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  • Bogleheads on Investing with Frazer Rice – Episode 29

Bogleheads on Investing with Frazer Rice – Episode 29

Post on: January 2, 2021 by Rick Ferri

Frazer Rice is the author of “Wealth, Actually: Intelligent Decision-Making for the 1%”, host of the “Wealth, Actually” podcast, creator of the “Wealth, Actually” blog, and a Northeast Regional Director for Pendleton Square Trust Company. Frazer is an attorney and experienced trust officer. His wealth management career has included serving for over 15 years as a Managing Director at Wilmington Trust Company. We cover a lot of ground in this episode including estate planning, reasons for using trusts, selecting trustees, family dynamics, investing for 1%’ers, and much more!  

You can discuss this podcast in the Bogleheads forum here.

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Rick Ferri: Welcome to Bogleheads on Investing Episode number 29. Today our special guest is Frazer Rice. Frazer 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 Ferri and I’m the host of Bogleheads on Investing.  This podcast, as with all podcasts, is brought to you by The John C. Bogle Center for Financial Literacy, a 501c3 nonprofit organization that you can find at boglecenter.net. Today our special guest is Frazer Rice. Frazer is the Northwest Regional Director for the 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 frazerrice.com.

Frazer 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 Frazer Rice, welcome to the Bogleheads Frazer.

Frazer Rice: 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. 

Rick Ferri: 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 like you’re sticking your neck out there and you’re saying, look, I advise to the elite, I advise to the one per cent 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.

Frazer Rice:  It’s funny you say that because when I put the book together and you know, the people who help me publish it, we’re saying you’ve got to market this. And one way to be good at marketing is to find your niche.

And you know, 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, “Jeez, you know, this is for the 1% only, it doesn’t apply to me.” And as I got through writing it, there are 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.

Rick Ferri: We’ll get to the book in a minute and everything you 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?

Frazer Rice: 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 the 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 locate 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 lost 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 counsel 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 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 estate side of it.

About year fourteen into my sixteen years at Wilmington I started a podcast which had been called Frazer Rice’s podcast because I’m not good with titles but then I also felt like I had a book in me. I wrote Wealth, Actually, which tried to congeal a lot of the lessons that I 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 multi family 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.

Rick Ferri: That’s quite a varied background and certainly you have the experience to help us out here today, and 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, high net worth one per center? How do you define this marketplace?

Frazer Rice:  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, you know, 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 maybe the 2.5 or three 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, 0 to 3 million is in the affluent; 3 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 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 in 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 multi family 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. 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 the 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, you know ,that the burn rate has to be lower than the passive income that you generate. But if you, in Brian’s case, I think he means to say that if you’ve got a lifestyle that you 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, you know, there’s some people in New York city for whom $800,000 is going to 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.

Rick Ferri: 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 can 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 health care 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 health care 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.

Frazer Rice: 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 cash flow statement and an asset and liability statement. And taken to one extreme, you know, if you have a $10 million house, but no income, you are quote unquote “wealthy” in one respect, but poor 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 advisers 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.

Rick Ferri: 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. 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 ear drums, 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.

Frazer Rice: 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 harken back to the example of someone who has a $10 million dollar house but doesn’t have 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 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 sort of 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 is 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 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.

Rick Ferri: Frazer, there are people who have unexpected wealth. I mean they hit it big, either they 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 options and the next thing you know they’re worth $225 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 twenties 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?

Frazer Rice: Well, first of all, it’s a great problem to have.The first thing I would try to impart on people is to say, “Okay, 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 you know, for 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 the benefit 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 if you– 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 sort of 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 dollar 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,”You know, number one, sort of think about what your life looks like on a you know, 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 then that goes to everything from picking advisers and getting, you know, 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–you know, it’s not like a big health change–you’re going from one type of thing to another very quickly.

Rick Ferri: Often I talk with clients and they say to me,”How should I structure my estate? Should I do marital trust? Should I do special needs trust? Should I do different types of trust?” 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?

Frazer Rice: Sure. So I think the universal truth is that a trust is a tool 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 coffee, or 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, okay, here’s the money or the network 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 intestate. 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 percent of people don’t find that particularly advisable.

So step one is to say, okay, what documents do I really need in place. Document one for everyone, whether you’re one percent or zero percent or you know, 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 the 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 power of attorney and healthcare proxies in case you are disabled and can’t make decisions for yourself. You don’t want to have a situation where there are different interpretations over who has control over the decision making if they have to make health care decisions for you. This is 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, everything hopefully the I’s are dotted and T’s are crossed and there’s 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, okay, 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’s young and I don’t know who she’s going to marry. I don’t want that 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 ten years ago, twenty 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 ten or twenty 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’s 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. That we’ve got very big state tax exemption capabilities, we have very low interest rates. And those two things together can be a powerful set of tools.

