EP270: How Billionaires Avoid Family Chaos (and Taxes)

0:00So in your own words, what is a trustee and what is a trustee's role? You know, a trustee's role is to be a trusted advisor for the family. You know, a sounding board, a thought partner. It's someone who listens carefully that really understands what the client's goals are, their objectives, their value system, and helps to translate those into good, sustainable decisions for the family. I have one situation where the Clients Council had put together this fantastic advisory team, a lot of structure around the organization, and it wasn't running well. And we had an all-hands advisory meeting. We're all in this big room together, a team of 10 to 15 advisors.

0:45He stood up and he said, I just built all of you a Ferrari. And they had spent hundreds and hundreds of thousands of dollars assembling all this structure. And what was missing was effective, clear communication and accountability within the advisory team. That moment reminded me that the trustee actually lives at the intersection of all these interdisciplinaries, from tax to legal to investments. And so where a good trustee can help a family run the Ferrari as it was meant to be run is deliberately, with precision, with purpose, in understanding how all of these different disciplines come together, in helping enable accountability within the structure.

1:28And sometimes that's just as simple as task management. So trustee sits in some ways outside of trust, almost like the QB. And I guess one of the questions should be for the trustee or the advisor should be, do you even do a trust? And if you decide to do a trust, what kind of trust? So it's not just this functional person within the four corners of a legal entity. It's also as a thought partner. That's how we view it. I mean, us at Blue Sky, we very much seek to be a trusted advisor for families and a thought partner within the advisory team. I would say this is one of the issues that I see as becoming more systemic in trustee service offerings where it's become more commoditized.

2:05But the danger there for families is that you're putting yes man person or yes man entity in the legal decision making seat for the family. And that can produce really bad outcomes if they don't actually understand the strategy and they don't understand what the client's real goals and objectives are in their value system. And when we last chatted, you mentioned that it was so critical for a trustee to be independent. What does that even mean? And two, why is it so important? So the independence matters, you know, for technical reasons, also philosophical reasons, and at times emotional reasons.

2:40Technically, independence is what makes a lot of the tax planning work. And so both from an estate tax and a gift tax and an income tax perspective, when you're implementing these trust structures and these tax strategies, there's a direct correlation between the independence piece and how effective these tax strategies can be. And philosophically, independence keeps the trustee aligned. And so, you know, when you have a trustee that may be part of a larger institution and the trustee role perhaps has been morphed into more of a sales role because they do at times sit at the intersection of all these interdisciplinarities and really see where the planes come together, it positions them across sell.

3:24It positions them to push clients into products. At Blue Sky Trust, we've been deliberate in establishing an independent model to avoid those conflicts from even being, there's no possibility because we don't compete for any of those other services like investment management and so forth. Our, or I should say a trustee that is truly independent, lets them focus entirely on judgment, on being a client who, as Dan Sullivan said in his famous book, Who Not How, like coming to them with ideas, thoughts, initiatives from investments to family dynamics, questions about their kids, long-term legacy planning, new businesses that they want to start.

4:07I would also say like on the independence piece where an independent trustee can help is we can bring more credibility into those conversations. So if there's a conversation that needs to happen with one of the beneficiaries, that's one of the brothers or sisters and so forth. We don't bring that family baggage with us. We don't bring all the history of the holiday parties and who said what, which can help us unlock for the family more effective communication to make decisions and maximize the pie for all. There's a question upstream of all this, which is who actually needs to trust? What are the common use cases?

4:46Obviously, one use case is you want to give more than the federal exemption on gift tax to your kids. I think somewhere roughly$30 million, correct me if I'm wrong, for the husband and the wife, for the parents. What are some other practical use cases, not theoretical ones, but ones that you deal with every day and who should really consider a trust? Yeah, great question, David. I would say more often than not, where conversations start is about a tax play. And so clients oftentimes come to us because of the tax initiative. That's what they need. and they really end up valuing us for, I would say, everything else that we do.

