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- [00:00]
A
If your client, the person who has the relationship, who maintains a relationship with you, if that person died, would you be the call that their spouse or kid, you know, thinks to dial? Or might you find out, you know, months later and you don't want to be in the latter category.
- [00:34]
B
All right, what is up? And welcome back, everyone, to another episode of Practical Planner Podcast. I'm your host, Thomas Coldman. Here with me are both my co hosts again, Ann Rhodes and Lisa Weigel. Thanks for joining me today, guys. All right, we're still learning how to handle three of us here together, but that's okay. That is perfect for anybody who has not done a podcast, let me tell you. And you have three people virtually. It is very hard because somebody's like half a second behind and you're trying to get the cues. But, but you know what? This is about as good of a group of three people educating you on estate planning you could find. So that doesn't matter anyways, but I'm excited for today's episode. So obviously, you know, everybody sees the posts from advisors and from, you know, people trying to tell advisors about, oh, this amount of wealth is going to be passed on for next generation in the next five years. This, that five years has been happening for 20 years, but it's still the thing that everybody sees. And, and so there's all the quotes of like, how do you engage the next generation? How do you make sure the assets stay with you? And I think on the estate planning side, there's a lot of questions here for advisors of one, how do you facilitate this? How do you help to stay working with the spouse or stay working with the kids? What roles can I take on? Am I able to be a trustee? Am I able to be the investment advisor? Does that open up compliance risks? And I'm really curious from your guys side, like, what does an advisor do here?
- [01:58]
A
So this is an episode I think that we wanted to do because we hear so many questions from investment advisors@wealth.com because we're one of those folks who, who is, you know, or are telling you, like, please engage the next generation and think of estate planning as within your wheelhouse and something you should be talking about to create stickiness with the assets beyond, you know, your client's death. And so there are so many episodes that we've done, you know, including with guest speakers where we talk about this and I encourage you to go check them out. This particular episode is actually about, you know, questions that we get about how to become an investment advisor. And here I'm going to say, you know, capital I, capital A. So investment advisor baked into the trust agreement itself or as a trustee. And so, you know, what are the pros and cons of that? Sort of. Is that going to create the stickiness that you're looking for if your name or your ria's name literally appears within the documents when that client dies and you're named either as like a successor trustee or successor investment advisor? And so we wanted to start here because so much of what we've done in the past is, you know, on those sort of softer skills, I would say, you know, how do you engage the next generation? But in this particular case it's like, what are the legal ramifications? Why would you want to or not want to become part of the document? And so first and foremost, what you should know is that a trustee is actually a position under the state laws. And that trust agreement is going to have governing law. That governing law could be Illinois where Lisa practices, California where I am. It could be a corporate trustee. Right, who has installed themselves in one of these favorable trustee jurisdictions that we've talked about in the past, like a Nevada or something like that. But what's interesting is investment advisor capitalized is not just this delegation role or where you've been engaged or have, you know, an account like contract level contract with this family or with the assets, but you actually have been elevated into a fiduciary position under the state's laws. So the same laws that created the trustee position in the sort of modern trust code have started becoming a little bit more sophisticated and taken your traditional trustee position and broken it up into pieces where it's still a fiduciary position. And we'll talk about what that means. But the trustee role has become kind of handed off into pieces to two or more parties. The two traditional ones are going to be administrative trustees. So you've heard of that before too, in previous episodes and we've had guests talk about administrative or directed trustees. It's been handed off in terms of the investment decisions to the investment advisor. So this is that capital IA role and perhaps even more people, other special trustees, distribution trustees, et cetera, et cetera. Or they might be called distribution advisors. Right. And so it becomes basically a three headed hydra. So you had one hydra, you cut off its head, three pop out. But everybody is still a hydra. It's still a fiduciary position. And what that means is, you know, your RIA or your, you know, company, or you yourself as the investment advisor need to be able, from a compliance perspective to be a trustee. You can't be a trustee, you can't be an investment advisor capitalized, generally speaking. And so it's nice to be named or have your RIA named in the documents. But can you actually serve as a fiduciary? Do you have the malpractice insurance? Do you have all of those things in place where fiduciary capitalized under the law means you have certain duties to beneficiaries. You have to follow prudent investment rules unless the trust, you know, does away with that you can't self deal with unless the document allows you to. And self dealing includes, you know, purchasing financial products from your own ria. So like you wear your hat as a trustee or fiduciary and you recommend financial products from your own, you know, RIA to the client or to the trust, the trustee, that becomes a conflict of interest. So actually when you push people like do you actually want this position in the documents? You know, people realize like, oh, I'm not even set up to do it. Or because of the conflicts of interest because the trust, you know, didn't override those. I am actually going to be manacled, like shackled to not even being able to do what I normally do for this family. So that's one of the things that we wanted to make sure people understood about kind of that investment advisor role within the trust.
