Welcome to Bogle Heads on Investing, episode number 29. Today, our special guest is Fraser Rice. Fraser is the author of Wealth Actually, Intelligent Decision Making for the 1%. He's also the host of the podcast Wealth Actually, and he's a director at Pendleton Square Trust Company. Welcome, everyone. My name is Rick Ferry, and I'm the host of Bogle Heads on Investing.

This podcast, as with all podcasts, is brought to you by the John C. Bogle Center for Financial Literacy, a 501(c)(3) nonprofit organization that you can find at boglecenter.net. Today, our special guest is Fraser Rice. Fraser is the Northwest Regional Director for Pendleton Square Trust Company, and the author of Wealth Actually, Intelligent Decision Making for the 1%.

He's also the host of the Wealth Actually podcast at FraserRice.com. Fraser has decades of experience working with high net worth and ultra high net worth families. We'll be talking about his experiences, and he'll be providing us with a lot of great ideas we can all use at every level of wealth.

With no further ado, let me introduce Fraser Rice. Welcome to the Bogle Heads, Fraser. Rick, thank you for having me on. I was looking at the podcast before I came on, and I saw that you had Morgan Housel, Cliff Asness, and Roger Lowenstein on before me. And to be part of that kind of a group of people is really cool.

I'm honored to be here. Well, I've been a follower of yours a long time, because you write some really interesting blogs, and you wrote a book called Wealth Actually, Intelligent Decision Making for the 1%. And it's almost, you're sticking your neck out there, and you're saying, look, I advise to be elite.

I advise to the 1%. And that might turn some people the wrong way, but for me, it intrigued me. One, that you say you do it. And number two, I want to have a conversation with you about this, because there might be some really good ideas that you're doing with your ultra high net worth clients that could help everyone.

It's funny you say that, because when I put the book together, and the people who helped me publish it were saying, you've got to market this, and one way to be good at marketing is to find your niche. And the niche for me in my practice was in that sort of 1% world, and we'll talk about what that means shortly.

But in terms of selling books, that was probably a big mistake, because a lot of people said, geez, this is for the 1%, only it doesn't apply to me. And as I got through writing it, there were a lot of lessons that apply to people in all different strata.

And if I had it to do over again, I might sort of couch it as something a little bit more broad from a book selling perspective. But the book itself, it's got some good lessons, I think, for people of all stripes. - And we'll get to the book in a minute, and everything you've wrote in there.

But before we do that, let's hear about your background. How did you get to become an advisor to the ultra wealthy? - Well, it's a varied background. And like most people, they go through two or three iterations of things before they get to where they are. I started out, I worked in politics after college.

I worked for New York State Department of Economic Development. And my job was to sort of go around the state and to try to help businesses either located in New York or otherwise stay here, which is difficult given our business climate. I didn't want to be a civil servant my whole life.

So I did what other law souls do, and I went to law school, went down to Emory in Atlanta. And I had a lot of, aside from the really good legal education there, I had a lot of really cool experiences. I worked for the SEC and for a music lawyer down there.

So I got some work in the entertainment space. Then I worked for the House Banking Committee my second summer, and then the Federal Reserve in my third year. So I had kind of an interesting pastiche of legal experiences. My third year in law school down there, and I said I liked Atlanta, nice people.

The Fed was sort of interesting work, half corporate council work, half regulatory. And that was interesting. But I decided pretty early on that practicing law wasn't what I wanted to do. I made it back up to New York. I passed the bar. And I got started. I practiced law with my uncle's firm for a couple of years, which entailed some lobbying and securities regulation and banking law, which sort of befitted the last two experiences I had.

But in the meantime, I wanted to do something else. And I ran into a family friend who started Wilmington Trust's office in New York, basically on the back of his Rolodex. And he liked the idea of lawyers as issue spotters. And at the same time, I hadn't been practicing so long that my answer to everything was no or it depends.

So he hired me. And I worked for a managing director for about four or five years. She left and moved on. And then I was on my own for almost 16 years. I took care of the ones I had and went out and found new ones. And when you work for a trust company, you get very heavily involved, certainly in the investments, certainly on the liability side of things, lending and that.

But I really got into the trust and the state side of it. About year 14 into my 16 years at Wilmington, I started a podcast, which had been called "Fraser Rice's Podcast" because I'm not good with titles. But then I also, I felt like I had a book in me.

I wrote "Wealth Actually," which tried to congeal a lot of the lessons that I'd learned within my experience with Wilmington and beyond. And I ended up publishing that. I had to leave Wilmington to do that. So I did, published my book, publicized that for a little while. I joined up with a smaller RIA and worked for them for about a year doing strategic work for some of their bigger clients.

And then the part that I'm really excited about is I moved to a trust company called Pendleton Square, trust company out of Tennessee. And it aligns really well with my way of thinking on things. And a lot of it has to do with independence. A lot of it has to do with using jurisdictions for planning.

And there are lots of good reasons to do that, not least of which tax, but there are other good estate planning reasons to do it. And it really gets me involved with a broader subset of the financial services community. I get to work with the investment advisors and it can be anywhere from Morgan Stanley or UBS or Goldman Sachs or whomever to the high-end RIAs, to broker dealers, to folks who are managing money.