5:20You're correct that starting next year, the exemption amount per spouse goes up to$15 million. So with pretty simplistic planning, you can maximize that at$30 million. That is for estate tax purposes. On the income tax side, I would say this is where we do the majority of our planning for clients. Preliquidity event planning is very common. And the earlier that those conversations start with us and their tax advisory teams really creates the greater opportunity through valuation discounting and so forth before there's an IPO or there's going to be some other liquidity event or perhaps a full exit.

5:58That valuation discounting is what allows you to maximize the estate tax exemption or in aggregate$30 million. On the income tax side, we do a lot of 1202 qualified small business stock stacking under the new big, beautiful bill that's been maximized even more starting next year. Longer whole periods, reducing from five years to three years. And oftentimes for our clients in our space, which tend to be centimillionaires and billionaires, it's around their second exit, bird exit, where we can do more of that tax structuring on the income tax side because there's less urgency and less of a need for that first big liquidity event.

6:43And by income tax, you mean capital gains from starting something? Correct. If parts of the portfolio allocation are going to have ordinary income, then perhaps it might make sense to implement private placement life insurance or KPLI. We work on that with partners as well, where there's a desire to have parts of the portfolio allocated to ordinary income producing assets. But the vast majority of what we do, you're correct on the income tax side, is focused on capital gains. Tell me if I'm getting this directly correct. So somebody starts a company, let's say it becomes Series B funded, it's worth$100 million, the 49A valuation may be low.

7:28They think that could be a$10 billion outcome. If they wait until the IPO and they want to send that money, everything over that$30 million to a kid or to several kids, they need to pay an estate tax, I think, which is something like 50%. So at a high level, the trust strategy would be getting those shares into those kids' names prior to that happen, which is itself a taxable event, but at a much lower basis. Is that basically the ARF that we're talking about? Correct. The estate tax rate is 40%. Putting those shares directly into the kids' hands is what terrifies clients. There's going to be a liquidity event.

8:05They potentially are going to have millions of dollars in their own bank account. How can I wrap my head around that? on it. This is where the trust structuring comes into play, where not only for their generation, but in leveraging your GST, your generation skipping tax exemption, which is equally$30 million, you can fund a trust and not only insulate it from your taxable state, but for taxable states throughout the generations in Nevada up to 365 years. And so that can be very powerful planning. I mean, often at times it's referred to as like the Rockefeller type of planning where you're able to maintain assets outside of taxable states for multiple generations.

8:45But the other part to it, David, is the control piece of it, right? I mean, giving assets to children, whether they are minors or even adult children, can be hard at times for clients to wrap their heads around. And so this is where with proper trust structuring, there's an ability to further the tax planning and do the instructor things really tax efficiently, but doesn't give them unfettered access to the access. I don't know if you meant to phrase it this way, but you said actual children or adult children, which is something that found many, many times in these situations. And on not being, what are some best practices?

9:27So that's kind of financial and tax, but in terms of just parenting, you've been on the inside of these families. What's the best practices to raising kids that don't become adult children and become fully grown adults that contribute and benefit from society? Really important question, dude. And I would say in my work, it's the most important question. And I'm always asked this at the beginning of, you know, we're talking about tax strategy. We're talking about putting stocks into these different trust structures. And the client says, I don't know, Thomas, like I'm worried about my kids becoming trust fund babies.

10:00I mean, there's a stigma there, right? Because it's used very commonly. and the trust actually, if well managed and having a trusted partner as the trustee is what positions the kids best to not become trust fund babies because it's managed well, it's managed with thoughtfulness and intentionality that aligns with the family's vision as well. But the thing that I also say to my clients, which some appreciate more than others, is the number one thing that it comes back to is parenting. There's no substitute for parenting. And you just kind of triggered me on one recent client conversation that I had.

