The Problem of Too Many Heirs
There’s probably a reason that wealthy, educated people tend to have fewer kids. Ha ha! Having kids is a lot of work. And for families with significant wealth, figuring out how to transfer that wealth to the next generations without greed and entitlement taking over is increasingly more complicated the more heirs are involved. Add some businesses or commercial properties to the mix and you have a mess. In this episode, you’ll learn three key insights that are critical to doubling the lifetime value of your accounts and dramatically increasing the value of your practice. Lean in as Paul shares a story about the complexity of having multiple heirs and a couple of strategies for dealing with this challenge. Make this information work for you so you can double the lifetime value of your accounts and increase the value of your practice. The Problem of Too Many Heirs This is the show devoted to financial advisors, fee-based investment advisors, and wealth managers who want to increase the value of their practice by attracting more premium clients and reducing client attrition. Now if this sounds like you, all you need to do is lean forward and listen carefully. Family Dynasty Planning is central to our discussions, and you and I will also explore other fascinating and important topics such as attracting wealthy clients, dealing with increasing competition, continuity planning and succession planning, growing and building your business, understanding the true worth of your business, and leveraging technology, just to name a few. In this episode, you’ll learn three key insights that I believe are critical to doubling the lifetime value of your accounts and dramatically increasing the value of your practice. You’ll discover why having a lot of heirs greatly complicates an estate plan, especially when one or more businesses are involved. You’ll learn the difference between single pot and separate pot trusts (and why this matters). Finally, you’ll hear how to suggest appointing a corporate trustee to your clients with multiple heirs. This would be a great referral if you have an affiliated trust company. Please read carefully. Because this episode could have a significant impact on your future success. When you can’t trust the trustee I was sitting in my conference room in Scottsdale, Arizona. It was mid-afternoon. Across from me were three adult siblings. They were concerned that their brother, Fernando, had taken over as trustee of their mother’s trust and that he was stealing money from the trust. The siblings in my office were ultimately to receive equal shares from this trust, so their brother stealing money from it was ultimately reducing their eventual inheritance. Decades earlier, their parents had started a tortilla factory, and multiple Mexican restaurants. The parents had given the tortilla factory to two of the kids. Each of the other kids had received a restaurant business. However, the actual real estate and building where each restaurant was located was still owned by the trust. The father then passed away. Fast forward to shortly before this meeting. The mother was getting dementia and could no longer manage the restaurants. So, Fernando took over as trustee. Years earlier, it seemed most logical for Fernando to be in charge of managing the trust. Fernando had convinced his parents that he was loyal and careful with money. But pretty soon the other kids noticed that Fernando was able to remodel his house and go on cruise vacations, even though his personal business income hadn’t changed. Fernando then demanded that the three siblings in my office start paying rent for the buildings that their restaurants were located in. The three siblings refused, because they didn’t trust that he would spend the money wisely. The siblings in my office were also concerned about a safe full of gold coins. The safe was located in their mother’s house. Had Fernando gotten into that safe? Single vs. Separate Pot Trusts As you can see, having multiple children can greatly complicate the estate planning process, especially when there are multiple businesses and significant personal property -- such as gold coins -- involved. Dividing businesses is different than trying to divide a couple of investment accounts. Businesses are like living, breathing animals. A business can’t really be divided like an account can. It would be like trying to divide a baby or divide a cherished pet dog. You could have a custody arrangement for a baby or dog. But I’ve never heard of doing that for a business. Imagine that you get to manage the business on Mondays, Wednesday and Friday. I get to manage the business on Tuesdays, Thursdays and weekends. That would be nuts, right! What the parents tried to do was to create what are called separate pot trusts. Let me explain the difference between a single pot trust and a separate pot trust. Imagine you have an investment account. You write your trust to say that when you die, the investment account is to remain in place for the benefit of your kids. That would be a single pot trust. A main issue with this is this: What happens if one of your kids needs significant medical care? Or what if one of the kids has children who all need college, but one child has no children? Is it fair to spend more money on the one child needing more medical care or who has kids needing college money? I had a case years ago involving two kids who were the beneficiaries of a single pot trust. The one child had significant psychological trauma from earlier childhood abuse. The estimate was that the lifetime care for that child would cost the entire value of the trust. But that would mean that my client would not receive any benefits. We were able to go to court and have the court divide the trust into two separate “pots” or halves so that they each received equal benefit from the trust. Having separate pots is usually fairer. But separate pot trusts only work if each separate subtrust or pot is large enough to be separately managed. That usually means that each pot needs to have at least $500,000 in it. How to introduce the idea of a corporate trustee This brings me to the idea of bringing in a corporate trustee. If you have a client with multiple heirs, and that client wants to make sure that the money lasts as long as possible, having a corporate trustee is a great idea. Otherwise, family dynamics get to be too complicated. At least some of the kids will be aggressively eager to get their money, and that makes for conflict even if the document limits distributions. It would be much easier for a corporate trustee to implement “tough love” and only give distributions as provided in the trust documents. If there’s a business, however, you need to make sure the corporate trustee has someone with the skills to manage the business. You may be affiliated with a trust company. If so, great. If not, now may be a good time to find one that has a good reputation. In terms of how to actually make the referral to a trust company, a lot of clients are squeamish about having a strange trust company manage their family’s wealth. So, to introduce this idea, I suggest first talking to the attorney and CPA. Get them on board with the idea, and then ask your client to schedule a joint meeting with the client and other advisors to discuss the estate plan. The annual review is a good time to do this. (By the way, having annual reviews is a must. If you aren’t doing this, and if you aren’t talking to the estate attorney and CPA each year, you’re missing out on a great opportunity for collaboration and possibly referring business to each other.) EPISODE REVIEW So, let’s do a quick review of the insights you and I discovered in this episode. You learned why having a lot of heirs greatly complicates an estate plan, especially when one or more businesses are involved. You learned the difference between single pot and separate pot trusts. And finally, we talked about corporate trustees being a great solution for situations involving multiple children or heirs. This would be a great referral if you have an affiliated trust company. And speaking of reviews, please go to DynastyAdvisorPodcast.com/iTunes and type-in your biggest “take-away” or ‘aha!’ moment you experienced during this episode. You can do this now in the Reviews section and when you do it, iTunes will ask to rate this episode ... I hope I’ve earned 5-stars from you! It’ll takes 3 minutes out of your day, but what you declare could provide you a lifetime of learning! I hope our paths cross again next week for the Dynasty Advisor Podcast, the show dedicated to helping you use Family Dynasty Planning to keep your biggest investment accounts even after your wealthy clients have passed away. Please do whatever it takes join me next week because our topic will be the danger of direct distributions. This greatly increase the chance that you’ll lose the investment account. So, it’s pretty relevant to you. The idea is that you can start to identify these dangerous situations and attempt to get them fixed ahead of time. (The incentive to the family is that by keeping the assets in trust longer, you are reducing the chance of the inheritance being squandered.) I encourage you to invite a friend or bring a study-buddy, because the next episode is pretty important. I can’t wait to connect with you then. In the meanwhile, all good wishes.