Bogleheads® on Investing Podcast 029 – Frazer Rice, host Rick Ferri (audio only)

00:00:00.000 | [MUSIC PLAYING]

00:00:09.440 | Welcome to Bogle Heads on Investing, episode number 29.

00:00:13.520 | Today, our special guest is Fraser Rice.

00:00:16.560 | Fraser is the author of Wealth Actually, Intelligent Decision

00:00:20.040 | Making for the 1%.

00:00:21.720 | He's also the host of the podcast Wealth Actually,

00:00:25.080 | and he's a director at Pendleton Square Trust Company.

00:00:28.440 | [MUSIC PLAYING]

00:00:38.580 | Welcome, everyone.

00:00:39.400 | My name is Rick Ferry, and I'm the host

00:00:41.140 | of Bogle Heads on Investing.

00:00:42.720 | This podcast, as with all podcasts,

00:00:44.960 | is brought to you by the John C. Bogle Center

00:00:47.720 | for Financial Literacy, a 501(c)(3) nonprofit organization

00:00:52.880 | that you can find at boglecenter.net.

00:00:56.760 | Today, our special guest is Fraser Rice.

00:00:59.960 | Fraser is the Northwest Regional Director for Pendleton Square

00:01:03.520 | Trust Company, and the author of Wealth Actually,

00:01:07.000 | Intelligent Decision Making for the 1%.

00:01:09.720 | He's also the host of the Wealth Actually podcast

00:01:12.520 | at FraserRice.com.

00:01:14.400 | Fraser has decades of experience working

00:01:16.840 | with high net worth and ultra high net worth families.

00:01:19.400 | We'll be talking about his experiences,

00:01:21.520 | and he'll be providing us with a lot of great ideas

00:01:23.960 | we can all use at every level of wealth.

00:01:26.960 | With no further ado, let me introduce Fraser Rice.

00:01:30.600 | Welcome to the Bogle Heads, Fraser.

00:01:33.080 | Rick, thank you for having me on.

00:01:35.120 | I was looking at the podcast before I came on,

00:01:37.600 | and I saw that you had Morgan Housel, Cliff Asness,

00:01:40.280 | and Roger Lowenstein on before me.

00:01:42.000 | And to be part of that kind of a group of people is really cool.

00:01:45.560 | I'm honored to be here.

00:01:47.160 | Well, I've been a follower of yours a long time,

00:01:49.440 | because you write some really interesting blogs,

00:01:52.640 | and you wrote a book called Wealth Actually,

00:01:55.880 | Intelligent Decision Making for the 1%.

00:01:58.600 | And it's almost, you're sticking your neck out there,

00:02:01.960 | and you're saying, look, I advise to be elite.

00:02:04.920 | I advise to the 1%.

00:02:07.000 | And that might turn some people the wrong way,

00:02:10.880 | but for me, it intrigued me.

00:02:13.120 | One, that you say you do it.

00:02:15.440 | And number two, I want to have a conversation with you

00:02:18.120 | about this, because there might be some really good ideas

00:02:21.280 | that you're doing with your ultra high net worth clients

00:02:24.440 | that could help everyone.

00:02:26.240 | It's funny you say that,

00:02:27.080 | because when I put the book together,

00:02:29.120 | and the people who helped me publish it were saying,

00:02:32.880 | you've got to market this,

00:02:34.000 | and one way to be good at marketing is to find your niche.

00:02:37.400 | And the niche for me in my practice

00:02:40.000 | was in that sort of 1% world,

00:02:41.680 | and we'll talk about what that means shortly.

00:02:44.040 | But in terms of selling books,

00:02:47.120 | that was probably a big mistake,

00:02:48.440 | because a lot of people said,

00:02:49.680 | geez, this is for the 1%, only it doesn't apply to me.

00:02:53.760 | And as I got through writing it,

00:02:55.000 | there were a lot of lessons that apply to people

00:02:57.040 | in all different strata.

00:02:58.360 | And if I had it to do over again,

00:03:00.400 | I might sort of couch it as something a little bit more broad

00:03:03.200 | from a book selling perspective.

00:03:04.760 | But the book itself, it's got some good lessons,

00:03:08.080 | I think, for people of all stripes.

00:03:10.680 | - And we'll get to the book in a minute,

00:03:11.960 | and everything you've wrote in there.

00:03:13.400 | But before we do that, let's hear about your background.

00:03:16.720 | How did you get to become an advisor to the ultra wealthy?

00:03:20.440 | - Well, it's a varied background.

00:03:22.920 | And like most people,

00:03:24.600 | they go through two or three iterations of things

00:03:27.200 | before they get to where they are.

00:03:29.480 | I started out, I worked in politics after college.

00:03:32.160 | I worked for New York State

00:03:33.280 | Department of Economic Development.

00:03:35.000 | And my job was to sort of go around the state

00:03:37.600 | and to try to help businesses either located in New York

00:03:41.360 | or otherwise stay here,

00:03:42.600 | which is difficult given our business climate.

00:03:45.320 | I didn't want to be a civil servant my whole life.

00:03:48.440 | So I did what other law souls do, and I went to law school,

00:03:51.280 | went down to Emory in Atlanta.

00:03:53.120 | And I had a lot of,

00:03:54.920 | aside from the really good legal education there,

00:03:57.120 | I had a lot of really cool experiences.

00:03:58.920 | I worked for the SEC and for a music lawyer down there.

00:04:03.200 | So I got some work in the entertainment space.

00:04:05.840 | Then I worked for the House Banking Committee

00:04:07.160 | my second summer,

00:04:08.160 | and then the Federal Reserve in my third year.

00:04:10.680 | So I had kind of an interesting pastiche

00:04:12.760 | of legal experiences.

00:04:14.880 | My third year in law school down there,

00:04:16.560 | and I said I liked Atlanta, nice people.

00:04:19.320 | The Fed was sort of interesting work,

00:04:21.880 | half corporate council work, half regulatory.

00:04:24.840 | And that was interesting.

00:04:25.760 | But I decided pretty early on

00:04:27.560 | that practicing law wasn't what I wanted to do.

00:04:31.320 | I made it back up to New York.

00:04:32.560 | I passed the bar.

00:04:34.200 | And I got started.

00:04:36.080 | I practiced law with my uncle's firm for a couple of years,

00:04:38.720 | which entailed some lobbying

00:04:39.960 | and securities regulation and banking law,

00:04:42.280 | which sort of befitted the last two experiences I had.

00:04:45.640 | But in the meantime, I wanted to do something else.

00:04:48.360 | And I ran into a family friend

00:04:50.560 | who started Wilmington Trust's office in New York,

00:04:53.960 | basically on the back of his Rolodex.

00:04:55.840 | And he liked the idea of lawyers as issue spotters.

00:04:58.840 | And at the same time, I hadn't been practicing so long

00:05:01.800 | that my answer to everything was no or it depends.

00:05:05.160 | So he hired me.

00:05:06.560 | And I worked for a managing director

00:05:09.040 | for about four or five years.

00:05:11.440 | She left and moved on.

00:05:12.920 | And then I was on my own for almost 16 years.

00:05:15.320 | I took care of the ones I had

00:05:17.520 | and went out and found new ones.

00:05:18.880 | And when you work for a trust company,

00:05:20.600 | you get very heavily involved,

00:05:22.240 | certainly in the investments,

00:05:24.000 | certainly on the liability side of things,

00:05:26.720 | lending and that.

00:05:27.920 | But I really got into the trust and the state side of it.

00:05:30.840 | About year 14 into my 16 years at Wilmington,

00:05:34.520 | I started a podcast,

00:05:38.680 | which had been called "Fraser Rice's Podcast"

00:05:40.880 | because I'm not good with titles.

00:05:43.080 | But then I also, I felt like I had a book in me.

00:05:46.480 | I wrote "Wealth Actually,"

00:05:47.880 | which tried to congeal a lot of the lessons

00:05:49.960 | that I'd learned within my experience

00:05:52.320 | with Wilmington and beyond.

00:05:54.320 | And I ended up publishing that.

00:05:56.920 | I had to leave Wilmington to do that.

00:05:59.160 | So I did, published my book,

00:06:01.120 | publicized that for a little while.

00:06:03.160 | I joined up with a smaller RIA

00:06:05.000 | and worked for them for about a year

00:06:06.360 | doing strategic work for some of their bigger clients.

00:06:09.640 | And then the part that I'm really excited about

00:06:12.440 | is I moved to a trust company called Pendleton Square,

00:06:17.440 | trust company out of Tennessee.

00:06:19.560 | And it aligns really well with my way of thinking on things.

00:06:24.040 | And a lot of it has to do with independence.

00:06:26.640 | A lot of it has to do with using jurisdictions for planning.

00:06:31.240 | And there are lots of good reasons to do that,

00:06:33.160 | not least of which tax,

00:06:34.440 | but there are other good estate planning reasons to do it.

00:06:37.560 | And it really gets me involved with a broader subset

00:06:40.880 | of the financial services community.

00:06:43.080 | I get to work with the investment advisors

00:06:45.320 | and it can be anywhere from Morgan Stanley or UBS

00:06:48.440 | or Goldman Sachs or whomever to the high-end RIAs,

00:06:52.880 | to broker dealers, to folks who are managing money.

