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- [00:00]
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Foreign.
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What is up? And welcome back everyone to another episode of the Practical Planner podcast. I'm your host, Thomas Goldman, here with me, Ann Rhodes. And we have Christopher Holtby here today as well. So Christopher basically works at a trust company and I think this is a really important conversation for us to have because, you know, prior we've talked about trustees, the value of trustees, but we haven't talked about, you know, corporate trustees versus individual trustees, why we hire them out, et cetera. So Christopher, thanks for joining us today. Man. Maybe before we dive into it, you want to kind of just give a quick intro of who you are, what we do, what you do, and then we'll go from there.
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C
So we're a trust company where clients can keep their financial advisor. We're based in South Dakota, we're ex Ernst and Young guys. And we just do the boring work and we never touch the investments. That's it.
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B
Okay. Simple enough. That keeps it simple enough. Well, let's talk, let's just kind of start the conversation around like what? Why do people hire trustees? Like what is the value in it? Because I think for a lot of advisors, they hear clients complain about the cost of having a trustee. And so they're like, ah, like, you know, how do we get them out of the mix?
- [01:23]
C
So a trustee, whether it's an individual or corporate trustee, can only do four things, manage money, distribute money, tax returns and other administrative issues. Most advisors would like to work with a corporate trustee that only does three distributions, taxes and the other administrative duties. But the real focus that a trustee does is they're involved in the risk and tying of following the rules that one of an advisor's clients created with the attorney. So it's all about who gets the money, when, why, where and how. And that's called a discretionary discussion. And so it's really a mixture of the corporate trustee reading the trust document, making a discretionary decision, working with the advisor. So it's done in a collaborative way. So the beneficiary or the client's advisor sees sort of one thought leader without it being confusing and, you know, like a plate of spaghetti. So again, corporate trustees, do four advisors want to use a corporate trustee that only does three, and that's never manage money.
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B
Understandable. So.
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When does the conversation start for an advisor, for anybody thinking to hire somebody versus you, somebody they know.
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C
So what we've seen over the Last sort of 20 years, is it based. It's based upon either a blended family.
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Children who could blow the money, sort of think sudden wealth or it could come from they don't have anyone that they know that they know and trust. Or most importantly, the dollar amounts get bigger. So think of $2 million to $3 million. You see a lot of friends and family named in that position. Ann has seen this sort of 2 to 10 is that gray zone where now you're deciding, do I want my cousin who I love, but they don't even manage their own money, let alone know how taxes work in the legal world. And once you get over $10 million, that's when you see corporate trustees being used more and more often. And again, yeah, sorry.
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A
Oh, and I was going to say that line actually makes a lot of sense, Christopher, because historically, and this is probably before the obbba.
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You know, rose or made the federal exemption up to 15 million and now, adjusted for inflation starting next year, that that $10 million line is really where you start thinking taxes as well, and estate taxes. And so all of a sudden you may need, for that specific tax planning strategy for why that trust even exists, you may need an independent trustee, somebody who's not too closely related to the person who formed the trust. So there are special rules about that that will then cause all sorts of, you know, tax implications. So, for example, the most prototypical example of this is you completely trust your kid. Your kid is, you know, or your client. Does your client completely trust their kid? They're great with money. They could handle $100 million without a problem. But because the child is a beneficiary of the trust, you can't make the child as the beneficiary, also a trustee, without causing all sorts of potential tax consequences or asset protection consequences. That $10 million line makes a lot of sense, Christopher.
- [05:11]
C
And then the other thing, Thomas, is if you look at an advisor's top 5% of their clients, this is where they want to make sure they don't inadvertently get replaced when they pass away. So what we see advisors who are using wealth.com tools, they're going to be very engaged. And so advisors have an opportunity to use wealth.com more to be involved there, more from a thought leadership standpoint, to embrace the philosophy of money and family and those questions that come out of that. And the other thing is a lot of advisors have relationships with clients who might be using a corporate trustee that is managing the money currently. And some of those advisors would like to.
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Take those assets and really create a holistic financial plan. So that's another avenue of how we get used to.
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B
Okay, that makes sense. So on the tax front, how often are, you know, the trustees really handling the taxes? Because I think I work with a few corporate trustees and most of the times they are the ones who are responsible for at least tracking and keeping the tax team externally, at least up to date, making the payments to federal, to state, et cetera. Is that pretty standard?
- [06:35]
C
It is. I would say it's probably 90% of the time once you get much bigger clients. Sort of north of what Ann talked about, you know, north of the 15, the 25, 30. Right. Assuming we have a married couple, that's when you see them wanting to use their own CPA because there's a lot of external stuff going on that it all needs to be coordinated.