But then I also get to work with the families themselves. And so many times I butt up against family offices and multifamily offices, people who really need a lot of structure around their wealth for a variety of different reasons. So that's where I am right now. And sort of gutting out COVID here in Manhattan, but doing a lot of good stuff.

- That's quite a varied background and certainly have the experience to help us out here today in understanding trusts and understanding taxes and investing and asset protection. And a lot of things that we don't normally talk about on an investing podcast, but I think it's extremely important to understand how these things work.

But before we dig into all the nitty gritty of the trust work that you do for high net worth clients, one of the Bogleheads asked a question. He would like this podcast to start with, what is a ultra high net worth, a high net worth 1% or how do you define this marketplace?

- Sure. And I've gone in this whole thing about how I fled the practice of law and I'm going to come back to the answer, it depends. But I try to tackle this a little bit in my book and there are a few ways to think about it. Sort of 1% from a current income perspective, let's call it sort of wage income, I think is probably in the, depending on where you live in the United States, let's call it the 300,000 to 700,000 bandwidth.

From an asset perspective, meaning the assets that you have in a net worth statement, I think it's probably more, I think maybe the two and a half or 3 million range. The banks, when they market segment to, let's call it the affluent, the high net worth and the ultra high net worth, I think in general, zero to 3 million is in the affluent, three to 10 million is in the high net worth, meaning you have a lot of assets and you have theoretically more money than you can spend before you die.

And then there's what I would call the really high net worth, which is maybe 10 million to 50 million, where, and certainly currently, you have significant estate planning issues and definitely more money than you should be able to spend. Yet at the same time, you are far away from what I would describe as institutional advice.

And then once you get over 50 million, I think most people would categorize that as ultra high net worth, where especially on the investment advice side, you're out of the, I'll put in quotes, retail high net worth offerings and much more into the institutional offerings and able to negotiate your terms of engagement with the institutions, things like that.

And I'll add one more sort of slice to that, which is the idea of the family office or the multifamily office, where your affairs are so complicated or so specific that you need your own staff that truly understands what you're up to. People have their own family offices. They make sense from a dollar perspective in terms of maintenance and upkeep of them, certainly over $100 million, but probably more like over 500 million or a billion dollars when you're hiring staff and doing that type of thing.

I would add one other thought process here, and I'm going to steal from two colleagues. And I can't call Scott Galloway a colleague. I've never met him, but I've read his books and I like them. He defines rich as when your burn rate is less than the passive income that you generate.

And I really like that, because that means when you go to bed at night, your assets are generating so much that it covers your costs and you don't have to really do anything. Another way of thinking about that is a definition from a friend of mine, Brian Portnoy, who in his book, "Geometry of Wealth," described it as funded contentment.

Now, that may be away from the equation that Scott Galloway put out that said that the burn rate has to be lower than the passive income that you generate. But in Brian's case, I think he means to say that if you've got a lifestyle that you've set upon and you have the assets and income necessary to fund it without a whole lot of worry and risk due to volatility and things like that, that that's interesting.

In my book, I try to define it. Am I rich deals with various types of flavor of those descriptions that we talked about. But I think just to throw numbers out at it, if you have $20 million and you're earning 4% off of that, however you find a way to do it, and that's $800,000, I think that's rich for most people.

I think that covers the lion's share of a lot of different spending. Now, obviously, there's some people in New York City for whom $800,000 is gonna be a couple of months rent out in the Hamptons, and that doesn't quite apply. But that 20 million figure, I think, really puts you in the category of rich.

- Interesting that the first thing you talked about was wages, where a lot of people associate wages and your income with being rich. And I think the government statistics generally break out their poverty levels based on income. You could go back to your Fed days and correct me if I'm wrong, but I find this ironic because a lot of the clients I work with are rich, according to your numbers.

And yet, if you look at their income, they're at the poverty level. They get listed on government statistics as being in the poverty level. And ironically, they qualify for ACA healthcare tax credits, subsidies, their energy paid for at their home in the wintertime and such, only because the government uses just income as a measure for who's wealthy and who's not.

And in reality, a lot of these folks who are getting healthcare subsidies and getting other subsidies are, in fact, multimillionaires. But that's just not the way those entities measure wealth. So things can be skewed pretty quickly. - Well, and it goes back to really, how do you analyze wealth?

And if you go back to sort of accounting features, it's the difference between a cashflow statement and an asset and liability statement. And taken to one extreme, if you have a $10 million house but no income, you are quote-unquote wealthy in one respect, but poor in another, as you just described.

Whereas the investment banker who makes $5 million a year over the course of, let's call it a 25-year career, but forgets to save, they're wealthy at one moment in time, but then poor once they get into the retirement component. And I think that's what we as advisors have to do, especially at the high end, is try to really educate people that wealth really involves taking a look at both of those kinds of features and that you don't forget one at the expense of the other.

- And the tax code itself is regressive. If you are saying that the rich need to pay their fair share of taxes, well, they're not talking about wealth. They're talking about income. And there's a big difference between wealth and income. I mean, we know a lot of people, all of us, who have very high incomes but have no wealth.

