By Al W. King III
The asset composition of high-net-worth individuals is very interesting to an investment or insurance professional. According to a Credit Suisse Wealth Databook study, we see that in the United States, only about 45 percent of the wealthy’s assets are nonfinancial.
In terms of the types of financial wealth, the top 1 percent of households own 35 percent of all privately held stock, 64.4 percent of financial securities, 38 percent of trusts and 61.4 percent of business equity. The top 10 percent of households own 81 to 94 percent of stocks, bonds, trust funds and business equity and almost 80 percent of non-home real estate.
Within the United States, we see that 66.3 percent of the population is below age 50. There are an estimated 77 million baby boomers who are or will be retiring at a rate of an estimated 10,000 per day. Now, that’s almost 4 million per year, so, as you can see, the glass is half full for the estate planning industry.
Major concerns are beach and golf
However, many of these families are worried that the beneficiaries of their trusts are going to spend their time lying on the beach or playing golf with their money. This is now a major concern for a lot of families.
As Warren Buffet said, “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.”
The main point to remember is that due to modern trust structures available today, trusts are no longer vehicles that lawyers and banks create to keep what rightfully belongs to the beneficiaries. The bad taste in a client’s mouth based upon his or her experience with an older trust in an antiquated trust jurisdiction is now gone.
What most clients’ lawyers do not know is if they are doing a trust in a jurisdiction where these modern trust, tax, and asset protection laws are available - i.e., South Dakota, Alaska, or Delaware - they do not technically have to practice there. They can draft the trust, integrate the South Dakota, Alaska or Delaware law, and then get local lawyers in these jurisdictions to opine on the document at very nominal fees.
The last thing you want to do as an advisor is to make the lawyers think they are going to be removed from the equation, because they are a key part of the team.
If you can sell the lawyers on these concepts and show them that you are a quarterback of these concepts, and know whom to bring to the table to assist them, the lawyers might have other clients to work with you in the future. We have seen that happen a lot in the insurance and investment community.
Six desires of trust clients
It is important to note that there are six popular desires that we see are very important to clients when doing trust planning.
As you could guess, family governance/involvement, education and succession are at the top of the list.
Not only that, these families want to retain some level of control and flexibility of their trust structures while also retaining control in their investment planning.
They also desire to have their trusts promote social and fiscal responsibility, which can be accomplished through perpetual trusts with incentive provisions.
Asset protection/wealth preservation is also a popular desire we see today.
Finally, saving on estate taxes, generation-skipping transfer taxes, state income taxes and premium taxes is a very popular goal and desire for families.
Whom these families choose to serve as trustee is very interesting. A Family Office Exchange (FOX) study recently reported that 70 percent of wealthy families do not use corporate trustees, opting to use family members, business colleagues or friends.
The FOX study also noted that the biggest family trustee concerns are concentration of assets, business interests and personal liability issues for the individual family trustee.
Personal liability for family members serving individually as a trustee can result from improper asset allocation, lack of diversification, unacceptable due diligence and monitoring, environmental issues with real estate, and other distribution and/or investment issues.
The directed trust, trust protector company/special purpose entity and private family trust company (PFTC) are three of the modern trust structures we are seeing to combat these potential liability issues without inhibiting a family’s flexibility and control.
Some trusts can be modified
The ability to modify/reform the trust can generally be inserted into a trust document at its creation. Reformations/modifications also may take place without language in the trust document if state law permits and there is a petition to the court by the trustee or a majority of beneficiaries.
Reformations and modifications are generally easiest when both the grantor and the beneficiaries are alive and all of them agree with the reformation/modification. Unborn beneficiaries can be represented pursuant to virtual representation statutes in some states.
Al W. King III, J.D., LL.M., is the co-founder, co-chairman and co-CEO of South Dakota Trust Co., a New York City-based national trust boutique. The firm serves wealthy families worldwide and has more than $28 billion in assets under administration. The above remarks are excerpts from “Unique and Creative Uses of Modern Trusts Involving Investments and Insurance,” his presentation at the 2015 Million Dollar Round Table annual meeting in New Orleans, La.