00:06:55.840 | But then I also get to work with the families themselves.

00:06:58.360 | And so many times I butt up against family offices

00:07:01.080 | and multifamily offices,

00:07:03.160 | people who really need a lot of structure

00:07:04.920 | around their wealth for a variety of different reasons.

00:07:07.240 | So that's where I am right now.

00:07:08.440 | And sort of gutting out COVID here in Manhattan,

00:07:10.600 | but doing a lot of good stuff.

00:07:13.480 | - That's quite a varied background

00:07:15.040 | and certainly have the experience to help us out here today

00:07:18.840 | in understanding trusts and understanding taxes

00:07:22.680 | and investing and asset protection.

00:07:26.200 | And a lot of things that we don't normally talk about

00:07:29.640 | on an investing podcast,

00:07:31.000 | but I think it's extremely important

00:07:33.040 | to understand how these things work.

00:07:35.400 | But before we dig into all the nitty gritty

00:07:38.680 | of the trust work that you do for high net worth clients,

00:07:43.680 | one of the Bogleheads asked a question.

00:07:47.280 | He would like this podcast to start with,

00:07:50.200 | what is a ultra high net worth,

00:07:53.680 | a high net worth 1% or how do you define this marketplace?

00:07:58.680 | - Sure.

00:08:01.080 | And I've gone in this whole thing

00:08:03.360 | about how I fled the practice of law

00:08:05.160 | and I'm going to come back to the answer, it depends.

00:08:08.280 | But I try to tackle this a little bit in my book

00:08:11.040 | and there are a few ways to think about it.

00:08:12.840 | Sort of 1% from a current income perspective,

00:08:16.000 | let's call it sort of wage income,

00:08:18.560 | I think is probably in the,

00:08:20.280 | depending on where you live in the United States,

00:08:22.240 | let's call it the 300,000 to 700,000 bandwidth.

00:08:26.480 | From an asset perspective,

00:08:28.160 | meaning the assets that you have in a net worth statement,

00:08:30.600 | I think it's probably more,

00:08:32.840 | I think maybe the two and a half or 3 million range.

00:08:35.760 | The banks, when they market segment to,

00:08:39.360 | let's call it the affluent, the high net worth

00:08:42.040 | and the ultra high net worth,

00:08:43.560 | I think in general, zero to 3 million is in the affluent,

00:08:47.200 | three to 10 million is in the high net worth,

00:08:49.720 | meaning you have a lot of assets

00:08:51.760 | and you have theoretically more money

00:08:54.240 | than you can spend before you die.

00:08:56.480 | And then there's what I would call

00:08:58.000 | the really high net worth,

00:09:00.000 | which is maybe 10 million to 50 million,

00:09:03.320 | where, and certainly currently,

00:09:05.520 | you have significant estate planning issues

00:09:09.040 | and definitely more money than you should be able to spend.

00:09:12.160 | Yet at the same time,

00:09:13.400 | you are far away from what I would describe

00:09:16.040 | as institutional advice.

00:09:17.600 | And then once you get over 50 million,

00:09:19.320 | I think most people would categorize that

00:09:21.760 | as ultra high net worth,

00:09:23.680 | where especially on the investment advice side,

00:09:25.960 | you're out of the, I'll put in quotes,

00:09:27.800 | retail high net worth offerings

00:09:30.200 | and much more into the institutional offerings

00:09:33.160 | and able to negotiate your terms of engagement

00:09:35.640 | with the institutions, things like that.

00:09:38.400 | And I'll add one more sort of slice to that,

00:09:40.440 | which is the idea of the family office

00:09:42.880 | or the multifamily office,

00:09:44.200 | where your affairs are so complicated or so specific

00:09:48.120 | that you need your own staff

00:09:49.680 | that truly understands what you're up to.

00:09:52.120 | People have their own family offices.

00:09:54.600 | They make sense from a dollar perspective

00:09:57.080 | in terms of maintenance and upkeep of them,

00:09:59.600 | certainly over $100 million,

00:10:01.720 | but probably more like over 500 million or a billion dollars

00:10:04.840 | when you're hiring staff and doing that type of thing.

00:10:07.800 | I would add one other thought process here,

00:10:10.120 | and I'm going to steal from two colleagues.

00:10:12.200 | And I can't call Scott Galloway a colleague.

00:10:14.360 | I've never met him, but I've read his books and I like them.

00:10:16.960 | He defines rich as when your burn rate

00:10:20.800 | is less than the passive income that you generate.

00:10:24.080 | And I really like that,

00:10:25.080 | because that means when you go to bed at night,

00:10:27.120 | your assets are generating so much

00:10:29.320 | that it covers your costs

00:10:30.640 | and you don't have to really do anything.

00:10:32.640 | Another way of thinking about that

00:10:34.240 | is a definition from a friend of mine, Brian Portnoy,

00:10:36.920 | who in his book, "Geometry of Wealth,"

00:10:38.960 | described it as funded contentment.

00:10:41.080 | Now, that may be away from the equation

00:10:43.560 | that Scott Galloway put out that said that the burn rate

00:10:47.600 | has to be lower than the passive income that you generate.

00:10:51.040 | But in Brian's case, I think he means to say

00:10:53.880 | that if you've got a lifestyle that you've set upon

00:10:55.960 | and you have the assets and income necessary to fund it

00:11:00.080 | without a whole lot of worry and risk due to volatility

00:11:04.440 | and things like that, that that's interesting.

00:11:06.560 | In my book, I try to define it.

00:11:08.120 | Am I rich deals with various types of flavor

00:11:11.360 | of those descriptions that we talked about.

00:11:13.880 | But I think just to throw numbers out at it,

00:11:16.720 | if you have $20 million and you're earning 4% off of that,

00:11:21.320 | however you find a way to do it,

00:11:22.840 | and that's $800,000, I think that's rich for most people.

00:11:27.400 | I think that covers the lion's share

00:11:28.920 | of a lot of different spending.

00:11:30.560 | Now, obviously, there's some people in New York City

00:11:33.320 | for whom $800,000 is gonna be a couple of months rent

00:11:37.000 | out in the Hamptons, and that doesn't quite apply.

00:11:39.600 | But that 20 million figure, I think,

00:11:41.640 | really puts you in the category of rich.

00:11:44.960 | - Interesting that the first thing you talked about

00:11:47.040 | was wages, where a lot of people associate wages

00:11:52.400 | and your income with being rich.

00:11:56.040 | And I think the government statistics generally break out

00:11:59.080 | their poverty levels based on income.

00:12:02.280 | You could go back to your Fed days

00:12:04.600 | and correct me if I'm wrong, but I find this ironic

00:12:07.840 | because a lot of the clients I work with are rich,

00:12:11.080 | according to your numbers.

00:12:13.360 | And yet, if you look at their income,

00:12:16.000 | they're at the poverty level.

00:12:18.220 | They get listed on government statistics

00:12:21.040 | as being in the poverty level.

00:12:22.480 | And ironically, they qualify

00:12:24.200 | for ACA healthcare tax credits, subsidies,

00:12:27.680 | their energy paid for at their home in the wintertime

00:12:31.480 | and such, only because the government uses just income

00:12:35.120 | as a measure for who's wealthy and who's not.

00:12:38.760 | And in reality, a lot of these folks

00:12:40.560 | who are getting healthcare subsidies

00:12:43.160 | and getting other subsidies are, in fact, multimillionaires.

00:12:46.720 | But that's just not the way those entities measure wealth.

00:12:50.160 | So things can be skewed pretty quickly.

00:12:54.160 | - Well, and it goes back to really,

00:12:56.320 | how do you analyze wealth?

00:12:57.640 | And if you go back to sort of accounting features,

00:13:00.460 | it's the difference between a cashflow statement

00:13:02.560 | and an asset and liability statement.

00:13:04.680 | And taken to one extreme,

00:13:06.680 | if you have a $10 million house but no income,

00:13:09.460 | you are quote-unquote wealthy in one respect,

00:13:12.760 | but poor in another, as you just described.

00:13:15.120 | Whereas the investment banker who makes $5 million a year

00:13:18.720 | over the course of, let's call it a 25-year career,

00:13:21.100 | but forgets to save, they're wealthy at one moment in time,

00:13:26.100 | but then poor once they get into the retirement component.

00:13:29.160 | And I think that's what we as advisors have to do,

00:13:31.800 | especially at the high end,

00:13:32.800 | is try to really educate people

00:13:34.400 | that wealth really involves taking a look

00:13:36.680 | at both of those kinds of features

00:13:39.240 | and that you don't forget one at the expense of the other.

00:13:42.360 | - And the tax code itself is regressive.

00:13:44.540 | If you are saying that the rich need to pay

00:13:47.480 | their fair share of taxes,

00:13:49.440 | well, they're not talking about wealth.

00:13:51.960 | They're talking about income.

00:13:53.900 | And there's a big difference between wealth and income.

00:13:56.280 | I mean, we know a lot of people, all of us,

00:13:57.740 | who have very high incomes but have no wealth.

00:14:02.340 | They're in debt up to their eardrums,

00:14:05.400 | but they have high income.

00:14:06.580 | So it's sort of an interesting discussion

00:14:09.520 | about is high income really a measure of wealth?