They're in debt up to their eardrums, but they have high income. So it's sort of an interesting discussion about is high income really a measure of wealth? And my answer is no, probably not. But unfortunately, it's the one that most government entities use for figuring things out, who gets what, and how the pie is sliced up.

- So essentially, when talking about different types of wealth, again, there's lots of different ways to come at the question. One thing that I see with a lot of clients is occasionally they don't understand the difference between, let's say, liquid and illiquid wealth. And sometimes that comes in the form of people who buy property, real estate in particular, and they say this is a good investment.

And I hearken back to the example of someone who has a $10 million house but doesn't have the liquidity to pay for the taxes or for their daily expenses, for that matter. And so what I try to do is get people to understand that there is value in liquidity in terms of sort of dealing with risk, dealing with lifestyle issues, dealing with spending.

And there can be value with illiquidity as it relates to being able to get a better return based on that investment's upside. And many times, by being illiquid, it has more flexibility to make better investments and to do better things to increase value. That's one aspect of it. From a time perspective, current wealth versus legacy wealth.

And a demarcation for that for some people might be death. It might be retirement. But it's generally that line when you're talking about your current needs that you need to fund and then things that you want to leave as part of your legacy, whether it's to your kids, whether it's to your philanthropies, whether it's to other causes that you think are interesting.

Thinking about wealth in terms of function on that front oftentimes can be very interesting in terms of helping people think about how to invest funds accordingly. As an example of that, and certainly the estate planning world talks about this in great detail. But from a tax perspective, if you're able to put assets that are framed for longer time horizons, i.e.

for legacy functions, you're able to get the benefit of compounding. If you put it in different structures, you might have better taxation of those assets. And ultimately, if you're able to bend things around a little bit, you might be able to use them in a tax-efficient way for things like philanthropies and so on.

Whereas if you need money as it relates to saving up to buy a house or to pay for a wedding or something like that, you don't want things to go up and down and not have it ready for you. So if you have a daughter who's getting married in three years and you've budgeted $100,000 for that wedding, to put that into Tesla or into Bitcoin or something like that where that value may go up and down, you may find yourself having put $100,000 away and having it worth $50,000 at the time you need it.

And so that's where that liquidity and illiquidity component comes in and how it relates to current versus legacy wealth. Time horizon, as you know, Rick, is a big function in putting together a portfolio. And I think it's an important function in just sort of understanding what your wealth is and what kind of investments you should be thinking about.

Fraser, there are people who have unexpected wealth. I mean, they hit it big. Either they, well, hit the lottery or they unexpectedly get a very large inheritance or they were lucky enough to invest in-- well, go to work for a company and get a lot of stock and stock auctions.

And the next thing you know, they're worth $20, $25 million because of that. And they're suddenly wealthy. And I find these people to be very scared in many ways. They don't know how to handle this wealth. I was just talking with an individual yesterday, as a matter of fact, who is in his early 20s.

And he's going to be getting a check for $10 million for an invention that he created. And then there will be more residual after that. And he's just very scared about this. What advice would you give to someone like that? Well, first of all, it's a great problem to have.

The first thing I would try to impart on people is to say, OK, you now have a really good set of issues here. But this lucky windfall, let's call it-- and let's kind of assume for a second that there's little planning that's been done for it. But this even applies to, say, the first round draft choice in the NBA or the NFL, et cetera.

Those types of people, I try to impart on them the idea that this chunk of money, a way to think about it is to annuitize it for your long-term benefit. Now, I don't mean to take the money and go buy an annuity. I'm saying that this $10 million, let's expect it to last the rest of your life.

And let's expect it to fund your legacy going forward. And to reframe it as away from, I've got this windfall, and I've got to watch people looking over the fence and wanting something from me, or am I going to spend too much, those are good and valid fears. And I think the scarier one is someone who inherits or gets that windfall and doesn't have that fear.

And you have to really deprogram them to thinking that $10 million equals $10 million a year going forward. But for those people who are equipped with that fear, I would say, look, this is something that, in my opinion, you need to think about what you want your life to look like going forward and what that looks like on a year-to-year basis.

I would also say that I would take a year before making any big decisions, because it's going to take a year to think about what that kind of windfall looks like and what that, from a current income, that it generates looks like and how it impacts your life. So for someone who gets a $10 million lottery winning or something like that and then goes and quits their job the next day, those are the ones who are really at risk.

Because now they have completely turned their life upside down. Any structure they may have had going forward has been completely swamped. I would really tell people, number one, think about what your life looks like on a if $10 million generates $400,000 a year type of basis, what does $400,000 a year look like to your life going forward?

And I would not make any decisions for at least six months and probably a year about anything related to moving, related to quitting your job, et cetera. Absent some crazy circumstance happening. But I would really take the time, and that goes to everything from picking advisors and talking to good people and really taking the time to sort of bed this new impact in.

It's a positive one, but it's one that it's not like a big health change. You're going from one type of thing to another very quickly. Often I talk with clients and they say to me, how should I structure my estate? Should I do marital trusts? Should I do special needs trusts?

Should I do different types of trusts? How are you counseling people on whether or not they should be putting their assets in a trust? How are trusts being used today versus, let's say, 10 years ago when they were used mostly to try to avoid estate taxes? Sure, so I think the universal truth is that trusts as a tool are to affect estate planning goals.