10:39Very successful entrepreneur, about to have his second exit, sell his company for well over$100 million. And under Trump's new big, beautiful bill with bonus depreciation, he said, this is the perfect year for me to buy a jet. I'm going to buy a jet. In my experience in working with clients far scale, there's very few situations where buying a jet actually pencils. You know, you're talking about an executive that is constantly on the road and so forth. Now, this entrepreneur does have his next venture planned and so forth, which does have geographic dispersion. And so his thought process behind buying a jet was this will give me more time back with my family.

11:21This will allow me to get to where I need to be more effectively. And so his goals were aligned with his values, which family first. But I tried to ask some thoughtful questions to pressure test this decision, which was, well, what are you going to use the jet for? Well, I'll use it for my business travel. And then, you know, whenever we're taking a family vacation, like that'll be able to fit into my schedule. I'm not subject to the airlines. We can go on a plane and we can go. Great. Have your children ever flown private? No. You're talking about creating an expectation for them where they only fly private.

12:01And that's all they're going to know until they're an adult with a job going and buying their own ticket. Are you comfortable with that? How do you feel about that? He's like, oh, I didn't think about it that way, Thomas. I was thinking about it that we'd all be together and spending more family time and this would be great. I wasn't thinking about setting an expectation with my kids that you just fly private. That's the way it's done. That night at like three in the morning, my phone buzzes and I get a text from and he says, Thomas, he goes, I haven't been able to sleep all night. You don't have to reply to me right now.

12:35I've been thinking about what you said. And it didn't even occur to me that maybe setting this expectation for my children that based on the amount of wealth that I want to leave to them, flying private may not be sustainable. Maybe if they're entrepreneurs and successful business people themselves, it will be. But that's not the value system that I'm trying to further within my kids. And so I'm not going to buy a jet. I'm going to do a jet share and do that for business travel only. But when it comes to traveling with the family, we're going to fly a commercial. There's two sets of entrepreneurs, founders, credit equity, you can call it centimillionaires, billionaires that I see.

13:13One is I would categorize as an egotistical person that just wants their kids to do exactly what they did. They did private equity finance. They have to do private equity finance, even if they want to pursue the arts. And then there's the other type, which I like to associate with as much as possible. And these are the ones that want their kids to be happy and to pursue what drives them, what makes them happy. it. And to your point, the problem with a second set, unless there is a substantial trust, is if they think that having a jet or having a six bedroom place is middle class, or just normal, there's very few things are not private equity finance from this side, that will actually pay for that.

13:53So you're actually creating this essentially fixed cost of living trust when I see them use the best is to allow kids to be more anti fragile. It's kind of like universal basic income, you have some level of income coming in every month. So you could start the company, you could go volunteer at a nonprofit, you could go into politics, whatever you want to do. The only thing that's ever going to be at stake is your ego is never going to be your ability to put food on the table. I think that to me has been kind of the best from from afar, the best use of trust. I know you're on the inside, you see these family dynamics, you talk to the patriarchs, you talk to the kids, what is the best case scenario, not from a tax maximization or from estate planning, but from a raising healthy kids that end up having successful eyes?

14:40Making sure that you're not disabling your children from not being able to lead, live a purpose-driven life. And this is one of the areas, David, where I do see friction in families sometimes. If you think of another situation, multi-generational business, the family had all worked in it for, you know, that's what they knew. That's what they did. Kids grew up, they did what they worked for, dad worked and so forth. It was absolutely the opportunity in time to sell this business. And they did with a very successful result. The family had done a lot of effective trust planning. Some of the children, grown adult children that had worked at the business their whole lives woke up the next day and didn't know what to do.

15:21You know, their purpose was working for this business their entire life. And as a result, for some, it created friction within the family. I mean, they didn't know what to do with themselves. And it led to behaviors that other family members didn't appreciate and cause friction and so forth. And we spent time and worked hard with the matriarch and the different family members to recognize what was going on, that to help them understand that the trust structures had enabled optionality for you to do a lot of different things. You can go start a new business. If you're more charitable interest, you can go do that.

