bottom, the idea of change. No industry, including the law, can survive by just plodding along the same course. Considering what’s occurred over the last 18 years in trusts and estates, we shouldn’t feel so discomfited with change. But, we have to stretch ourselves even further. We don’t want to end up stuck with a landline-type practice in a smartphone-based world. Targeting new growth areas, incorporating technology to create efficiencies and positioning ourselves for the coming demographic changes, including that more women will be the primary breadwinners and control a greater amount of wealth, should be at the top of the agenda.
Not long after I turned 40, someone asked me which stereotypical sports car I had on order. I demurred, maybe even laughing it off. What I should have said was that preparing for the future of trusts and estates would be sufficiently invigorating enough.
Endnotes
1. www.census.gov/newsroom/press-releases/2017/cb17-tps50-wealth-sipp.html.
2. www.census.gov/data/tables/2013/demo/wealth/wealth-asset-ownership.html.
3. Joint Committee on Taxation, History, Present Law, and Analysis of the Federal Wealth Transfer Tax System (JCX-52-15), March 16, 2015, at p. 25, tab. 2.
4. Ibid. at p. 30, tab. 4.
5. www.irs.gov/pub/irs-soi/2016estatetaxonesheet.pdf. If you’re a data junkie, you can get your additional fix at www.irs.gov/statistics/soi-tax-stats-estate-tax-statistics.
6. Artificial intelligence (AI) “is the term used to describe how computers can perform tasks normally viewed as requiring human intelligence, such as recognizing speech and objects, making decisions based on data, and translating languages. AI mimics certain operations of the human mind.” See https://jolt.law.harvard.edu/digest/a-primer-on-using-artificial-intelligence-in-the-legal-profession.
7. Deloitte has estimated that over 100,000 legal jobs “have a high chance of being automated in the next twenty years.” Seewww.legaltechnology.com/latest-news/deloitte-insight-100000-legal-roles-to-be-automated. McKinsey has estimated “that 23% of a lawyer’s job can be automated.” Seewww.nytimes.com/2017/03/19/technology/lawyers-artificial-intelligence.html. Others have said that implementing all currently available legal technology immediately would shrink lawyers’ hours at large law firms by an estimated 13 percent. Ibid.
8. See generally Dana Remus and Frank Levy, “Can Robots be Lawyers? Computers, Lawyers, and the Practice of Law” (Nov. 27, 2016). Available at SSRN, https://ssrn.com/abstract=2701092.
9. Ibid.
10. Ibid.See alsowww.theedgesingapore.com/lawyers-may-need-tech-skills-ai-changes-nature-legal-industry; www.nytimes.com/2017/03/19/technology/lawyers-artificial-intelligence.html.
11. See generally Frank Pasquale and Glyn Cashwell, “Four Futures of Legal Automation,” 63 UCLA L. Rev. Disc. 26 (2015).
12. Accenture, “The ‘Greater’ Wealth Transfer: Capitalizing on the Intergenerational Shift in Wealth,” www.accenture.com/t20160505T020205__w__/ca-en/_acnmedia/PDF-16/Accenture-CM-AWAMS-Wealth-Transfer-Final-June2012-Web-Version.pdf.
13. Sandra M. Colby and Jennifer M. Ortman, The Baby Boom Cohort in the United States: 2012 to 2060, U.S. Census Bureau, May 2014, at pp. 1-2 and 12.
14. Ibid., at p. 1.
15. Ibid., at pp. 2, 7 and 12.
16. Ibid.
17. Ibid., at pp. 1 and 10-12.
18. Ibid., at pp. 1 and 12.
19. William H. Frey, “The Millennial Generation: A Demographic Bridge to America’s Diverse Future,” Metropolitan Policy Program at Brookings (January 2018), at p. 4.
20. Ibid.
21. See generally Frey, supra note 19.
22. Ibid., at p. 11; Jonathan Vespa, The Changing Economics and Demographics of Young Adulthood: 1975-2016, U.S. Census Bureau, April 2017, at pp. 5-6.
23. Vespa, ibid., at p. 6.
24. Frey, supra note 19, at pp. 12-13. See also Vespa, supra note 22, at p. 10.
25. Vespa, supra note 22, at p. 3
26. Frey, supra note 19, at p. 13; Vespa, supra note 22, at p. 16.
27. Vespa, supra note 22, at pp. 10-11 and 16.