And that's kind of where I start out when talking to people. And sometimes when people go on the cocktail-- if it was coffee, they'd be more sensible-- the cocktail circuit. And they hear about different transactions, or they hear about sort of the flavor of the month in terms of a tax planning angle or something like that.

And that's driving the planning. It's kind of going backward. From an estate planning perspective, I think the smart thing to do or an intelligent thing to do for better long-term planning is to understand, OK, here's the money or the net worth that I have, and here are my goals for it.

Do I want my kids to benefit from it? Do I want my charities to benefit from it? Are there things that I'm trying to look around the corner and protect against? And so you start by having an honest discussion with yourself and your advisor saying, here is where I am.

Here is my fact pattern in time. And this is what I want to plan for. Now, in the estate planning world, if you die without any documents whatsoever, you die in test date. And then that goes automatically to the court system. And the state essentially decides, according to its general rules, how your assets are divided going forward.

99.99% of people don't find that particularly advisable. So step one is to say, OK, what documents do I really need in place? Document one for everyone. Whether you're 1% or 0% or whatever you think, you should have a will, which allows for the bequeathing of your assets in a manner in which you decide you want to do it.

Now, forget tax planning for a second. That's just a way to do it so that you're able to put forward your assets in the way you want to do it, and that's not according to state law. Step two is the power of attorney and health care proxies in case you are disabled and can't make decisions for yourself.

You don't want to have a situation where there is different interpretations over who has control over the decision making if they have to make health care decisions for you. Terri Schiavo is the case that really brought this to light where, unfortunately, that person was brain dead for a while, and her estate planning was unclear, and it was unclear whether she should be taken off the feeding tube or kept on.

That kind of documentation, I think, is useful and important going forward. So then you get to the point where wills go through a process called probate, where they are proven within a state court, and essentially, the will is put there. Hopefully, the I's are dotted and T's are crossed, and there are enough witnesses and things like that.

And then the court goes through that process, and then the assets can get distributed by the executor. Occasionally-- not occasionally. This is much more standard now, and especially in the high net worth space, there is the concept of a revocable trust. And this is usually where most people first hear the word trust beyond the idea of setting up a, quote unquote, "fund for their kids" or something like that.

But a revocable trust is a way to take the bulk of your assets and put it in a trust that is revocable, meaning you can change it up until you die. And then upon your death, it automatically flows into a trust, and those assets are distributed according to the terms of the trust.

Why is this useful? This is useful because you avoid the probate process. It's less expensive. It's autopilot. It happens very quickly, and the executor doesn't have to really do anything. The trustee comes on board, and the assets are dispersed proportionately, et cetera. Just as a quick aside, I would say that it's a good idea to put bulky assets into a revocable trust and to have a will on top of that, because revocable trust planning doesn't really work unless the assets are titled in the name of the trust.

Otherwise, it goes back into your regular estate, and hopefully you have a will that governs that. So I think standard procedure is to have both in place. That's estate planning 101. Then the concept gets into place when people say, OK, I've kind of thought about my family fact pattern, and I have things I need to worry about.

Is my son a drug addict? I have a daughter who is young, and I don't know who she's going to marry. I don't want my daughter's new husband to have access to the assets. And by the same token, I'd like to leave some of it to my charities, and there may be a tax reason for that type of thing.

That's when trusts really start to come into play. So against that backdrop, that's where the need for structure to avoid next generation problems comes into play. And I think that's consistent now and has been from 10 years ago, 20 years ago, and beyond. It's just the tools that are at our disposal for some of those things.

They're not necessarily different, but sometimes they get more popular. And then to sort of bridge into the next component of what we're talking about, I think what's interesting now versus 10 or 20 years ago is the fact that there is relatively settled law-- and of course, this could get changed in 2021-- but relatively settled law and settled tools that are at our disposal to avoid things like estate tax and other forms of taxes.

Essentially, in a quick summary, there are things called estate value freezes, where by placing assets into a trust at a current value, you are able to pass the growth on to the next generation. These are especially interesting right now because we are in a generationally low interest rate environment, and we are at a generationally high estate tax exemption environment.

So there is a way to get double the leverage using a lot of different techniques to get assets out of one estate and into the hands of beneficiaries going forward. And if you combine that with other charitable techniques, you can get even more leverage out of it. So that's, I think, what's different between now and 20 years ago.

We've got very big estate tax exemption capabilities. We have very low interest rates. And those two things together can be a powerful set of tools. How do you go about finding a good estate planning attorney right at the beginning? A lot of people ask me, who should I use?

And I'm rather uncomfortable because I don't know who's good and who isn't. You have to be careful whom you refer to people because you have the $1,500 an hour types on down to those with sole proprietorship practices. I try to come up with a list of three people. Usually, if I know where the client is coming from that are ideological fits, that are personality fits, that it's not too aggressive or not too conservative, depending on the person.

And then somewhere up and down the price range. If I'm out there and I don't know of the community real well, I would go to-- one's accountant is usually a good place to start if they have that in place because accountants are always dealing with attorneys, both estate planning and otherwise.