00:14:14.620 | And my answer is no, probably not.

00:14:17.900 | But unfortunately, it's the one

00:14:19.460 | that most government entities use

00:14:22.060 | for figuring things out, who gets what,

00:14:24.120 | and how the pie is sliced up.

00:14:26.420 | - So essentially, when talking

00:14:29.020 | about different types of wealth,

00:14:30.540 | again, there's lots of different ways

00:14:32.720 | to come at the question.

00:14:35.040 | One thing that I see with a lot of clients

00:14:37.300 | is occasionally they don't understand the difference

00:14:39.620 | between, let's say, liquid and illiquid wealth.

00:14:42.660 | And sometimes that comes in the form

00:14:45.680 | of people who buy property, real estate in particular,

00:14:49.020 | and they say this is a good investment.

00:14:50.860 | And I hearken back to the example

00:14:52.760 | of someone who has a $10 million house

00:14:54.980 | but doesn't have the liquidity to pay for the taxes

00:14:58.100 | or for their daily expenses, for that matter.

00:15:00.820 | And so what I try to do is get people

00:15:02.420 | to understand that there is value in liquidity

00:15:05.820 | in terms of sort of dealing with risk,

00:15:08.140 | dealing with lifestyle issues, dealing with spending.

00:15:11.260 | And there can be value with illiquidity

00:15:13.100 | as it relates to being able to get a better return

00:15:16.180 | based on that investment's upside.

00:15:19.340 | And many times, by being illiquid,

00:15:21.580 | it has more flexibility to make better investments

00:15:23.900 | and to do better things to increase value.

00:15:26.380 | That's one aspect of it.

00:15:28.620 | From a time perspective, current wealth versus legacy wealth.

00:15:32.780 | And a demarcation for that for some people might be death.

00:15:37.740 | It might be retirement.

00:15:39.520 | But it's generally that line when

00:15:41.580 | you're talking about your current needs

00:15:43.740 | that you need to fund and then things

00:15:46.860 | that you want to leave as part of your legacy,

00:15:48.780 | whether it's to your kids, whether it's

00:15:50.780 | to your philanthropies, whether it's to other causes

00:15:54.040 | that you think are interesting.

00:15:56.180 | Thinking about wealth in terms of function on that front

00:16:00.220 | oftentimes can be very interesting in terms

00:16:02.140 | of helping people think about how to invest funds accordingly.

00:16:06.140 | As an example of that, and certainly the estate planning

00:16:09.300 | world talks about this in great detail.

00:16:11.660 | But from a tax perspective, if you're

00:16:14.460 | able to put assets that are framed for longer time

00:16:17.540 | horizons, i.e.

00:16:18.660 | for legacy functions, you're able to get

00:16:21.540 | the benefit of compounding.

00:16:22.960 | If you put it in different structures,

00:16:24.540 | you might have better taxation of those assets.

00:16:27.820 | And ultimately, if you're able to bend things around

00:16:30.940 | a little bit, you might be able to use them

00:16:32.780 | in a tax-efficient way for things like philanthropies

00:16:35.420 | and so on.

00:16:36.660 | Whereas if you need money as it relates to saving up

00:16:40.020 | to buy a house or to pay for a wedding or something like that,

00:16:43.160 | you don't want things to go up and down and not have it ready

00:16:45.740 | for you.

00:16:46.420 | So if you have a daughter who's getting married in three years

00:16:48.940 | and you've budgeted $100,000 for that wedding,

00:16:52.020 | to put that into Tesla or into Bitcoin or something

00:16:55.380 | like that where that value may go up and down,

00:16:58.540 | you may find yourself having put $100,000 away

00:17:01.620 | and having it worth $50,000 at the time you need it.

00:17:05.780 | And so that's where that liquidity and illiquidity

00:17:08.260 | component comes in and how it relates

00:17:10.100 | to current versus legacy wealth.

00:17:12.500 | Time horizon, as you know, Rick, is a big function

00:17:15.980 | in putting together a portfolio.

00:17:17.980 | And I think it's an important function in just sort

00:17:20.380 | of understanding what your wealth is

00:17:22.140 | and what kind of investments you should be thinking about.

00:17:25.340 | Fraser, there are people who have unexpected wealth.

00:17:30.020 | I mean, they hit it big.

00:17:31.460 | Either they, well, hit the lottery

00:17:34.100 | or they unexpectedly get a very large inheritance

00:17:38.380 | or they were lucky enough to invest in--

00:17:43.020 | well, go to work for a company and get a lot of stock

00:17:46.140 | and stock auctions.

00:17:47.100 | And the next thing you know, they're worth $20, $25 million

00:17:50.300 | because of that.

00:17:51.940 | And they're suddenly wealthy.

00:17:53.920 | And I find these people to be very scared in many ways.

00:17:58.060 | They don't know how to handle this wealth.

00:18:01.820 | I was just talking with an individual yesterday,

00:18:03.860 | as a matter of fact, who is in his early 20s.

00:18:06.740 | And he's going to be getting a check for $10 million

00:18:09.020 | for an invention that he created.

00:18:11.140 | And then there will be more residual after that.

00:18:14.140 | And he's just very scared about this.

00:18:18.300 | What advice would you give to someone like that?

00:18:22.700 | Well, first of all, it's a great problem to have.

00:18:25.300 | The first thing I would try to impart on people

00:18:29.100 | is to say, OK, you now have a really good set of issues here.

00:18:34.980 | But this lucky windfall, let's call it--

00:18:38.700 | and let's kind of assume for a second

00:18:40.420 | that there's little planning that's been done for it.

00:18:46.060 | But this even applies to, say, the first round draft

00:18:49.900 | choice in the NBA or the NFL, et cetera.

00:18:53.380 | Those types of people, I try to impart on them the idea

00:18:57.540 | that this chunk of money, a way to think about it

00:19:01.580 | is to annuitize it for your long-term benefit.

00:19:07.020 | Now, I don't mean to take the money and go buy an annuity.

00:19:09.540 | I'm saying that this $10 million,

00:19:12.060 | let's expect it to last the rest of your life.

00:19:16.700 | And let's expect it to fund your legacy going forward.

00:19:21.260 | And to reframe it as away from, I've got this windfall,

00:19:26.700 | and I've got to watch people looking over the fence

00:19:32.280 | and wanting something from me, or am I going to spend too

00:19:34.900 | much, those are good and valid fears.

00:19:37.620 | And I think the scarier one is someone

00:19:40.060 | who inherits or gets that windfall

00:19:42.700 | and doesn't have that fear.

00:19:44.020 | And you have to really deprogram them

00:19:46.660 | to thinking that $10 million equals $10 million

00:19:49.580 | a year going forward.

00:19:51.740 | But for those people who are equipped with that fear,

00:19:53.940 | I would say, look, this is something that, in my opinion,

00:19:57.500 | you need to think about what you want your life to look

00:20:01.260 | like going forward and what that looks

00:20:04.740 | like on a year-to-year basis.

00:20:06.660 | I would also say that I would take a year

00:20:13.180 | before making any big decisions, because it's

00:20:16.780 | going to take a year to think about what

00:20:20.620 | that kind of windfall looks like and what that,

00:20:24.340 | from a current income, that it generates looks like

00:20:26.900 | and how it impacts your life.

00:20:28.580 | So for someone who gets a $10 million lottery winning

00:20:31.020 | or something like that and then goes and quits

00:20:33.960 | their job the next day, those are the ones

00:20:36.060 | who are really at risk.

00:20:37.020 | Because now they have completely turned their life upside down.

00:20:41.300 | Any structure they may have had going forward

00:20:44.580 | has been completely swamped.

00:20:48.940 | I would really tell people, number one,

00:20:52.180 | think about what your life looks like on a if $10 million

00:20:55.700 | generates $400,000 a year type of basis,

00:20:58.900 | what does $400,000 a year look like to your life going

00:21:03.100 | forward?

00:21:03.980 | And I would not make any decisions for at least six

00:21:07.460 | months and probably a year about anything related to moving,

00:21:11.480 | related to quitting your job, et cetera.

00:21:14.500 | Absent some crazy circumstance happening.

00:21:17.140 | But I would really take the time,

00:21:18.980 | and that goes to everything from picking advisors

00:21:21.580 | and talking to good people and really taking the time

00:21:27.140 | to sort of bed this new impact in.

00:21:32.140 | It's a positive one, but it's one

00:21:34.620 | that it's not like a big health change.

00:21:36.260 | You're going from one type of thing to another very quickly.

00:21:40.820 | Often I talk with clients and they say to me,

00:21:44.540 | how should I structure my estate?

00:21:47.340 | Should I do marital trusts?

00:21:49.660 | Should I do special needs trusts?

00:21:51.460 | Should I do different types of trusts?

00:21:54.100 | How are you counseling people on whether or not

00:21:57.780 | they should be putting their assets in a trust?

00:22:00.700 | How are trusts being used today versus, let's say,

00:22:04.980 | 10 years ago when they were used mostly

00:22:06.780 | to try to avoid estate taxes?

00:22:09.820 | Sure, so I think the universal truth

00:22:12.700 | is that trusts as a tool are to affect estate planning goals.

00:22:17.020 | And that's kind of where I start out when talking to people.