- [07:03]
B
Okay, okay, that makes sense. So how do people go about really picking a trust company? Obviously I think there's a little self serving here, like feel free to promote you and what you do. Like how do, how like you know, I think I've seen advisors in communities be like, oh I got my first client, they need a corporate trustee. How do I go pick somebody? Because fees range a lot, right? Maybe there are some with flat fees versus a um fees like a couple of my clients, they're very high net worth and they came over at the trustee and they're not managing the money and they're paying.04% on above $10 million just, just to have the trustee. So they're like great, how do I get out of this as fast as I can? But I think that's probably a common question advisors have.
- [07:45]
C
So I think the first thing is if you're, if you're an independent financial advisor, you really have two choices. You can use the custodian trust companies, right? Schwab Fidelity, or you can use the independent.
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Trust companies like ours. And I think advisors.
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Want some portability if they ever change custodians, which you can't. If you use, you know, custodian trust company, I think the larger amounts they want more customized time. Right. Because the only thing a trust company has to offer is time. And so if you allocate too many trust accounts or per trust officer, then you have a problem with being rushed, saying no too quickly, not really getting creative around the distributions that really helping advisors create that strong bond with the beneficiaries. So I think it's really the DNA of the trust company, why they exist, how they, how the trust officers handle number of accounts and those are some of the bigger ones. It's never fees because everyone's going to be pretty close. So it's really is how does the advisor not get embarrassed? Ann, what are you seeing?
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A
Well, so when I was in private practice, we as attorneys also got involved in that conversation of what kind of trustee might you pick? There's a range out there. There's, there's anyone from. Not professional trustees, right? Think of like picking your brother in law or your cousin because they're far enough removed for tax purposes or whatever that you, you still have that person. But then that person might move and they might, you know, pass away or become incapacitated. There are all sorts of issues, of course, as well as lack of sophistication potentially with the financial plan where you might not always go to a non professional individual person. But then you also have these individual trustees who are professionals, they have to get certifications, et cetera, within their states. And it's a fiduciary role. Right. And so they take on that responsibility. We saw a lot of them, especially in a contentious family context. So think of, you know, the former, except that now you don't want your cousin or you don't want your brother in law actually being the trustee because they're family members now who are fighting over the money potentially at death. And so you might bring in one of these individuals, still not corporate, but an individual, to come in and be that sort of neutral third person who can kind of, you know, deal with the distributions, deal with the court, et cetera, et cetera. And of course the beneficiaries who are not getting along. And then really you start graduating towards more professional corporate trustees. And, and there I think that, you know, Christopher, at least for my clients, a lot of the planning, because I worked in the ultra high net worth space was very tax driven, asset protection driven. And so there you're picking trustees because of their charters and where they have the ability to operate at the end of the day, you know, for some of these tax strategies, you know, like you want to do some income tax planning for your trust, you, you don't want to be paying California income taxes. You can't have an, a trustee here in California. So then all of a sudden you're picking a company kind of like Christopher's, where you might be located in a more favorable jurisdiction. And so if the beneficiary ends up paying income taxes because they're still in California or New York or wherever, that's a different question. But at least your trustee has been kind of placed in a state that is attractive and has an attractive industry for the trust business. And then, and then finally, you know, we had clients who did have those institutional custodian trustees for a variety of different reasons. You know, maybe they had family offices or you know, some other.
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Reason to have kind of that larger platform. You know, maybe this is a family that engages in a lot of kind of like M and A or they have like business interests that make it so that they also need kind of the investment banking side advice, right? And then the trust is getting pulled in because it owns stock in the business. So you kind of see this progression of what clients kind of need. But I think that where we were, if it was very tax driven, very asset protection driven, we actually loved working with a trust company like Christopher's, which we would call, you know, either delegated or directed or administrative trustee. And maybe you can explain to us, Christopher, kind of what the, the differences there are. But there are trust companies that can be more nimble, truthfully, that may be more creative on the fee structure as well, depending on what kind of trust you're asking them to hold and what kind of assets. But those were some of the advantages that we saw for sure. And we really liked kind of like sitting in that part of the industry as attorneys to work with a trust company like that.
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C
So. And you know what's interesting? So trust law is driven by state law, right? And there's seven great states for trust law. It, it, it's almost like a W, right? Alaska, Nevada, Wyoming, South Dakota, Tennessee, Delaware, New Hampshire. Those are the magic seven. And they allow the separation between the trustee doing the boring work and the advisor being able to manage the money. They obviously don't have state income tax or state capital gains tax. Trust lasts forever. But two states.