- [07:01]
B
Did you see this often? Because I don't. And it's funny, like if you Google like, because clients have asked, like clients like, can you be the trustee if you Google it? The first thing is a Michael Kitces article about why you should not do this and why most RIAs should never do it because it is a conflict of interest. Right. Like if you have some trust you have to oversee, like you have to be a fiduciary of the trust, whether that's what's actually best for that individual person and Right. What if the best thing for that person is actually distribute it all? Go do it. But like that technically doesn't follow by what the rules should be. I think it becomes this really tough gray area.
- [07:37]
A
Yeah, no, exactly. I always love when this podcast agrees with Michael Kitces. Of course we have a lot of Kitces fans of this, the audience. But no, it's right. And actually a lot of the fiduciary, like earliest fiduciary laws or case laws were about trustees who had done nothing wrong. So you know, the trust has certain types of assets, I don't know, farmland or something, trustee goes out there looking for a buyer arm's length deal, couldn't find anybody better than themselves. So they actually were the top bidder or whatever on purchasing the asset from the trust. And that alone was a breach of, of their responsibilities. And so whenever your RIA may have a financial interest in your dealings with a trust as trustee, that already might trigger some, you know, breaches of your responsibilities. So that can be really tough. Now investment advisor can be a very fulfilling role for sure if you create that stickiness with the family in the first place. Right. So a lot of the investment advisors who do get named in trust agreements, you know, do this as a matter of like their normal business. They may actually have an affiliated trust company so that they can even do, you know, the trustee side of the, like the full trustee side of the house. But that, that can be a very good thing. But it doesn't replace, like being named in a document does not replace establishing a good relationship with the people who come behind your client. And what I mean by that is usually trust agreements have a way to remove any of these fiduciary positions. So just being written in does not guarantee that people will keep you in. Right. Somebody usually has a role that allows them to remove any trustee or any fiduciary, including the investment advisor, and replace them with people that they like. So you're still subject to potentially that turnover. So nothing really replaces all those other softer ways of establishing a relationship with the family.
- [09:51]
B
It's kind of interesting here because I think like we can see for sure, right, when there's multiple beneficiaries of a trust there. I almost don't think there's a way to make this work. Right. Because if you're ex client, you're working the ex client, but then now there's a family trust or not a family trust, you know what I mean? A trust that has a couple beneficiaries that, that just becomes a conflicting interest if they're the only one. Maybe there's a little bit more room here. But if I'm the advisor and I can't serve in this capacity, how do I help in this situation? Like where, where am I able to best help? Like how do I get connected with some of the other family members or kids? Like how do I not overreach or not especially mess up on this fiduciary side of things?
- [10:31]
A
Yeah. What I would say is the most successful sort of sticky relationships that I've seen is for the financial advisor to understand in the coming generation. First of all do not forget the spouse, right? Like you have easy access to that spouse. Or you should, because when you signed on the client, you should have had established at least like a baseline of being able to speak and communicate to the spouse. So don't forget the spouse. But then in terms of like the beneficiaries who come. I think the most successful advisors I've seen are the ones who understand the dynamic among the siblings and the family. You know, the people who will remain. Because usually somebody will be driving the decisions in a coming generation and there will be sort of tag along beneficiaries, if you will. It's just human psychology, right? Like they're free riders. And so if you can establish, you know, like understand the dynamic, see who shows up to a call for a family meeting, who asks really good questions, who really wants to engage with you. Those are all the things that you can suss out while your clients are still alive. And so refer to those episodes where we talk about having those conversations with your clients to establish those meetings. But try to see like, who is really going to be driving decisions going forward.
