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What Warren Buffett's Estate Plan Means for Investors

By Dan Caplinger – Updated Feb 29, 2020 at 11:25AM

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The Oracle of Omaha set out his plans for what will happen after his death.

Warren Buffett has had an illustrious career, and Berkshire Hathaway (BRK.A -0.22%) (BRK.B -0.28%) shareholders have benefited greatly from his long-term success. But with Buffett turning 90 years old later this year, even the Oracle of Omaha is starting to think about his own mortality.

Buffett acknowledged those concerns in his annual letter to shareholders, reassuring investors that Berkshire is ready to go on without him. In describing what's in his estate planning documents, Buffett showed that he believes an orderly distribution of his Berkshire shares is in the best interests of both his estate and the overall company.

Let's take a closer look at what Buffett put in his will, and what it means for Berkshire's shareholders.

How Buffett changed the rules

When a person dies, the personal representative of the person's estate takes control of any financial assets the estate holds. Ordinarily, the personal representative's primary responsibility is to preserve and protect the value of the estate during the process of administration, whether it's going through a probate proceeding in court or simply following the instructions left in a will.

Therefore, when an estate holds risky assets, many personal representatives liquidate those holdings, creating a pool of cash that is easier to divide and distribute, and that eliminates any market risk during the administration period.

Warren Buffett, with several people behind him.

Image source: The Motley Fool.

However, as he's often done, Buffett decided to go a different route. In his will, the Berkshire CEO specifically directs the executors of his estate not to sell its Berkshire stock.

The will also includes a provision that protects those executors from the legal liability that they'd usually have if they chose to hang onto the Berkshire stock and an adverse move in the share price created losses for Buffett's heirs. That's especially important because Berkshire stock makes up 99% of Buffett's net worth.

What happens next?

Instead of selling off Buffett's stock in one big chunk immediately after his death, the executors of Buffett's estate will instead take advantage of the provision allowing them to convert Class A shares to Class B shares, with each A share turning into 1,500 B shares. Distributions of B shares will then go to the foundations that Buffett has chosen to endow in his will.

Eventually, any estate proceedings will close, and remaining Berkshire shares will get put into trust. Thereafter, the trustees of those trusts will follow the same game plan, converting shares periodically for distribution to charitable foundations.

Buffett estimates that it will take 12 to 15 years for his stake in Berkshire to get distributed in this manner. That should spread out any impact on the market from having a flood of shares suddenly available for sale.

What shareholders should take from Buffett's move

From the shareholder perspective, Buffett still has confidence that holding Berkshire stock after his death will likely work out well. In his words, "I myself feel comfortable that Berkshire shares will provide a safe and rewarding investment during the disposal period."

Of course, he acknowledges the possibility that adverse conditions could prove him wrong, but he still sees a high likelihood of success from his strategy, compared to what the typical estate planning situation would entail.

Warren Buffett's frankness about his eventual death is just another example of how the Berkshire CEO has been able to communicate directly and effectively about issues that few other top corporate executives would ever discuss publicly. It's hard to envision Berkshire without Buffett, but the Omaha native is comfortable that his legacy will endure long into the future.

Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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