00:22:20.380 | And sometimes when people go on the cocktail--

00:22:24.980 | if it was coffee, they'd be more sensible--

00:22:26.780 | the cocktail circuit.

00:22:27.900 | And they hear about different transactions,

00:22:30.500 | or they hear about sort of the flavor

00:22:32.180 | of the month in terms of a tax planning angle

00:22:34.140 | or something like that.

00:22:35.340 | And that's driving the planning.

00:22:37.500 | It's kind of going backward.

00:22:39.300 | From an estate planning perspective,

00:22:40.900 | I think the smart thing to do or an intelligent thing

00:22:43.620 | to do for better long-term planning

00:22:46.460 | is to understand, OK, here's the money or the net worth

00:22:50.620 | that I have, and here are my goals for it.

00:22:53.100 | Do I want my kids to benefit from it?

00:22:54.780 | Do I want my charities to benefit from it?

00:22:56.660 | Are there things that I'm trying to look around the corner

00:22:59.120 | and protect against?

00:23:00.020 | And so you start by having an honest discussion

00:23:03.300 | with yourself and your advisor saying, here is where I am.

00:23:06.620 | Here is my fact pattern in time.

00:23:09.180 | And this is what I want to plan for.

00:23:11.460 | Now, in the estate planning world,

00:23:14.260 | if you die without any documents whatsoever,

00:23:17.620 | you die in test date.

00:23:18.740 | And then that goes automatically to the court system.

00:23:22.140 | And the state essentially decides,

00:23:25.260 | according to its general rules, how your assets

00:23:28.140 | are divided going forward.

00:23:29.980 | 99.99% of people don't find that particularly advisable.

00:23:33.820 | So step one is to say, OK, what documents do I really

00:23:38.660 | need in place?

00:23:40.260 | Document one for everyone.

00:23:41.860 | Whether you're 1% or 0% or whatever you think,

00:23:45.340 | you should have a will, which allows

00:23:48.060 | for the bequeathing of your assets

00:23:50.700 | in a manner in which you decide you want to do it.

00:23:52.900 | Now, forget tax planning for a second.

00:23:55.460 | That's just a way to do it so that you're

00:23:57.220 | able to put forward your assets in the way you want to do it,

00:24:01.140 | and that's not according to state law.

00:24:04.700 | Step two is the power of attorney and health care

00:24:07.900 | proxies in case you are disabled and can't

00:24:11.140 | make decisions for yourself.

00:24:12.660 | You don't want to have a situation where

00:24:15.100 | there is different interpretations over who

00:24:17.820 | has control over the decision making

00:24:19.900 | if they have to make health care decisions for you.

00:24:22.780 | Terri Schiavo is the case that really brought this to light

00:24:26.100 | where, unfortunately, that person was brain dead

00:24:29.260 | for a while, and her estate planning was unclear,

00:24:31.500 | and it was unclear whether she should

00:24:33.020 | be taken off the feeding tube or kept on.

00:24:36.060 | That kind of documentation, I think,

00:24:38.300 | is useful and important going forward.

00:24:40.900 | So then you get to the point where

00:24:42.460 | wills go through a process called probate, where they

00:24:45.140 | are proven within a state court, and essentially, the will

00:24:51.340 | is put there.

00:24:52.140 | Hopefully, the I's are dotted and T's are crossed,

00:24:54.860 | and there are enough witnesses and things like that.

00:24:57.500 | And then the court goes through that process,

00:25:01.220 | and then the assets can get distributed by the executor.

00:25:04.660 | Occasionally-- not occasionally.

00:25:06.100 | This is much more standard now, and especially

00:25:08.020 | in the high net worth space, there

00:25:09.500 | is the concept of a revocable trust.

00:25:12.460 | And this is usually where most people first

00:25:14.660 | hear the word trust beyond the idea of setting up

00:25:17.460 | a, quote unquote, "fund for their kids"

00:25:19.220 | or something like that.

00:25:20.500 | But a revocable trust is a way to take the bulk of your assets

00:25:24.540 | and put it in a trust that is revocable,

00:25:27.180 | meaning you can change it up until you die.

00:25:29.620 | And then upon your death, it automatically

00:25:31.900 | flows into a trust, and those assets

00:25:34.980 | are distributed according to the terms of the trust.

00:25:38.260 | Why is this useful?

00:25:39.300 | This is useful because you avoid the probate process.

00:25:42.340 | It's less expensive.

00:25:43.500 | It's autopilot.

00:25:44.660 | It happens very quickly, and the executor

00:25:47.900 | doesn't have to really do anything.

00:25:49.380 | The trustee comes on board, and the assets

00:25:51.340 | are dispersed proportionately, et cetera.

00:25:54.660 | Just as a quick aside, I would say

00:25:56.420 | that it's a good idea to put bulky assets

00:25:58.740 | into a revocable trust and to have a will on top of that,

00:26:01.980 | because revocable trust planning doesn't really

00:26:04.820 | work unless the assets are titled

00:26:06.620 | in the name of the trust.

00:26:07.980 | Otherwise, it goes back into your regular estate,

00:26:10.820 | and hopefully you have a will that governs that.

00:26:13.820 | So I think standard procedure is to have both in place.

00:26:17.780 | That's estate planning 101.

00:26:19.860 | Then the concept gets into place when people say, OK,

00:26:23.260 | I've kind of thought about my family fact pattern,

00:26:26.460 | and I have things I need to worry about.

00:26:28.860 | Is my son a drug addict?

00:26:30.820 | I have a daughter who is young, and I don't

00:26:33.340 | know who she's going to marry.

00:26:35.020 | I don't want my daughter's new husband

00:26:37.100 | to have access to the assets.

00:26:39.780 | And by the same token, I'd like to leave some of it

00:26:42.980 | to my charities, and there may be a tax reason

00:26:46.180 | for that type of thing.

00:26:48.220 | That's when trusts really start to come into play.

00:26:50.860 | So against that backdrop, that's where the need for structure

00:26:54.780 | to avoid next generation problems comes into play.

00:26:58.980 | And I think that's consistent now

00:27:00.420 | and has been from 10 years ago, 20 years ago, and beyond.

00:27:04.340 | It's just the tools that are at our disposal

00:27:06.740 | for some of those things.

00:27:08.220 | They're not necessarily different,

00:27:09.600 | but sometimes they get more popular.

00:27:11.620 | And then to sort of bridge into the next component of what

00:27:14.540 | we're talking about, I think what's

00:27:16.500 | interesting now versus 10 or 20 years ago

00:27:19.660 | is the fact that there is relatively settled law--

00:27:23.100 | and of course, this could get changed in 2021--

00:27:25.940 | but relatively settled law and settled tools

00:27:28.780 | that are at our disposal to avoid things like estate tax

00:27:32.540 | and other forms of taxes.

00:27:35.500 | Essentially, in a quick summary, there

00:27:37.940 | are things called estate value freezes,

00:27:41.420 | where by placing assets into a trust at a current value,

00:27:46.040 | you are able to pass the growth on to the next generation.

00:27:49.620 | These are especially interesting right now

00:27:51.740 | because we are in a generationally low interest rate

00:27:54.860 | environment, and we are at a generationally high estate tax

00:27:58.340 | exemption environment.

00:27:59.780 | So there is a way to get double the leverage using

00:28:02.220 | a lot of different techniques to get assets out of one estate

00:28:06.940 | and into the hands of beneficiaries going forward.

00:28:09.900 | And if you combine that with other charitable techniques,

00:28:12.780 | you can get even more leverage out of it.

00:28:14.540 | So that's, I think, what's different between now

00:28:16.820 | and 20 years ago.

00:28:18.260 | We've got very big estate tax exemption capabilities.

00:28:21.740 | We have very low interest rates.

00:28:23.660 | And those two things together can

00:28:26.260 | be a powerful set of tools.

00:28:28.280 | How do you go about finding a good estate planning attorney

00:28:30.820 | right at the beginning?

00:28:31.780 | A lot of people ask me, who should I use?

00:28:34.340 | And I'm rather uncomfortable because I don't know

00:28:36.620 | who's good and who isn't.

00:28:38.300 | You have to be careful whom you refer to people

00:28:40.500 | because you have the $1,500 an hour types on down

00:28:44.300 | to those with sole proprietorship practices.

00:28:47.100 | I try to come up with a list of three people.

00:28:50.940 | Usually, if I know where the client is coming from that

00:28:55.700 | are ideological fits, that are personality fits,

00:28:59.700 | that it's not too aggressive or not too conservative,

00:29:02.060 | depending on the person.

00:29:03.420 | And then somewhere up and down the price range.

00:29:06.420 | If I'm out there and I don't know of the community

00:29:09.540 | real well, I would go to--

00:29:11.740 | one's accountant is usually a good place

00:29:13.460 | to start if they have that in place

00:29:16.180 | because accountants are always dealing with attorneys, both

00:29:18.500 | estate planning and otherwise.

00:29:20.260 | That's a good place to start from a networking standpoint.

00:29:22.900 | If people use a financial advisor,

00:29:24.580 | they will have a pretty well-established network

00:29:26.900 | of estate planning attorneys as well.