That's a good place to start from a networking standpoint. If people use a financial advisor, they will have a pretty well-established network of estate planning attorneys as well. And then if they have a lawyer for other uses, whether it's real estate or business or something like that, many times they either have that within their own firm or have worked with other people in terms of business succession or other issues that have popped up.

Start with the state of residence. And then for those people who are really, really large and gigantic, oftentimes there are national or international practices. So if you're in Nebraska, I'm not sure I'd want to be doing Columbia inbound estate planning. But there are people who deal with that. But sometimes larger national law firms, they'll certainly take your call.

And if they can't do it, they'll direct you. I think that there's always an issue with parents talking with children about how they are setting up their estate or children who are looking at their parents trying to talk with them about how they should set up their estate. A family dynamic goes on where even though different generations should be talking with each other sometimes or a lot of times, it doesn't happen well.

Maybe there's some hard feelings. I've dealt with families where the parents thought it was important that all five of their children be co-trustees of everything. Yikes. And it gets to be very, very messy. Can you talk about some of the family dynamics and how you might be able to facilitate these conversations and make them simpler as far as decision making?

What has been your experience? Well, and it's a big, deep, and important question. And it underpins everything. I think that-- let me reference two TV shows because sometimes people say, well, what does this relate to it? I grew up enjoying Dallas with J.R. Ewing and the like. Because he always chewed up the scenery and it was a lot of fun.

But watching the dynamics play out amongst people of the same generation with husbands and wives and kids and what happened with a significant oil empire, that was sort of my first exposure to it from a sort of entertainment perspective. The show Succession on HBO deals with it as well, where you have people who have different ideas about how things should happen.

Essentially, it comes back to two truths. The first one is that there is a saying that transcends a culture called shirtsleeves to shirtsleeves in three generations, where the first generation makes the money and the second generation kind of spends it and enjoys it. And then the third generation loses it.

And this is the offshoot of the idea-- this is me talking-- where I think that over the long haul, assets increase linearly while liabilities increase geometrically. So everything that you're doing from estate planning purposes and from investing and so on is trying to fight that natural law of asset depletion.

And against that backdrop, that second generation and beyond, where the people who created the money, they created the culture that accumulated assets, that built businesses, that generated the wealth. How do you get that to the next generation? How do you have people who can enjoy the wealth, use the wealth, take advantage of the advantage in many ways, and build off of that without creating entitlement?

And that is the thing that most people really, really worry about. So some things to think about on that front. I think that communication and education are big sets of tools that are important on that front. Step one, I think from a communication standpoint, to get started early is good in terms of fostering discussion around why things are the way they are, how the wealth was generated, and what it means.

You can debate what is too early or not early. But one way to sort of foster communication-- and I think a tool that's interesting-- is the idea of having shared philanthropy. So what does that mean? And could it be used by someone not in the 1%? Absolutely. And here's what I would say.

If you're parents and you've got, let's say, three kids, and let's say you have $5 to give away philanthropically, I think an interesting exercise is to give each of the kids $1 to give away under their own set of values, what they want to do. And then have the three kids decide together how to give away that other $2 of the $5 that you set aside for philanthropy.

What does that do for you? Number one, it gives you some insight as to what's important with the kids. Number two, it gives them some idea of how to work together to make a decision around money, around a very low stakes and very positive situation, namely giving it away to a charity that deserves it.

I think if you build a culture around that early and young, I think that gets the kids not only seeing what's important to them and what's important to them jointly, but it also gives them some insight and some context into what they're good and not good at. So out of those three kids, maybe one of them is totally disinterested.

So there's some context around that. Maybe one of them is particularly good at math and driven. And maybe they're the one that, if they end up running the family company, there's a good couple decade track record of understanding that those talents were in place. And maybe the other kid is somewhere in between.

Or maybe artsy and off to do Peace Corps type things. And that while their endeavors are just as valuable as maybe the business aspect of it, it's just different. And so as a set of parents looking at that and sort of seeing that interplay when they are sort of coming up with the why as far as how their estate plan is put forward and put in place, the kids have some context around that already.

And one of the worst things that happens, I see, is when the estate plan essentially is laid out to the kids upon the death of the matriarch or patriarch. And they find out that things were done for reasons that weren't stated and combine that with decades of baggage. And he wronged me because of this.

And I didn't get invited to that over time. And I was excluded from this. That's when conflict really happens and when it gets particularly expensive. So that's one tool. And then to add on to that, and I'm going to borrow from Tom Rogerson, who is an expert in the family governance field.

He has the idea of a vacation fund, which essentially-- let's say you have those three kids-- the idea of having a fund for vacation. So let's say you set aside $5,000 for the vacation. And at a certain level, let's say the kids are all teenagers. But you have the three kids make joint decisions around the investments of that money.

And it's going to teach them very quickly. They're going to touch the stove and put it in Bitcoin too late. Or they're going to put it in Tesla too soon. Or maybe they'll get conservative quickly. But they'll learn on-the-ground investment lessons with money that isn't the corpus of the family estate.

And at the same time, they learn to work with each other on money. They learn to have a shared set of values and education around how investment decisions are made. And this can happen at the foundation level too if you want to do it for a family foundation. But I like it in the family vacation mode.