16:02And then one of the things that we helped establish for this family were periodic family meetings where they would all get together with the goal of making decisions related to the big picture of family wealth very effectively. Because of some of this friction and lack of purpose that some of them were feeling, I was very intentional on having separate conversations with each of the children, the beneficiaries. And this brother is going to talk about this new charitable interest. I know you, sister or brother, might think it's silly. Give them space to talk about it. So that way it will enable us to focus on the decisions that we need to make and today at the meeting.

16:44So that way we can move things forward and continue to maximize the pie for all of it. And so I would say that's where some of like the family dynamics piece comes into play here. With good structuring, you can enable a lot of optionality. and back to the point that you started with, David, where you have perhaps these PE-driven entrepreneurs that are huge wealth creators that are not the type that they have to do what mom or dad did, but more I want to provide them the flexibility to do whatever they want. It's having very intentional, thoughtful conversations with them about that's what this wealth represents for you, that you can go volunteer for your favorite charity in perpetuity, but you can live in a nice high rise in that city.

17:34You know, maybe not the best high rise. You're not going to be on Billionaire's Row, but you don't have to live somewhere that someone that typically chooses those types of careers is unable to attain. And that's where it just unlocks a lot of optionality for the family on the entrepreneurship side as well. The way that I always look at this is it's almost like a midlife crisis, but as the child enters adulthood. And I always look at this as almost like you brainstorm what you would want to do. And a lot of people actually stop at something because they say this will be hard. Well, I'd love to run for Congress, but it's impossible.

18:11This would be hard. At the same time, holding the idea that there's nothing they could do, that they have everything to them. instead of really going towards this hardness. So picking your heart and going towards that hardness is I think where a lot of people, regardless of their situation and even their financial situation, could really find their next passion. Pursuing that thing, not necessarily because it's hard, but even though it's hard and knowing that you're gonna really evolve and become better at that. That's when I started this podcast, it's generally difficult to get from zero to 50 episodes, all this.

18:42I chose my heart. I knew that was gonna be hard. I knew that there was compounding to it And I chose to make that my heart because I knew what I wanted. I knew the end goal. One of the biggest gifts that the patriarch could give to their children is explaining how pursuing the heart is the thing. That's actually what brings you passion as well. No, I agree with you. I mean, and that's where through a lot of this effective trust structuring, it can enable that and unlock that for the kids that you have this ability to pursue your heart. We're also intentional in structuring things where those opportunities exist along the way.

19:14You know, using different trust structures where they have access to a little and then a little bit more and a little bit more. So that way it gives them an opportunity to pursue their hard, perhaps fail, but they're failing with the smaller pieces. And so that way, when they do have access to the larger pieces of the wealth, they've got some lessons learned along the way. And not every business idea is a great idea and that maybe you need to have a business. when people want to invest in u.s class i always say start investing get from zero get off of zero as soon as quickly but do really small checks just assume you're going to lose everything but you can't play poker with fake money you must play with real money is that is that like a best practice for truck in terms of like life exploration as well kind of segmenting those by certain age so that as the child becomes wiser they have more capital and hopefully make less mistakes?

20:10So they're tax rules, right? I mean, you alluded to like the estate tax exemption, which next year will be$15 million for styles,$30 million in aggregate. You can couple that with your generation skipping tax exemption to get those assets into a legacy trust that can run for 365 years in November. That type of structuring, I would say is like, we often start conversations there and the client immediately is like, this is what is for my kids. The reality is as we, as we layer in the strategies for the client is that structure, that, that generation skipping tax exemption, you know, structure with legacy wealth is actually for their grandkids and the future generations.

20:51And there's other trust planning that you can do, um, with grant or retained annuity trusts or, or other structures. If the client's philanthropically, uh, motivated where they know they're going to give so much to charity, you can use charitable lead annuity trust. We were giving money to charity, but perhaps after 10 or 15 or 30 years when the term ends, that those assets will then go to the children. And they're includable in the child's taxable estate. But at those different intervals, it gives them access to a little bit more, a little bit more, a little bit more that helps to supplement their balance sheet to do some of these hard things.