00:29:29.420 | And then if they have a lawyer for other uses,

00:29:32.260 | whether it's real estate or business or something

00:29:34.500 | like that, many times they either

00:29:36.180 | have that within their own firm or have

00:29:38.740 | worked with other people in terms of business succession

00:29:41.380 | or other issues that have popped up.

00:29:43.100 | Start with the state of residence.

00:29:44.540 | And then for those people who are really, really large

00:29:47.900 | and gigantic, oftentimes there are

00:29:49.460 | national or international practices.

00:29:51.980 | So if you're in Nebraska, I'm not

00:29:53.340 | sure I'd want to be doing Columbia inbound estate

00:29:57.780 | planning.

00:29:58.700 | But there are people who deal with that.

00:30:00.740 | But sometimes larger national law firms,

00:30:04.360 | they'll certainly take your call.

00:30:05.740 | And if they can't do it, they'll direct you.

00:30:08.240 | I think that there's always an issue with parents talking

00:30:14.060 | with children about how they are setting up their estate

00:30:17.700 | or children who are looking at their parents trying

00:30:20.980 | to talk with them about how they should set up their estate.

00:30:26.060 | A family dynamic goes on where even though different

00:30:30.580 | generations should be talking with each other sometimes

00:30:34.460 | or a lot of times, it doesn't happen well.

00:30:37.580 | Maybe there's some hard feelings.

00:30:38.980 | I've dealt with families where the parents thought

00:30:41.940 | it was important that all five of their children

00:30:43.980 | be co-trustees of everything.

00:30:46.160 | Yikes.

00:30:46.660 | And it gets to be very, very messy.

00:30:51.660 | Can you talk about some of the family dynamics

00:30:53.620 | and how you might be able to facilitate these conversations

00:30:58.380 | and make them simpler as far as decision making?

00:31:01.840 | What has been your experience?

00:31:03.780 | Well, and it's a big, deep, and important question.

00:31:08.660 | And it underpins everything.

00:31:11.540 | I think that-- let me reference two TV shows

00:31:15.780 | because sometimes people say, well,

00:31:17.660 | what does this relate to it?

00:31:18.820 | I grew up enjoying Dallas with J.R. Ewing and the like.

00:31:24.580 | Because he always chewed up the scenery

00:31:26.740 | and it was a lot of fun.

00:31:27.700 | But watching the dynamics play out

00:31:31.180 | amongst people of the same generation

00:31:33.380 | with husbands and wives and kids and what

00:31:36.340 | happened with a significant oil empire,

00:31:38.660 | that was sort of my first exposure to it

00:31:41.700 | from a sort of entertainment perspective.

00:31:44.500 | The show Succession on HBO deals with it

00:31:47.020 | as well, where you have people who have different ideas

00:31:49.580 | about how things should happen.

00:31:51.460 | Essentially, it comes back to two truths.

00:31:54.500 | The first one is that there is a saying that

00:31:57.980 | transcends a culture called shirtsleeves

00:32:01.060 | to shirtsleeves in three generations, where

00:32:03.140 | the first generation makes the money

00:32:04.660 | and the second generation kind of spends it and enjoys it.

00:32:08.420 | And then the third generation loses it.

00:32:10.580 | And this is the offshoot of the idea--

00:32:12.980 | this is me talking-- where I think that over the long haul,

00:32:17.940 | assets increase linearly while liabilities

00:32:21.140 | increase geometrically.

00:32:22.980 | So everything that you're doing from estate planning purposes

00:32:26.740 | and from investing and so on is trying

00:32:28.660 | to fight that natural law of asset depletion.

00:32:33.100 | And against that backdrop, that second generation

00:32:36.780 | and beyond, where the people who created the money,

00:32:40.340 | they created the culture that accumulated

00:32:42.940 | assets, that built businesses, that generated the wealth.

00:32:46.620 | How do you get that to the next generation?

00:32:48.900 | How do you have people who can enjoy the wealth,

00:32:52.180 | use the wealth, take advantage of the advantage in many ways,

00:32:56.940 | and build off of that without creating entitlement?

00:32:59.860 | And that is the thing that most people really, really

00:33:03.540 | worry about.

00:33:04.460 | So some things to think about on that front.

00:33:07.540 | I think that communication and education

00:33:10.420 | are big sets of tools that are important on that front.

00:33:14.660 | Step one, I think from a communication standpoint,

00:33:17.420 | to get started early is good in terms of fostering discussion

00:33:22.220 | around why things are the way they are,

00:33:25.140 | how the wealth was generated, and what it means.

00:33:28.580 | You can debate what is too early or not early.

00:33:31.380 | But one way to sort of foster communication--

00:33:34.060 | and I think a tool that's interesting--

00:33:35.700 | is the idea of having shared philanthropy.

00:33:38.620 | So what does that mean?

00:33:39.620 | And could it be used by someone not in the 1%?

00:33:42.420 | Absolutely.

00:33:43.540 | And here's what I would say.

00:33:44.700 | If you're parents and you've got, let's say, three kids,

00:33:47.860 | and let's say you have $5 to give away philanthropically,

00:33:52.620 | I think an interesting exercise is

00:33:54.260 | to give each of the kids $1 to give away

00:33:56.980 | under their own set of values, what they want to do.

00:34:00.060 | And then have the three kids decide together

00:34:03.580 | how to give away that other $2 of the $5

00:34:07.460 | that you set aside for philanthropy.

00:34:10.060 | What does that do for you?

00:34:11.220 | Number one, it gives you some insight as to what's

00:34:13.220 | important with the kids.

00:34:14.780 | Number two, it gives them some idea

00:34:17.220 | of how to work together to make a decision around money,

00:34:21.140 | around a very low stakes and very positive situation,

00:34:25.220 | namely giving it away to a charity that deserves it.

00:34:27.860 | I think if you build a culture around that early and young,

00:34:31.980 | I think that gets the kids not only

00:34:34.300 | seeing what's important to them and what's

00:34:36.820 | important to them jointly, but it also

00:34:38.980 | gives them some insight and some context into what

00:34:41.420 | they're good and not good at.

00:34:42.860 | So out of those three kids, maybe one of them

00:34:44.740 | is totally disinterested.

00:34:46.420 | So there's some context around that.

00:34:48.300 | Maybe one of them is particularly good at math

00:34:50.220 | and driven.

00:34:50.740 | And maybe they're the one that, if they end up

00:34:52.940 | running the family company, there's

00:34:54.660 | a good couple decade track record of understanding

00:34:57.140 | that those talents were in place.

00:34:59.260 | And maybe the other kid is somewhere in between.

00:35:01.660 | Or maybe artsy and off to do Peace Corps type things.

00:35:05.380 | And that while their endeavors are just

00:35:08.380 | as valuable as maybe the business aspect of it,

00:35:11.900 | it's just different.

00:35:12.940 | And so as a set of parents looking at that and sort

00:35:16.460 | of seeing that interplay when they are sort of coming up

00:35:19.820 | with the why as far as how their estate plan is put forward

00:35:23.860 | and put in place, the kids have some context around that

00:35:28.020 | already.

00:35:28.660 | And one of the worst things that happens,

00:35:31.380 | I see, is when the estate plan essentially

00:35:34.860 | is laid out to the kids upon the death of the matriarch

00:35:38.100 | or patriarch.

00:35:39.300 | And they find out that things were done for reasons

00:35:42.220 | that weren't stated and combine that with decades of baggage.

00:35:45.700 | And he wronged me because of this.

00:35:47.940 | And I didn't get invited to that over time.

00:35:50.340 | And I was excluded from this.

00:35:52.100 | That's when conflict really happens

00:35:53.820 | and when it gets particularly expensive.

00:35:56.020 | So that's one tool.

00:35:57.380 | And then to add on to that, and I'm

00:35:58.900 | going to borrow from Tom Rogerson, who

00:36:01.300 | is an expert in the family governance field.

00:36:04.260 | He has the idea of a vacation fund, which essentially--

00:36:09.380 | let's say you have those three kids--

00:36:11.100 | the idea of having a fund for vacation.

00:36:14.940 | So let's say you set aside $5,000 for the vacation.

00:36:18.300 | And at a certain level, let's say the kids are all teenagers.

00:36:21.140 | But you have the three kids make joint decisions

00:36:25.020 | around the investments of that money.

00:36:27.620 | And it's going to teach them very quickly.

00:36:30.180 | They're going to touch the stove and put it in Bitcoin too late.

00:36:33.420 | Or they're going to put it in Tesla too soon.

00:36:35.700 | Or maybe they'll get conservative quickly.

00:36:38.220 | But they'll learn on-the-ground investment lessons

00:36:41.740 | with money that isn't the corpus of the family estate.

00:36:46.100 | And at the same time, they learn to work

00:36:48.260 | with each other on money.

00:36:49.620 | They learn to have a shared set of values and education

00:36:53.740 | around how investment decisions are made.

00:36:56.820 | And this can happen at the foundation level

00:36:58.540 | too if you want to do it for a family foundation.

00:37:01.180 | But I like it in the family vacation mode.

00:37:03.500 | Because if it goes from $5,000 to $10,000

00:37:06.860 | and you have a better vacation, there's

00:37:08.820 | a real concept of shared accountability.

00:37:10.940 | And if the parents buy into that as well,

00:37:13.100 | and the whole family has shared accountability,

00:37:16.420 | the lessons go beyond just the investment component.