Because if it goes from $5,000 to $10,000 and you have a better vacation, there's a real concept of shared accountability. And if the parents buy into that as well, and the whole family has shared accountability, the lessons go beyond just the investment component. And they go to the family decision-making component, and then the context around the long-term planning of the family assets component.

So that's another tool. A third tool, which is usually kind of around in the-- let's call it the family office world-- is the idea of a family bank. And that can really be the idea of kids who have entrepreneurial ideas can come up and give a business plan to a group of people as decided by the family.

And you put some structure around that. But in a sense, kids learn how to come up with an idea, put a business plan around it. And you can obviously support that and bring your advisors in and get as involved or not involved as you want. But get that in place so that the kids get up and they learn to think of the plan, think about how to execute it, and think about selling it to a dispassionate-- although they're family members-- but a dispassionate group of people.

And that's a life lesson. It's that kind of experience that I think raises kids above the level of the entitled and at least gives them a little bit of experience into how the world works. You've talked a lot about parents talking with children. But I also see it the other way.

I see parents not opening up to their children and their children needing to have conversations with their parents. I'll often talk with a client and gathering their information and talking with them about their own retirement if they're in their 40s. I'll ask things like, are you in line to inherit any money?

And sometimes there's silence. And one person will say to the other, well, my family, no. But my spouse, yes. And I say, well, what kind of assets are we talking about that you would inherit? And they say, well, I don't really know how much my parents have. I don't know what it is.

But I think they have a substantial amount. But I don't know. They're in their 40s and sometimes in their 50s. And they still don't know what their parents have. So how do you get the conversation to go the other way? Well, that's a great question because it's a big deal.

And the worst thing that happens is people assume they have something. And then they are displeasantly surprised or unpleasantly surprised that it's not there. And the life that they'd kind of penciled out based on the assets that they thought were there aren't. Or worse, this is kind of in more in the-- let's call it in the $1 to even $10 million range, but maybe more like in the $1 to $5 million range.

The costs of health care are not going down. And the idea that Medicare is going to take care of everything, I think it's dangerous. I've seen it with my own family. My parents dealt with my grandmother who made it to 102. Sadly, the last seven years of that weren't particularly pleasant because of dementia.

And it cost thousands and thousands and thousands and dozens of thousands of dollars, almost per month, especially at the end, to make that happen. So to answer your question, how do you break that divide? I think there are a couple of interesting things going on. Number one, I would say an interesting component to kind of back your way into the conversation, especially if you're in your 40s, 50s, et cetera, is to say, mom and dad, I'm doing my estate planning for myself now.

I'm reviewing it. I've seen the tax laws. I've heard a lot about it. It's time to get things buttoned up and reviewed. Can you fill me in on what is and isn't available, if not for me, then for my kids, so that I know how to make decisions on my estate planning that affect them, that don't double up or cut in half the benefits that I think are important for them?

That may be met with one response or another. But that's one way to get it started, to say that you're doing the responsible thing by getting your estate planning looked at and in order. And you need more information to make that happen. And that part of that information needs to come from above, from the more senior generation.

The second part about it is that, mom and dad, I need to plan for your health care going forward. And we need to make this a joint decision, because there are lots of different variabilities in place. And it's extremely expensive. And if we don't think about this correctly, we could be left up the creek without a paddle.

And it could be left with everything from not much in the way of access to health care facilities to just a dangerous situation where a sudden death could occur. And we don't understand where things are. I think an interesting tool on that front is to have the idea of a fire drill.

And it's oftentimes very difficult to get families to execute on this. But I think it's interesting to say, you know what? OK, this is all sort of hypothetical. But dad just died. What happens next? OK, step one, where are the documents? Step two, who are the advisors we have to talk to?

The lawyer, the accountant. Is there a health care facilitator? Funeral arrangements, that type of thing. There are going to be people who are sort of recalcitrant. And they're not going to want to do that. And that's tough. But I like the idea of couching it in terms of a family fire drill.

What happens if? What happens when? If this, then what? Doing that maybe once a year, even once every two years, at the very least, you know how things are going to get executed. And then you can back into what's in those documents if it gets particularly complicated. That'd be another way I'd be thinking about it.

I'd be thinking about it in terms of, you know, how do I best plan for my family? I need to use the first generation's information from them to make my planning work. And then step two, it's a very good thing for this family to understand what happens if there's an emergency or there's a problem and to run a drill off of that.

Yeah, for sure. Again, I speak with a lot of clients who have parents' assets in probate for a year, year and a half. It just takes forever, in some cases, to resolve some of these things because there wasn't really any planning. Or the parents didn't communicate with the children.

Or the children didn't initiate a conversation with the parents or something. But in the end, it does fall on the children who, if they inherit the money, they're the ones who have to sort it all out. And it can take a very long period of time. So it's a good idea, if possible, to have that conversation if the parents and the children are willing to do it.

I mean, the one thing that I think is useful for everybody is to have a sort of go-bag or a list of documents and contact information so that even if you don't know exactly what the process looks like, you know whom to call quickly. That first week is going to be brutal for most people.

It's emotionally fraught. There's problems. If you have sort of an end-of-life situation, those early periods of time are important. If you can have some checklists laid out of things that you should be thinking about, and if you can drill ahead of time and to sort of impart on the senior generation as to why it's important to have these in place, that may help break the ice a little bit.