21:28All the while you have the legacy trusts that are really intended for the multiple generations as a backstop that can supplement further if needed. But when we're showing a beneficiary, a child, a statement report, a balance sheet, we are very intentional in showing like, okay, this is the piece that is for multiple generations. It's at the edge of the page for a reason. That's not what you should think about when you're talking about your own entrepreneurial endeavors and things you want to do. The next one over, this is where you should focus. And I think that helps it. Like you're doing it with real money, right?

22:06It's not just funny money. You're doing it with real money. But it adds a psychology that it's, oh, wow, this is, okay, there's this big thing here, but this is what I have to work with. And writing million-dollar checks may not be the right way to start here. Maybe it's$100 ,000 checks and maybe doing a little bit more diligence in some of these deals and fewer deals. You've alluded to this multiple times, good structuring with optionality. What does that mean? And how could a trust be structured in a way to preserve optionality? So the simplest way is finding a trustee that you really trust.

22:41So I'm located in Nevada. Question I'm oftentimes asked is how does Nevada compare to the other trust jurisdictions, Delaware, South Dakota, et cetera. I'm even though I'm located in Nevada, I'm not a jurisdiction promoter. You pick a trustee that you trust. And yeah, maybe there's some differences on the margin. Some might be better at longer term planning, 365 years versus in perpetuity. What's the difference? Right. Some might be better from an asset protection or credit protection standard. Put all that aside, you pick a trustee that you trust. And on an earlier episode, you had Jay Hughes, who's very well known in our space and has spent a career, or I would say maybe the second part of his career, really focused on family dynamics and so on and so forth.

23:24And this was one of the points that he made where one of the most important decisions a family or an individual can make is who is the trustee? Going back to your question of optionality, how you attain the most optionality is by picking a trustee that you trust and then giving them full discretion to use their judgment. Because legally, that's also important, right? That's the paradox in that you have to, the laws are written in such a way that you have to actually give up control to a non-family member. And that is almost the definition of somebody that you trust that is a non-family member that will act in your interest.

23:58Correct. And so the trustee has legal ownership of the assets. They're responsible for them and are required of being held to a fiduciary standard to manage them as if they're their own. Where the split is, the trustee doesn't actually get the benefit from those assets. The beneficiaries do. That separation from property interests of the beneficial interest and the legal decision-making interest is what enables a lot or most of the tax planning under the tax code and utilization of trusts. Yes, there are certain jurisdictions that have better trust laws to enable more optionality than other state jurisdictions.

24:34The most critical piece of it, in my view, is selecting a trustee that you do view as a trusted advisor and then giving them the keys. You layer in a mechanism, and we always lead with this with all new client relationships, that you layer in a mechanism that gives the client the ability to hire and fire. One of my early experiences when I was back in Boston, I remember reviewing a trust instrument, and it had a person named as the trustee when it was created, who was a partner of this big law firm in Boston. And it said, you know, under the successor trustee provisions, anybody can be named the successor.

25:10But the people that get to make that decision is the management committee of the same law firm. And so they took that away from the family. They took that away from the client. And I think this is where historically trustees or larger institutional trustees have tried to like bear hug these assets. Oftentimes they're coupled with an investment advisory piece. It's, you know, higher margin business, very successful for them. We lead with, this is your mechanism to hire and fire us. So now that that is behind us and you know that you can get rid of us whenever you want. First of all, we resign first, but you can get rid of us whenever you want.

25:44Now let's talk about giving us as much of the discretion as you can possibly feel comfortable with, because that is going to enable us to do what the family needs us to do when they need us to do it down the road. And the one thing that I can say unequivocally in my experience in this space is that family circumstances and dynamics evolve over time. People are different. You know, people are human. Like, I think back just personally, like decisions I made in my 20s versus decisions I made in my 30s and decisions I'm making now in my 40s. Some might call that wisdom. It may just be like my circumstances have changed.