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Have something really, really unique. They have a legislative governor's mandated trust task force that every single year, well, every single, every year in South Dakota, every two years in Nevada is that they give the state legislators updates to the trust statutes. And there are term limits on this group of the Governor's trust task force. That's why certain states constantly are in a thought leadership position. There's one state that does one thing beyond unbelievably well, that may only happen one basis point of a percent out of most advisors. And that is Wyoming, where you've got a family with $400 million in one asset with mom or dad who built this asset from nothing. They have a family office. They want to put it into a private trust company. The best state to do that in is Wyoming.
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No joke, that is, I mean, look, South Dakota has private trust company rules. And my humble opinion, Wyoming is better so for that little teeny, teeny tiny piece, that's where you go for that. And these amounts are in the 3,500 million dollars. Owning one asset that has been sold and the creator of the wealth of this one asset is still alive. Once they, once he or she dies, then you need a real trust company doing the real work. But that could be 20 or 30 years.
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A
So what is that legal feature that makes Wyoming so unique? Do you mind kind of spelling that up? Because I'm actually learning something new today.
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C
So they don't have the same amount of regulatory oversight in cap and surplus requirements that a private trust company has in Nevada or South Dakota. So it's just less regulatory capital driven and so that's why it's better.
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A
That's very interesting because that would have been appropriate for a lot of my clients who are out here on the west coast, you know, who have businesses concentrate, concentrated positions in startups that have now, you know, become unicorn companies and they still haven't divested of all their, you know, initial stock after the liquidity event potentially. You know, I had a client that actually moved to Jackson Hole, Wyoming. And so maybe for them they should have also brought a slew of people, including their financial advisor with them to form a private trust company. But, but yeah, no, that's very, very interesting. Christopher, are. So you said your trust company right now is situated Sidus in, in South Dakota? Yes. And so what else are you exploring in terms of that landscape? I'm wondering.
- [16:53]
C
We're looking at Tennessee, New Hampshire and Nevada just depending on, you know, where people are. Obviously the key thing for Tennessee is covering the, the southeast, New Hampshire, Northeast, Nevada, California, primarily a little bit of Phoenix. The two best states for trust law right now is Nevada and South Dakota. And the reason is because they have a Governor's trust task force that we talked about. People shouldn't get caught up on the what, they should get caught up on the why. Why are these two states year in, year out? It's because it's like what advisors do. They're constantly monitoring and have a systemized process of how they do their updates, whereas the other states within 6 to 12, 18 months just kind of mimic whatever Nevada and South Dakota do. The one issue that is unique to South Dakota. Sorry, you don't mind if I shout it out, do you?
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A
No, no, not at all. And I'm happy to.
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C
South Dakota, South Dakota is the only state in the country that if you go to court to make a change, it's never recorded ever. And it's in the state constitution, not trust, statute, state constitution. So if you have families who have, who are public families, either from business, politics, entertainment or sports.
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And they like to keep things sort of on the, on the down low and they make a change to a trust. South Dakota is the only state that never records it, ever. And it's at the constitution level, not just at the statute level. Every other states two years and you gotta reapply.
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A
Let me play this out for our audience. I think recently, if you've been reading, you know, the New York Times, other media, news media, you know that very recently the Murdoch family all had to show up in court in Nevada and the New York Times was able to get their hands on court records and the public interest sort of be able to publish these pieces really detailing and in great detail all the family drama.
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So what you're saying is had they had a South Dakota trust, a South Dakota trustee, maybe they could have avoided a lot of the grief from showing.
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C
Up in the media because nothing's recorded.
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A
That is very interesting.
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C
That it is. Nothing's recorded. It's approved by the court and that's it.
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B
That's interesting.
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C
I don't know how, how often that that happens, but all things being equal, it's not a bad thing.
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B
But anyway, for sure, yeah. Okay, so what I'm thinking about is so the average advisor, right, they're thinking about, you know, clients are going through estate planning, we need to get trustees set up. I think part of the conversation for advisors is helping educate their clients on why to hire or why to pick somebody in your family. And I think and you hit on some really interesting points of like, okay, great, so you pick your brother in law or you pick your friend or something. Like I've actually seen a lot of wealthy people start to pick friends, which is I think a little bit interesting, right? You're like, okay, I'm going to pick my friend, they're going to pick me. Then you know, then the second is the contingent is going to be somebody else. I know and we're kind of all going to do this together. And I find a lot of people pick that. One is because it's somebody they know. And two, they're like, okay, great, like if they need to approve distributions or things, we feel comfortable about that. I think one hesitation for people hiring trustees is like, what if they don't? Like, I don't want to feel like I have to ask for permission or do things from somebody else that I don't know. How do you help people kind of overcome that concern.