Well, Fraser, given everything you just talked about, the family dynamics and the initial part of the estate plan, can we get further into trusts? Sure, so as I just laid out, the idea that if you can understand why you're doing things and the purpose of it, the use of trusts is to-- there are lots of different functions for them.

But the idea is to provide structure around the wealth in order to pursue other goals. Goals can be asset protection. It can be tax avoidance. It could be putting structure around the wealth so that kids don't spend willy-nilly or that they don't go down a certain path in life that you think is inappropriate for them.

And as we sort of talk these things through, I think the idea that anything that can be done to preserve the assets or forestall that shirtsleeves to shirtsleeves phenomenon, that's the point of a trust. And for those matriarchs and patriarchs that have ideas about the wealth that they created and the impact and the legacy that it provides, that's the point of a trust, is to sort of put that structure around it so that the decisions made as to how it is spent and how it's invested and how it's protected, ultimately, allow it to be preserved for as long as possible.

A lot of clients are talking about Nevada trusts. They're talking about Dakota trusts. They're talking about all of these different states changing their trust laws and moving around going to and using different state laws. What is that all about? And how can somebody utilize that? Sure, so again, this is what I'm doing in my day job and sort of advising larger clients and other clients about how to sort of use jurisdiction to your advantage, which you described Nevada, South Dakota, Delaware, Tennessee, which is where I'm working.

I work in New York for a Tennessee trust company. These places all have trust laws that have various advantages. Now, first and foremost, especially if you're in California or New York, places I just described have no state income tax. And so there are a lot of different things you can do with your estate planning and sometimes your income tax planning to be able to take advantage of that non-state income tax feature of those states.

These states also have asset protection features. So whenever there's a possibility of lawsuit or something else where there's a creditor in play that you want to defend your assets against, these types of jurisdictions are interesting compared to other ones. There's a notion where you can bifurcate roles. So you don't have to have one trustee or one corporate trustee do everything.

And so Tennessee and the other jurisdictions described have direction trusts where you can appoint people who are good at various parts of the trust process, whether it's investments, the administration component, or the distribution component. You can divvy up those roles as well. And there's all sorts of other different features.

For instance, in Tennessee, the trust can last 360 years. Some places are limited to the rule against perpetuities, which basically caps you at a generation. So for a real multi-generational wealth, one of these usual suspects, as I call them, from a jurisdiction standpoint is particularly interesting. So just to be clear, I don't need to live in Tennessee or I don't need to live in Nevada to be able to use these trusts.

Nope. If you have a corporate trustee or an administrative trustee who serves in that function, you get the benefits of that jurisdiction's law. And let me get down to one question that I have all the time. I always ask, who is going to be the trustee? Should it be five children all equally, or how do you deal with that?

Well, it's complicated for a lot of different reasons. The trust has three main parts to it. It has a grantor, which is someone who forms the trust and funds it with assets. It has a trustee. And that trustee has three main functions. They have to safeguard and report on the assets.

They have to invest the assets prudently. And they have to distribute it to the beneficiaries according to the terms of the trust and then state law if it's silent. Then the third part of the trust is the beneficiaries. So against that backdrop, that's a trust in a general sense.

When you're picking a trustee, oftentimes people have an idea of what that word means and don't have an idea of those three functions I just described. Finding that one person who is both a good investment manager, is good at taking notes and making sure that the tax returns are filed and that they're also-- that the assets are safeguarded and that the reporting is correct, that's another function.

And then also that person who is able to have the hard conversations around how to distribute those assets when they have the discretion to do so. And a hard conversation might be a son wants to pillage the trust to buy a Lamborghini versus the daughter wants to use the trust to buy a house versus what does it say in the trust versus what does state law say.

Finding that individual who can deal with all three of those functions is hard. And it's doubly hard because people who understand that role and understand those three functions understand that it's a high liability situation and that they should get paid for it. That in turn argues for a trustee that understands the risks, hopefully has some idea of understanding the family's dynamics, and then also has the structure in place to make those decisions so that when something goes wrong, which invariably it does, and siblings start fighting and they think one's been favored over another, or maybe keeping that position in Kodak wasn't a good idea, that they're going to get sued.

So choosing a trustee is, when you really get into the weeds on it, very difficult. Oftentimes, corporate trustees are brought in, and they can be expensive and they cost, but they help soak up some of those functions that individuals may not be very good at. They can provide structure around the distribution process.

They can provide structure around the investment process, they can provide the back office for those administrative details. So when one's coming up with a trust, the choice of trustee is extremely important, not least of which-- and I talk about this in, I think, about two sentences in my book, which is to say, trustees get old, individuals do.

So the family lawyer who puts this together at age 65, they may be 95 when the situation comes to pass where there's conflict or real judgment needs to take place. And that's tricky, because that person is probably retired, or they shouldn't be making decisions for whatever reason. It's important either to create sort of a situation where there's help that is going to be consistent, even if people move in and out, or that your trustees and that your advisors around your wealth get younger as you get older.