00:37:19.940 | And they go to the family decision-making component,

00:37:23.340 | and then the context around the long-term planning

00:37:25.940 | of the family assets component.

00:37:28.340 | So that's another tool.

00:37:29.500 | A third tool, which is usually kind of around in the--

00:37:32.380 | let's call it the family office world--

00:37:33.940 | is the idea of a family bank.

00:37:35.900 | And that can really be the idea of kids

00:37:38.780 | who have entrepreneurial ideas can come up and give a business

00:37:41.660 | plan to a group of people as decided by the family.

00:37:45.340 | And you put some structure around that.

00:37:47.220 | But in a sense, kids learn how to come up with an idea,

00:37:51.860 | put a business plan around it.

00:37:53.140 | And you can obviously support that and bring your advisors in

00:37:55.600 | and get as involved or not involved as you want.

00:37:58.060 | But get that in place so that the kids get up

00:38:00.140 | and they learn to think of the plan,

00:38:03.220 | think about how to execute it, and think about selling it

00:38:05.980 | to a dispassionate--

00:38:07.680 | although they're family members--

00:38:09.020 | but a dispassionate group of people.

00:38:10.940 | And that's a life lesson.

00:38:12.620 | It's that kind of experience that I

00:38:14.180 | think raises kids above the level of the entitled

00:38:18.100 | and at least gives them a little bit of experience

00:38:20.300 | into how the world works.

00:38:22.420 | You've talked a lot about parents talking with children.

00:38:25.540 | But I also see it the other way.

00:38:27.780 | I see parents not opening up to their children

00:38:30.940 | and their children needing to have conversations

00:38:33.920 | with their parents.

00:38:34.900 | I'll often talk with a client and gathering their information

00:38:39.140 | and talking with them about their own retirement

00:38:41.420 | if they're in their 40s.

00:38:42.420 | I'll ask things like, are you in line to inherit any money?

00:38:48.500 | And sometimes there's silence.

00:38:50.860 | And one person will say to the other, well, my family, no.

00:38:54.940 | But my spouse, yes.

00:38:57.900 | And I say, well, what kind of assets

00:39:01.800 | are we talking about that you would inherit?

00:39:03.980 | And they say, well, I don't really

00:39:04.980 | know how much my parents have.

00:39:06.220 | I don't know what it is.

00:39:07.900 | But I think they have a substantial amount.

00:39:10.420 | But I don't know.

00:39:11.780 | They're in their 40s and sometimes in their 50s.

00:39:14.080 | And they still don't know what their parents have.

00:39:16.200 | So how do you get the conversation

00:39:17.580 | to go the other way?

00:39:19.660 | Well, that's a great question because it's a big deal.

00:39:22.580 | And the worst thing that happens is people

00:39:25.220 | assume they have something.

00:39:26.420 | And then they are displeasantly surprised or unpleasantly

00:39:30.500 | surprised that it's not there.

00:39:33.100 | And the life that they'd kind of penciled out

00:39:36.440 | based on the assets that they thought were there aren't.

00:39:39.220 | Or worse, this is kind of in more in the--

00:39:42.820 | let's call it in the $1 to even $10 million range,

00:39:45.300 | but maybe more like in the $1 to $5 million range.

00:39:47.700 | The costs of health care are not going down.

00:39:50.780 | And the idea that Medicare is going

00:39:54.340 | to take care of everything, I think it's dangerous.

00:39:58.940 | I've seen it with my own family.

00:40:00.540 | My parents dealt with my grandmother who made it to 102.

00:40:05.060 | Sadly, the last seven years of that

00:40:07.580 | weren't particularly pleasant because of dementia.

00:40:10.980 | And it cost thousands and thousands and thousands

00:40:13.420 | and dozens of thousands of dollars, almost per month,

00:40:16.300 | especially at the end, to make that happen.

00:40:18.420 | So to answer your question, how do you break that divide?

00:40:23.460 | I think there are a couple of interesting things going on.

00:40:26.140 | Number one, I would say an interesting component

00:40:29.580 | to kind of back your way into the conversation,

00:40:31.900 | especially if you're in your 40s, 50s, et cetera,

00:40:34.420 | is to say, mom and dad, I'm doing my estate planning

00:40:37.860 | for myself now.

00:40:39.300 | I'm reviewing it.

00:40:40.500 | I've seen the tax laws.

00:40:41.580 | I've heard a lot about it.

00:40:42.700 | It's time to get things buttoned up and reviewed.

00:40:46.740 | Can you fill me in on what is and isn't available,

00:40:51.300 | if not for me, then for my kids, so

00:40:53.580 | that I know how to make decisions on my estate planning

00:40:56.420 | that affect them, that don't double up or cut in half

00:41:00.180 | the benefits that I think are important for them?

00:41:02.780 | That may be met with one response or another.

00:41:05.700 | But that's one way to get it started,

00:41:07.740 | to say that you're doing the responsible thing by getting

00:41:11.180 | your estate planning looked at and in order.

00:41:13.180 | And you need more information to make that happen.

00:41:15.540 | And that part of that information

00:41:17.380 | needs to come from above, from the more senior generation.

00:41:21.500 | The second part about it is that, mom and dad,

00:41:24.100 | I need to plan for your health care going forward.

00:41:27.420 | And we need to make this a joint decision,

00:41:29.780 | because there are lots of different variabilities

00:41:32.380 | in place.

00:41:33.020 | And it's extremely expensive.

00:41:34.660 | And if we don't think about this correctly,

00:41:37.060 | we could be left up the creek without a paddle.

00:41:39.700 | And it could be left with everything

00:41:41.340 | from not much in the way of access to health care

00:41:44.660 | facilities to just a dangerous situation

00:41:47.940 | where a sudden death could occur.

00:41:49.500 | And we don't understand where things are.

00:41:52.700 | I think an interesting tool on that front

00:41:54.860 | is to have the idea of a fire drill.

00:41:58.780 | And it's oftentimes very difficult to get

00:42:01.500 | families to execute on this.

00:42:03.380 | But I think it's interesting to say, you know what?

00:42:06.220 | OK, this is all sort of hypothetical.

00:42:08.900 | But dad just died.

00:42:11.020 | What happens next?

00:42:12.820 | OK, step one, where are the documents?

00:42:15.420 | Step two, who are the advisors we have to talk to?

00:42:18.260 | The lawyer, the accountant.

00:42:19.660 | Is there a health care facilitator?

00:42:21.820 | Funeral arrangements, that type of thing.

00:42:23.940 | There are going to be people who are sort of recalcitrant.

00:42:26.540 | And they're not going to want to do that.

00:42:28.220 | And that's tough.

00:42:29.220 | But I like the idea of couching it

00:42:32.060 | in terms of a family fire drill.

00:42:33.940 | What happens if?

00:42:35.340 | What happens when?

00:42:37.100 | If this, then what?

00:42:38.740 | Doing that maybe once a year, even once every two years,

00:42:42.620 | at the very least, you know how things

00:42:44.900 | are going to get executed.

00:42:46.540 | And then you can back into what's

00:42:48.300 | in those documents if it gets particularly complicated.

00:42:51.860 | That'd be another way I'd be thinking about it.

00:42:53.820 | I'd be thinking about it in terms of, you know,

00:42:55.780 | how do I best plan for my family?

00:42:57.660 | I need to use the first generation's information

00:43:01.940 | from them to make my planning work.

00:43:05.300 | And then step two, it's a very good thing for this family

00:43:08.060 | to understand what happens if there's an emergency

00:43:10.660 | or there's a problem and to run a drill off of that.

00:43:13.580 | Yeah, for sure.

00:43:14.700 | Again, I speak with a lot of clients

00:43:16.340 | who have parents' assets in probate for a year,

00:43:20.700 | year and a half.

00:43:21.980 | It just takes forever, in some cases,

00:43:24.660 | to resolve some of these things because there wasn't really

00:43:27.660 | any planning.

00:43:28.820 | Or the parents didn't communicate with the children.

00:43:31.340 | Or the children didn't initiate a conversation

00:43:33.300 | with the parents or something.

00:43:34.540 | But in the end, it does fall on the children

00:43:37.140 | who, if they inherit the money, they're

00:43:39.060 | the ones who have to sort it all out.

00:43:41.540 | And it can take a very long period of time.

00:43:43.460 | So it's a good idea, if possible,

00:43:45.100 | to have that conversation if the parents and the children

00:43:47.820 | are willing to do it.

00:43:48.900 | I mean, the one thing that I think is useful for everybody

00:43:51.580 | is to have a sort of go-bag or a list of documents and contact

00:43:57.300 | information so that even if you don't know exactly what

00:44:00.940 | the process looks like, you know whom to call quickly.

00:44:04.460 | That first week is going to be brutal for most people.

00:44:07.260 | It's emotionally fraught.

00:44:08.380 | There's problems.

00:44:09.620 | If you have sort of an end-of-life situation,

00:44:12.060 | those early periods of time are important.

00:44:14.820 | If you can have some checklists laid out of things

00:44:17.100 | that you should be thinking about,

00:44:19.420 | and if you can drill ahead of time

00:44:21.100 | and to sort of impart on the senior generation

00:44:23.700 | as to why it's important to have these in place,

00:44:26.180 | that may help break the ice a little bit.