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C
So.
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A typical trustee wants a beneficiary to do a budget. I don't want to do a budget. I don't even know beneficiaries wants to do a budget. My wife gives me a plan of what we can spend for the next five years. I can do a plan. So the way that we handle it is we look at the trust document, the advisor gets involved in the financial plan and then we merge those two things together. So the beneficiary knows, oh, this is my plan for this year. But it has a long term viewpoint of how it's going to deal with the ups and downs of investments in my financial needs. But it's a plan, I think that works much, much better. When individuals are involved, they kind of, and you've, I'm sure, seen this, they just agree to everything. And.
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I give this example. If you have a friend who is a really successful oil and gas guy, his definition of prudent, which is investment and distribution decisions, is going to be very different than if the best friend is a art teacher.
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Both great candidates potentially. But what's their definition of prudent? How consistent are they for the future generations and will they be impartial? Will they be balanced? Will they document it? All right, I mean, Ann, that's what you've seen, right?
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A
Yeah, for sure. I mean, for us in private practice, you have, you need to go to your trustee quite often, right, on behalf of the beneficiaries or even the client who set up the trust and is still alive. And you pick your trustees for a variety of different reasons. But that sort of third party, independent individual trustee who's really a friend, who's really a business associate, somebody you have to, you know, you want to take out to dinner and you're going to go to their kids, you know, baptism, etc. Like truly, how impartial are they in the long run?
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B
It.
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A
That's a real question, right? And so if the reason why you set up the trust is because you fear for the beneficiary's ability to not squander the wealth that you built for them, then all of a sudden you know, that person who's more sort of like rubber stamping the decisions that come before them doesn't even need to be represented by counsel. They're just like, sure, you know, like, I trust that you came to me for the right reason. It becomes hard for that person to say no potentially, or let's plan into this, right? It's not a no, but it's A, you know, what would the implications be of this? And, and why did we not plan in the way that you're asking us to, to spend those, those funds? And so I do think, you know, part of the reason why we as attorneys did really like to have these sort of directed, delegated administrative trustees is because there is still a partner who works with that family. Right. Who becomes enmeshed in the fabric of that family and really learns to work well with all of the other trusted advisors within that circle. And let's be honest, oftentimes there is a family member who is, you know, the patriarch or kind of the leader within the beneficiary group, if that makes sense. And you learn to work with that person too, so that actually there's a person to mediate those conversations with the beneficiary who's actually making the request.
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B
Right.
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A
And so there's a whole trusted circle of people involved potentially with your that trust. And you as a financial advisor need to also work well with that trustee. And if it's somebody who is an individual who's there and doesn't really understand the complexity of, of working with a lot of beneficiaries for that trust, it can be a very frustrating experience for you too. So just loosey goosey distribution is not always a good thing.
- [25:19]
C
No, and we've seen CPAs talk, talk about this all the time. So.
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You know, I think the other thing is, and then you use the word directed and delegated just for everyone to know. A delegated trust means we delegate to the investment advisor to manage the money. So if anything goes wrong, we share being on the hook. So it's generally about 20 to 30% more expensive than a directed trust where the trust document directs us to use Thomas, for example. Right. So then we have no duty of oversight on the investments because the grantor told us to use Thomas. And we have a whole harmless language inside the trust document. So that's the difference between directed and delegated. And are you seeing, because we see this, you know, once you get past that 6,7 million, we see working with a lot of co trustees and we do that all the time. Are you seeing that as well?
- [26:24]
A
Yes, absolutely. So the wonderful thing about trusts is that they can be drafted in a million different ways and they can be drafted in a way that works best for that family's asset composition, the potential, the dynamics among beneficiaries, but also, you know, what you want your trustees dynamic to be. And so the wonderful thing is, you know, you can slice and dice kind of the trustee role into all sorts of ways. Right. You think of it traditionally as one trustee handling everything, the four things that Christopher has just talked about. But you can actually further subdivide that. Right? Trusts are agreements. And so you can say, for example, that you want always a professional trustee, a corporate trustee to help with, you know, holding the assets. And maybe that's partly because you want the state and the income tax implications. Right. So you don't want somebody to be a full trustee who right now lives in South Dakota but then moves and picks up, you know, their family and moves to New York and then all of a sudden you're like, oh my gosh, did they inadvertently move without giving us a chance to like hand off that trust to somebody who stays in South Dakota? Right.