If a family were to go down the road of hiring a professional trustee instead of family members so that there is this consistency and no favoritism or ambiguity, what would that cost a family? So it's a good question, and it depends which functions the trustee takes on. If you have a full mandate for a trust, meaning investment management, trust administration, distribution responsibilities, I would expect that to be in the 1 and 1/4 plus percent range.

I think 25 basis points for the trust administration, 1% for the investment administration. Obviously, as you move up the ladder and those functions get delineated, there's negotiation around that. By the same token, if you hire a lawyer to be a trustee for you, and that happens very frequently, they may have an hourly rate, they may have a flat rate.

But I would say that, in essence, kind of in that 1% plus range is probably a good place to start. And it will vary depending on assets, functions, complications, things like that. So not inexpensive, I guess. It's a double negative. Well, it can be expensive. Now, many times people balk at the price to get, let's call it a professional trustee, and they have family members serve in trustee roles.

And very often, that's fine. But I think the idea is that when something has to happen and if there is the potential for a lawsuit for conflict reasons, et cetera, I think it's a good idea to start thinking about professional trustees. Because an individual who forgets to file a tax return or forgets the election of some state law that needs to happen, they're liable.

That's it. And I think many people who take that role on, let's call it for free or for de minimis, they may be saving the trust on fees, but they may be really piling on liability for themselves. And it's something, in fact, they should probably investigate some liability insurance as well.

A lot of people come to me and they ask me to refer them to professional trustees. But it's not my area of expertise, and I don't know how to go about evaluating one professional trustee against another. How would somebody do this who is looking for a professional trustee? Well, the first thing I would do, if you're going through an estate planning attorney, they should have a pretty robust network of trustees, both individual and corporate, to choose from if they won't do it themselves.

Failing that, financial advisors, people who work with them oftentimes, they have another set of people in their network that sometimes works. I tend to sort of gravitate toward the legal community for referrals on that front. It can really be like unearthing truffles, because the person who has the expertise with the family dynamic and the assets, sometimes that can be a really specialized person.

But being part of a trust company, I'm also more than willing to take any calls or any entreaties from your listenership if they have any questions about it. Let's get into a final area, because this is the Bogle Heads-On Investing Show. Let's talk about investing and the ultra-high net worth and the 1%ers.

I mean, these people have access to really special mutual funds that outperform all the time, correct? I guess. I'm sort of a-- my theory on investments-- and again, I work for a trust company that provides trustee services, not investment management. I'm a big fan of after-tax, after-fees, after-inflation, and then I'll put in parentheses, after-spend.

So as a trustee, I try to fight the after-spend part and try to really sort of add value on that front. And then to make sure that we're operating in as an efficient manner as possible on the fee and tax side of things. And then asset allocation tends to take care of the rest.

That said, many trusts, especially ultra-high net worth people, they believe in alternative assets, special situations. Many times, they built their wealth on something where they had a definitive edge. And that's the part where I would be-- I am not inclined to discourage people from investing in things where they have experience, resources, context, and also just that advantage that I think is sometimes missing with general money managers when they're trying to beat an index.

Is there any truth to the idea that ultra-high net worth people have access to better investments than the rest of us? There is some truth to it. I mean, Warren Buffett getting Goldman Preferreds is not something that, during the financial crisis, is not something that people had access to.

But I would say for the lion's share of people, that that may be a little bit overstated. But that's true. Ultra-high net worth people, especially the ones who traffic around family office worlds and so on, are exposed to individual deals. They're exposed to private equity funds and so on.

Those people who know what they're good at and also know what they're not good at, they're willing to pay fees for things that they understand extremely well. And then I see it work best when they delegate and pay as little as possible for things that are either commoditized or provide some diversification, but they may not understand real well.

David Swenson from Yale. His view is that, unless you're the ultra-high net worth, hundreds of millions of dollars, maybe even a billion, that you're just not going to get quality asset management and that you should just index most of your portfolio. How do you feel about that? I generally agree.

There's certainly exceptions to the rule. An example would be in real estate. For those people who understand neighborhoods and understand classes, multi-fam versus office, and they're really good at it and that's their thing, and investing in that or investing in a manager that they understand, where you're able to take advantage of scale, where you're able to take advantage of expertise, those are reserved for very big situations.

And to find them grouped together in situations that are really structured to raise capital as much as to provide outsized returns. I mean, everybody gets paid along the way, and that comes out of the investor's pocket ultimately. I'd agree with Swenson on that one. Unless you're able to develop that deal yourself with your own expertise and your own resources in many ways, the sub-ultra-high net worth level, I think you just have to really look twice and think three times before heading into it.

The name of the book is called "Wealth Actually, Intelligent Decision-Making for the 1%." Thank you so much for being on the Bogle Heads on Investing podcast. And good luck with your new role as a director at Pendleton Square Trust Company. Terrific. Rick, thank you very much. And I want to say it's a pleasure to be on.

You do a great service for the investing community and for the high net worth, ultra-high net worth, and beyond for those people even who are just learning about investing. So I'm thrilled to be a part of it. This concludes Bogle Heads on Investing, episode number 29. I'm your host, Rick Ferry.

Join us each month to hear a new special guest. In the meantime, visit bogleheads.org and the Bogle Heads Wiki. Participate in the forum and help others find the forum. Thanks for listening. (upbeat music) (upbeat music)