00:44:28.220 | Well, Fraser, given everything you just

00:44:30.060 | talked about, the family dynamics

00:44:31.820 | and the initial part of the estate plan,

00:44:34.220 | can we get further into trusts?

00:44:37.980 | Sure, so as I just laid out, the idea

00:44:41.460 | that if you can understand why you're doing things

00:44:43.860 | and the purpose of it, the use of trusts is to--

00:44:47.940 | there are lots of different functions for them.

00:44:49.900 | But the idea is to provide structure around the wealth

00:44:52.820 | in order to pursue other goals.

00:44:55.620 | Goals can be asset protection.

00:44:57.420 | It can be tax avoidance.

00:44:59.300 | It could be putting structure around the wealth

00:45:02.260 | so that kids don't spend willy-nilly

00:45:05.420 | or that they don't go down a certain path in life

00:45:07.780 | that you think is inappropriate for them.

00:45:10.180 | And as we sort of talk these things through,

00:45:13.620 | I think the idea that anything that

00:45:16.580 | can be done to preserve the assets

00:45:18.620 | or forestall that shirtsleeves to shirtsleeves phenomenon,

00:45:21.820 | that's the point of a trust.

00:45:23.300 | And for those matriarchs and patriarchs

00:45:25.780 | that have ideas about the wealth that they created

00:45:29.660 | and the impact and the legacy that it provides,

00:45:32.300 | that's the point of a trust, is to sort of put

00:45:34.620 | that structure around it so that the decisions made

00:45:37.860 | as to how it is spent and how it's invested

00:45:40.180 | and how it's protected, ultimately,

00:45:41.980 | allow it to be preserved for as long as possible.

00:45:44.860 | A lot of clients are talking about Nevada trusts.

00:45:47.180 | They're talking about Dakota trusts.

00:45:49.580 | They're talking about all of these different states

00:45:52.100 | changing their trust laws and moving around going to and using

00:45:56.540 | different state laws.

00:45:57.940 | What is that all about?

00:45:58.940 | And how can somebody utilize that?

00:46:02.260 | Sure, so again, this is what I'm doing in my day job

00:46:05.500 | and sort of advising larger clients and other clients

00:46:09.180 | about how to sort of use jurisdiction

00:46:11.700 | to your advantage, which you described Nevada, South Dakota,

00:46:15.780 | Delaware, Tennessee, which is where I'm working.

00:46:18.620 | I work in New York for a Tennessee trust company.

00:46:21.420 | These places all have trust laws that have various advantages.

00:46:25.740 | Now, first and foremost, especially

00:46:27.740 | if you're in California or New York,

00:46:29.740 | places I just described have no state income tax.

00:46:32.060 | And so there are a lot of different things

00:46:33.860 | you can do with your estate planning

00:46:36.060 | and sometimes your income tax planning

00:46:38.260 | to be able to take advantage of that non-state income tax

00:46:41.060 | feature of those states.

00:46:42.740 | These states also have asset protection features.

00:46:45.820 | So whenever there's a possibility of lawsuit

00:46:48.500 | or something else where there's a creditor in play

00:46:51.340 | that you want to defend your assets against,

00:46:53.380 | these types of jurisdictions are interesting

00:46:55.460 | compared to other ones.

00:46:57.260 | There's a notion where you can bifurcate roles.

00:47:00.020 | So you don't have to have one trustee or one corporate

00:47:03.220 | trustee do everything.

00:47:04.980 | And so Tennessee and the other jurisdictions described

00:47:07.900 | have direction trusts where you can

00:47:09.940 | appoint people who are good at various parts of the trust

00:47:13.780 | process, whether it's investments, the administration

00:47:17.180 | component, or the distribution component.

00:47:19.500 | You can divvy up those roles as well.

00:47:23.220 | And there's all sorts of other different features.

00:47:25.940 | For instance, in Tennessee, the trust can last 360 years.

00:47:30.260 | Some places are limited to the rule

00:47:31.980 | against perpetuities, which basically

00:47:33.700 | caps you at a generation.

00:47:35.420 | So for a real multi-generational wealth,

00:47:37.780 | one of these usual suspects, as I call them,

00:47:40.460 | from a jurisdiction standpoint is particularly interesting.

00:47:46.420 | So just to be clear, I don't need to live in Tennessee

00:47:49.100 | or I don't need to live in Nevada

00:47:50.500 | to be able to use these trusts.

00:47:52.460 | Nope.

00:47:52.940 | If you have a corporate trustee or an administrative trustee

00:47:56.540 | who serves in that function, you get the benefits

00:47:59.260 | of that jurisdiction's law.

00:48:01.900 | And let me get down to one question

00:48:03.780 | that I have all the time.

00:48:05.420 | I always ask, who is going to be the trustee?

00:48:10.260 | Should it be five children all equally,

00:48:12.940 | or how do you deal with that?

00:48:16.220 | Well, it's complicated for a lot of different reasons.

00:48:18.820 | The trust has three main parts to it.

00:48:21.460 | It has a grantor, which is someone who forms the trust

00:48:25.020 | and funds it with assets.

00:48:26.860 | It has a trustee.

00:48:28.740 | And that trustee has three main functions.

00:48:30.980 | They have to safeguard and report on the assets.

00:48:33.660 | They have to invest the assets prudently.

00:48:35.780 | And they have to distribute it to the beneficiaries

00:48:38.140 | according to the terms of the trust

00:48:39.700 | and then state law if it's silent.

00:48:41.820 | Then the third part of the trust is the beneficiaries.

00:48:45.060 | So against that backdrop, that's a trust in a general sense.

00:48:50.820 | When you're picking a trustee, oftentimes people

00:48:54.380 | have an idea of what that word means

00:48:56.660 | and don't have an idea of those three functions

00:48:58.860 | I just described.

00:49:00.420 | Finding that one person who is both a good investment manager,

00:49:05.100 | is good at taking notes and making sure

00:49:07.100 | that the tax returns are filed and that they're also--

00:49:10.300 | that the assets are safeguarded and that the reporting is

00:49:13.300 | correct, that's another function.

00:49:16.100 | And then also that person who is able to have

00:49:18.020 | the hard conversations around how to distribute those assets

00:49:21.220 | when they have the discretion to do so.

00:49:23.740 | And a hard conversation might be a son

00:49:26.060 | wants to pillage the trust to buy a Lamborghini

00:49:29.020 | versus the daughter wants to use the trust to buy a house

00:49:31.740 | versus what does it say in the trust

00:49:33.740 | versus what does state law say.

00:49:36.340 | Finding that individual who can deal

00:49:39.260 | with all three of those functions is hard.

00:49:42.380 | And it's doubly hard because people

00:49:44.260 | who understand that role and understand those three

00:49:46.780 | functions understand that it's a high liability situation

00:49:50.700 | and that they should get paid for it.

00:49:52.820 | That in turn argues for a trustee

00:49:56.180 | that understands the risks, hopefully

00:49:58.780 | has some idea of understanding the family's dynamics,

00:50:03.020 | and then also has the structure in place

00:50:05.020 | to make those decisions so that when something goes wrong,

00:50:08.260 | which invariably it does, and siblings start fighting

00:50:11.780 | and they think one's been favored over another,

00:50:13.860 | or maybe keeping that position in Kodak wasn't a good idea,

00:50:18.620 | that they're going to get sued.

00:50:20.260 | So choosing a trustee is, when you really

00:50:22.660 | get into the weeds on it, very difficult. Oftentimes,

00:50:26.100 | corporate trustees are brought in, and they can be expensive

00:50:29.860 | and they cost, but they help soak up

00:50:31.980 | some of those functions that individuals may not

00:50:34.460 | be very good at.

00:50:35.580 | They can provide structure around the distribution

00:50:37.620 | process.

00:50:38.260 | They can provide structure around the investment process,

00:50:41.740 | they can provide the back office for those administrative

00:50:44.540 | details.

00:50:45.540 | So when one's coming up with a trust, the choice of trustee

00:50:49.540 | is extremely important, not least of which--

00:50:52.260 | and I talk about this in, I think,

00:50:54.460 | about two sentences in my book, which is to say,

00:50:57.380 | trustees get old, individuals do.

00:50:59.940 | So the family lawyer who puts this together at age 65,

00:51:04.420 | they may be 95 when the situation comes

00:51:07.240 | to pass where there's conflict or real judgment

00:51:10.580 | needs to take place.

00:51:11.780 | And that's tricky, because that person is probably retired,

00:51:15.660 | or they shouldn't be making decisions for whatever reason.

00:51:19.060 | It's important either to create sort of a situation

00:51:22.540 | where there's help that is going to be consistent,

00:51:25.740 | even if people move in and out, or that your trustees

00:51:29.460 | and that your advisors around your wealth

00:51:31.460 | get younger as you get older.

00:51:34.420 | If a family were to go down the road of hiring

00:51:37.020 | a professional trustee instead of family members

00:51:40.540 | so that there is this consistency and no favoritism

00:51:46.140 | or ambiguity, what would that cost a family?

00:51:50.140 | So it's a good question, and it depends which functions

00:51:53.420 | the trustee takes on.