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So, so that's one reason to potentially have a co trustee. But honestly, it's also just to get the whole family behind this idea that like, this trust is yours. It's a, you know, it's the family's, you know, legacy. But you also need to learn how to work with advisors around you who are going to be good stewards with you of this money so that it's not just gone, you know, in a generation. So I think of it as, you know, developing this like, muscle, the reflexive, you know, the, the, the reflexive muscle so that this family, every single one of the second, third generation, are used to working with professionals in this space.
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C
So a trust document is almost like a Legos. You can pull in and out different parts of the Lego and it can be adapted.
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A
Exactly. And I will tell you one of the most, the sort of interesting examples that I have is also prenups. We've talked about prenups on this show and how some clients want to be the bad guy, right? To have somebody they can point to and be like, well, you need a prenup. Not because I don't love you, you know, as the beneficiary. That's a very awkward thing to say to your future spouse. But because the trust requires it. Because my father, you know, my mother, when they put together this trust, you know, want all of us to get used to thinking about, you know, property and you know, as, as the families thing. And so I think of the trustee almost in the same way. You get to have that sort of neutral third party things have been put into the trust that Lego did. Lego instructions, right. You've built the trust as a client a certain way so that you can be the bad guy if anything happens. And you know, your Beneficiaries are going, undergoing whatever life changes that they are that may not be to your liking.
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C
Fair point.
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B
Yeah, I think it's a super interesting point because I think a lot of advisors, maybe even I did early on, assume that like, okay, unless you work with a certain wealth range of a client, then you won't ever need a corporate trustee. But like, you know, I have clients who have it who are in the wealth range, but I also have other people who were considering it because one, you know, they have two kids, one of the kids might have, you know, some, some issue mental, etc and you're like, I was gonna, you know, do I really want to have my other child oversee this trust? And then now they have a really weird dynamic with their sibling. And then like, you know, siblings asking and then like the other siblings give me approval. And now they've created this like, you know, almost father. Like, you know, they don't want to have to like, you know, fight with their sibling about this. I've had other people who are like, they're single, right? Like I have a client who's 200 plus million net worth, he's single, he has no kids, he isn't married. And so it's like, okay, you want to make sure you use this well, but then do you like have it be for the benefit of your brother? And then your brother, you know, is also the trustee. Like that's also kind of interesting. And what, have you passed away before your mom? And so now like your mom can't handle this, so you do need somebody to help think through it. And there's other people who are just like, you know, my wealth is getting so large that the last thing I want to do is have any one of my kids be able to be the trustee of this, you know, ten plus million dollar trust. And that's if I pass away today, let alone if that's 20, 30 years from now. So I don't think it's always a net worth thing. It's also just like, you know, do you have somebody in your family? You know, is there just. Nobody is capable of handling this. I mean, we all hear the stories of people running out of money really fast. And so it's like, what parameters can you put in to make this money last the longest?
- [31:11]
C
And that goes back to the plan, right? So if you stay away from a budget, but you focus on the plan, so the duration of the plan matches the duration of the underlying marketable securities or trust assets, then you've got that really long term benefit cooking so that's, that's the key.
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B
Great point.
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A
Our podcast is called the Practical Planner. So I think I just want to leave our audience with like a nugget of, you know, something to take away from this. You can plan into the trust investments and distributions the same way that you plan into whatever it is that your clients as individuals want to achieve with their money in their lives. And so that actually is well within your wheelhouse. You have a role that you can continue to play. Of course, you might want to involve a trustee in that, but together, I think that idea of planning into the trust, you know, lifetime of how it manages its money, how you know it, it distributes the money, is actually something that you can do well.
- [32:19]
C
And then. And then from a again and sticking on the planning on the Practical Planner, advisors should look at their top five clients and make sure who is named as the successor trustee. If it's a friend or family member, get them as a client so they don't get removed when their client passes away. If it's a competing corporation, they probably want to get that changed to someone like us who won't remove them when their client passes away. That's sort of top five, top 10 clients. And then they should tell every single center of influence that they can manage money when a corporate trustee is required, because advisors want everyone to know that they have that potential. So those are two big takeaways. And don't get hung up on one of the seven states that's a commodity. Right? Focus on the why. Why this trust company? Why do they exist? How do they think.
- [33:26]
That they don't manage money, that they don't custody and that they're in a top state that's a commodity. That's no more a value add. That's a given.
- [33:37]
B
Love it. Love it. Okay. Perfect way to end. So, Chris, I know we've been waiting to do this for a long time. Really appreciate you coming on and kind of sharing this with everybody topic that we need to do is. And good to see you as always, everybody. If you like this episode, Please Rate this 5 stars. Subscribe and tune back in for another episode here in a couple weeks.
- [33:56]
C
And thank you so much again too.
- [33:59]
A
Of course. Thank you.
- [34:12]
Sam.