Rick Ferri: 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 in a guy and I’m rather uncomfortable because I don’t know who’s good and who isn’t.

Frazer Rice: You have to be careful whom you refer to people because you have the $1500 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 as usually a good place to start if they have that in place, because accountants are always dealing with attorneys, both the 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 want to be doing sort of Colombia 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.

Rick Ferri: I think that there is 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. 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. 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?

Frazer Rice: 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, you know, what does this relate to it?  I grew up enjoying Dallas with J. R. Ewing and the like because he was, 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’s 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 culture, which leads 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 communications 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 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 your 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 sort of 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. Okay, 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, you know, 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 you know, he wronged me because of this and I didn’t get invited to that in overtime 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. You know, 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 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 it goes from $5000 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 family, 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 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 know, 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.

Rick Ferri: 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 the client and gathering their information and talking with them about their own retirement. If they’re in their forties, 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, and I said, “Well, what kind of assets are we talking about that you would inherit? And they said, “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 forties and sometimes in their fifties and they still don’t know what their parents have. So how do you get the conversation to go the other way?

Frazer Rice: Boy 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 kind of penciled out based on the assets that they thought were there, aren’t or worse. You know, this is kind of in more, in the let’s call it in the one to even ten million range, but maybe more like in the one to five 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 is 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 costs 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 know, 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 we could be left with everything from not much in the way of access to healthcare 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 say, 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, okay, this is all sort of hypothetical, but Dad just died. What happens next?”

Okay. Step one. Where are the documents? Step two. Who are the advisers we have to talk to? The lawyer, the accountant. Is there a healthcare facilitator, funeral arrangements, that type of thing. They’re 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 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.

Rick Ferri: 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.

Frazer Rice: The one thing that I think is useful for everybody is to have a 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 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.

Rick Ferri: Frazer, given everything you just talked about the family dynamics and the initial part of the estate plan, can we get further into trusts?

Frazer Rice:  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 trust 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 are 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, how it’s invested, and how it’s protected ultimately allow it to be preserved for as long as possible.

Rick Ferri: A lot of clients are talking about Nevada Trust, they’re talking about Dakota Trust, they’re talking about all these different states, changing their trust laws and moving around, using different state laws. What is that all about? And how can somebody utilize that?

Frazer Rice: 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. What 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 and 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 real multi generational wealth, one of these usual suspects, as I call them from a jurisdiction standpoint is particularly interesting.

Rick Ferri: 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.

Frazer Rice: No. If you have a corporate trustee or an administrative trustee who serves in that function, you get the benefits of that jurisdiction’s law.

Rick Ferri: 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?

Frazer Rice: Well, it’s complicated for a lot of different reasons. The trust has three main parts to 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. And the third part of the trust is the beneficiaries. So, against that backdrop, that’s 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 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 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 a 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 that’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 that 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 and 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 that where there is 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 your advisors around your wealth get younger as you get older.

Rick Ferri: If a family was 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?

Frazer Rice: 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 one and a quarter 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, you know, 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.

Rick Ferri: So not not inexpensive, I guess it’s a double negative.

Frazer Rice: Well, it can be, it can be expensive. Now, many times people balk at the price and to get, let’s call it a professional trustee and they have family members serve in trusty 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.

Rick Ferri: A lot of people come to me and they asked 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?

Frazer Rice: 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 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 specialist 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.

Rick Ferri: Let’s get into a final area, because this is the Bogleheads on Investing show. Let’s talk about investing and the ultra high net worth and the one per centers. I mean, these people have access to really special mutual funds that outperform all the time, correct?

Frazer Rice: 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 front 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 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 that advantage that I think is sometimes missing with general money managers when they’re trying to beat an index.

Rick Ferri: Is there any truth to the idea that ultra high net worth people have access to better investments than the rest of us?

Frazer Rice: 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 may be a little bit overstated. So, but that’s true. I mean, 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.

Rick Ferri: David Swensen 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?

Frazer Rice: 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 group together in situations that are really structured to raise capital as much as to provide outsized returns. And everybody gets paid along the way and that comes out of the investors pocket.

Ultimately, I’d agree with Swensen on that one and there’s — 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 I think three times before heading into it.

Rick Ferri: The name of the book is called Wealth, Actually: Intelligent Decision Making for the 1%. Thank you so much for being on the Bogleheads on Investing podcast and good luck with your new role as a director at Pendleton Square Trust Company.

Frazer Rice: 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.

Rick Ferri: This concludes Bogleheads on Investing. Episode number 29. I’m your host, Rick Ferri. Join us each month to hear a new special guest. In the meantime, visit bogleheads dot org and the Bogleheads Wiki. Participate in the forum and help others find the forum. Thanks for listening.

About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant



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