00:51:55.460 | If you have a full mandate for a trust,

00:51:58.380 | meaning investment management, trust administration,

00:52:01.820 | distribution responsibilities, I would

00:52:04.660 | expect that to be in the 1 and 1/4 plus percent range.

00:52:09.660 | I think 25 basis points for the trust administration,

00:52:13.540 | 1% for the investment administration.

00:52:16.900 | Obviously, as you move up the ladder

00:52:18.900 | and those functions get delineated,

00:52:21.780 | there's negotiation around that.

00:52:23.980 | By the same token, if you hire a lawyer to be a trustee for you,

00:52:28.580 | and that happens very frequently,

00:52:30.580 | they may have an hourly rate, they may have a flat rate.

00:52:33.380 | But I would say that, in essence,

00:52:36.700 | kind of in that 1% plus range is probably a good place to start.

00:52:41.500 | And it will vary depending on assets, functions,

00:52:44.420 | complications, things like that.

00:52:46.460 | So not inexpensive, I guess.

00:52:49.220 | It's a double negative.

00:52:50.940 | Well, it can be expensive.

00:52:53.300 | Now, many times people balk at the price to get,

00:52:57.260 | let's call it a professional trustee,

00:52:59.060 | and they have family members serve in trustee roles.

00:53:02.540 | And very often, that's fine.

00:53:05.620 | But I think the idea is that when something has to happen

00:53:11.860 | and if there is the potential for a lawsuit for conflict

00:53:16.940 | reasons, et cetera, I think it's a good idea

00:53:20.580 | to start thinking about professional trustees.

00:53:23.980 | Because an individual who forgets to file a tax return

00:53:27.940 | or forgets the election of some state law that needs to happen,

00:53:34.820 | they're liable.

00:53:35.700 | That's it.

00:53:36.340 | And I think many people who take that role on,

00:53:38.780 | let's call it for free or for de minimis,

00:53:42.420 | they may be saving the trust on fees,

00:53:45.300 | but they may be really piling on liability for themselves.

00:53:48.660 | And it's something, in fact, they should probably

00:53:51.100 | investigate some liability insurance as well.

00:53:54.220 | A lot of people come to me and they

00:53:56.020 | ask me to refer them to professional trustees.

00:54:00.220 | But it's not my area of expertise,

00:54:02.700 | and I don't know how to go about evaluating

00:54:06.860 | one professional trustee against another.

00:54:09.020 | How would somebody do this who is looking

00:54:10.740 | for a professional trustee?

00:54:13.060 | Well, the first thing I would do, if you're

00:54:14.900 | going through an estate planning attorney,

00:54:16.860 | they should have a pretty robust network of trustees,

00:54:21.260 | both individual and corporate, to choose from if they

00:54:24.580 | won't do it themselves.

00:54:26.100 | Failing that, financial advisors,

00:54:28.340 | people who work with them oftentimes,

00:54:29.860 | they have another set of people in their network

00:54:32.220 | that sometimes works.

00:54:33.900 | I tend to sort of gravitate toward the legal community

00:54:38.380 | for referrals on that front.

00:54:40.060 | It can really be like unearthing truffles,

00:54:42.620 | because the person who has the expertise with the family

00:54:45.020 | dynamic and the assets, sometimes

00:54:47.660 | that can be a really specialized person.

00:54:49.340 | But being part of a trust company,

00:54:51.780 | I'm also more than willing to take

00:54:54.420 | any calls or any entreaties from your listenership

00:54:57.740 | if they have any questions about it.

00:55:00.020 | Let's get into a final area, because this is the Bogle

00:55:02.420 | Heads-On Investing Show.

00:55:03.500 | Let's talk about investing and the ultra-high net worth

00:55:07.100 | and the 1%ers.

00:55:08.820 | I mean, these people have access to really special mutual funds

00:55:13.060 | that outperform all the time, correct?

00:55:16.660 | I guess.

00:55:19.060 | I'm sort of a--

00:55:21.620 | my theory on investments-- and again,

00:55:23.380 | I work for a trust company that provides trustee services, not

00:55:27.740 | investment management.

00:55:28.860 | I'm a big fan of after-tax, after-fees, after-inflation,

00:55:33.300 | and then I'll put in parentheses, after-spend.

00:55:36.380 | So as a trustee, I try to fight the after-spend part

00:55:38.820 | and try to really sort of add value on that front.

00:55:43.460 | And then to make sure that we're operating

00:55:45.300 | in as an efficient manner as possible on the fee and tax

00:55:47.820 | side of things.

00:55:49.100 | And then asset allocation tends to take care of the rest.

00:55:51.940 | That said, many trusts, especially

00:55:56.860 | ultra-high net worth people, they

00:55:59.620 | believe in alternative assets, special situations.

00:56:04.780 | Many times, they built their wealth on something

00:56:06.980 | where they had a definitive edge.

00:56:09.060 | And that's the part where I would be--

00:56:11.260 | I am not inclined to discourage people

00:56:15.180 | from investing in things where they have experience,

00:56:19.660 | resources, context, and also just that advantage that I

00:56:29.460 | think is sometimes missing with general money managers

00:56:33.380 | when they're trying to beat an index.

00:56:35.580 | Is there any truth to the idea that ultra-high net worth

00:56:40.540 | people have access to better investments than the rest of us?

00:56:46.820 | There is some truth to it.

00:56:47.900 | I mean, Warren Buffett getting Goldman Preferreds

00:56:50.300 | is not something that, during the financial crisis,

00:56:52.700 | is not something that people had access to.

00:56:54.580 | But I would say for the lion's share of people,

00:56:57.980 | that that may be a little bit overstated.

00:57:02.380 | But that's true.

00:57:03.180 | Ultra-high net worth people, especially the ones

00:57:05.140 | who traffic around family office worlds and so on,

00:57:07.780 | are exposed to individual deals.

00:57:10.020 | They're exposed to private equity funds and so on.

00:57:13.140 | Those people who know what they're good at

00:57:15.700 | and also know what they're not good at,

00:57:17.660 | they're willing to pay fees for things that they understand

00:57:21.100 | extremely well.

00:57:22.580 | And then I see it work best when they delegate and pay

00:57:25.340 | as little as possible for things that are either commoditized

00:57:28.900 | or provide some diversification, but they may not

00:57:32.420 | understand real well.

00:57:33.980 | David Swenson from Yale.

00:57:36.060 | His view is that, unless you're the ultra-high net worth,

00:57:41.100 | hundreds of millions of dollars, maybe even a billion,

00:57:44.980 | that you're just not going to get quality asset management

00:57:49.180 | and that you should just index most of your portfolio.

00:57:52.500 | How do you feel about that?

00:57:55.140 | I generally agree.

00:57:56.580 | There's certainly exceptions to the rule.

00:57:59.340 | An example would be in real estate.

00:58:01.500 | For those people who understand neighborhoods

00:58:03.900 | and understand classes, multi-fam versus office,

00:58:07.180 | and they're really good at it and that's their thing,

00:58:09.980 | and investing in that or investing in a manager

00:58:12.460 | that they understand, where you're

00:58:14.180 | able to take advantage of scale, where

00:58:17.420 | you're able to take advantage of expertise,

00:58:20.780 | those are reserved for very big situations.

00:58:24.860 | And to find them grouped together

00:58:27.220 | in situations that are really structured to raise capital

00:58:30.100 | as much as to provide outsized returns.

00:58:33.020 | I mean, everybody gets paid along the way,

00:58:34.900 | and that comes out of the investor's pocket ultimately.

00:58:38.740 | I'd agree with Swenson on that one.

00:58:41.100 | Unless you're able to develop that deal yourself

00:58:43.860 | with your own expertise and your own resources in many ways,

00:58:48.940 | the sub-ultra-high net worth level,

00:58:51.380 | I think you just have to really look twice and think three

00:58:55.060 | times before heading into it.

00:58:57.380 | The name of the book is called "Wealth Actually, Intelligent

00:59:00.740 | Decision-Making for the 1%."

00:59:02.580 | Thank you so much for being on the Bogle Heads

00:59:04.260 | on Investing podcast.

00:59:05.660 | And good luck with your new role as a director at Pendleton

00:59:09.260 | Square Trust Company.

00:59:11.180 | Terrific.

00:59:11.660 | Rick, thank you very much.

00:59:12.780 | And I want to say it's a pleasure to be on.

00:59:15.540 | You do a great service for the investing community

00:59:18.740 | and for the high net worth, ultra-high net worth,

00:59:21.140 | and beyond for those people even who are just

00:59:23.540 | learning about investing.

00:59:24.660 | So I'm thrilled to be a part of it.

00:59:26.860 | This concludes Bogle Heads on Investing, episode number 29.

00:59:30.980 | I'm your host, Rick Ferry.

00:59:33.180 | Join us each month to hear a new special guest.

00:59:36.540 | In the meantime, visit bogleheads.org

00:59:39.900 | and the Bogle Heads Wiki.

00:59:41.660 | Participate in the forum and help others find the forum.

00:59:45.420 | Thanks for listening.

00:59:48.180 | [MUSIC PLAYING]

00:59:51.220 | (upbeat music)

00:59:53.800 | (upbeat music)

Bogleheads® on Investing Podcast 029 – Frazer Rice, host Rick Ferri (audio only)

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