- [11:54]
B
Yeah, that makes sense. I think, you know, there a lot of advisors think that this is like, oh, let's take the family out to dinner or do something. I think it's actually more so like, hey, we know your daughter is now working at Amazon, right? Like, well, let her know if she wanted to meet, we could help her pick her for a 1k and Roth or traditional and how to invest it and some of the other things. It's like, you know, sit down with them, add value. Don't just sit there and be like, how do we get your future assets from it? Because if you're working with a wealthy family, you're being paid pretty well. Like, occasional meetings with kids can be something that's super valuable. If you do something that is actually helping them on their financial life. I think people can really, you know, it's not going to pass the, the smell test if you're like really pushing, like, hey, in the future when you get this $20 million, like, here's how we're going to plan for it. Or you know, there's all these salesy ways to do it. I think younger people see that and that's not what they want. They want somebody who understands them, who has worked with somebody similar, who's tried to be valuable to them. And I think there's just not enough education around doing that. And I think a lot of people are also like, well, I'm not being paid Yet. So like, why would I do that? It's like, if you really want to have, you know, if you want to be seen, well in their eyes, just be valuable. Like, it's pretty much that simple.
- [13:08]
A
The other thing that I'll add is beneficiaries are really wary of using the same advisors that their parents did because they feel like even after mom and dad are gone, they're not going to have my back. They're going to have some preconceived notion of like what these, the asset investment strategy should be. And they're, they're not going to really listen to me now that, you know, my parents are gone. And so there is a way to straddle that conversation to say, hey, like, you know, I work for mom and dad right now. You know, we are working on this for your sake because of XYZ reason. These are, you know, their objectives. But at the end of the day, you know, like, I just want what's best for the family and, and what it means for you to like achieve the objectives that you have. And so to start that conversation, to get a sense of where there are, I think is great because then you get to understand also, and this is a little bit perhaps self serving, but you understand why building some flexibility into trust and other structures like that becomes so important. So a good estate planner will kind of fight their clients or push their clients to not put really, really strict distribution rules, for example, into their trust, you know, to require, you know, X amount and only X percent to come out of the trust every year. Or these are the only types of, you know, distributions that are worthwhile to make because life changes. I mean, I cannot tell you the number of trusts that have education funds in them for my clients that were calculated based on like the Harvard tuition multiplied by blah, blah, blah, adjusted for inflation. And that's what the education Fund will have. Who's to say that in 20 years a college degree will even be worthwhile? The most worthwhile way to show that you're financially ready and responsible or that you can contribute to society. I think of all these high schoolers who have joined me on the streets of San Francisco to become AI startup founders, right? And they've never gone to college. So we as estate planners often think about how to guide our clients through decisions like that. And I think by talking to their beneficiaries right away, you can kind of also assess like how much they'll trust you to work with them through the trust.
- [15:36]
C
Yeah, I'll add to that just to say you know, I think sometimes this can be. This is similar to the sort of spouse perspective, but also like the kids perspective. The sometimes it's a really tricky situation as the advisor or as the attorney, where you're like, hey, we should really be communicating with this next generation in particular, because sometimes the parents, like, the client level will be really cagey of like, oh, I really don't want them to know, you know, how much money we have here or anything like that. I think, you know, couching it in terms of, like, we don't need to get into specifics. We don't need to, you know, share your details. Obviously, that's private. But if you want to set these next generations up for success, they should also have some financial savvy that they might not get in some other way. So let's open up a dialogue. Let's, you know, to your point, Thomas, like, be helpful on other ways. Let's talk about their investment options, you know, through their 401k things that are just, you know, soft touches like that to get in the door with them and help them have some educational understanding. When I worked at the trust company, that was such a big thing that we, we pushed especially, it was like, we, we want these gener be completely blindsided by the funds that they become beneficiaries of after the parents died and have no clue how money works, no clue how investments work. You know, you got to start small and try to build that up. And that also helps, you know, build that trust and, and their willingness to come to you then with questions when that time arises.
- [17:01]
B
Yeah, yeah, good point. So, so then if I'm the advisor and I think, okay, let's maybe mark off trustee, let's maybe mark off investment advisor, where, you know, how do I help my client in the situation? Do I help them then go find the corporate trustee? How do we think about the investment advisor? Do we. Do we maybe find somebody, a separate investment advisor who just does that, but we coordinate together? Do we say like, you know, I don't even, you know, I don't want to help pick that because then I'm like, you know, what happens there? How do you think about that?
- [17:33]
A
So here's what I would say. You can still be an investment advisor to the assets in the trust, but this is lowercase I and A by establishing a relationship with the trustee that gets picked as well, because they're the ones who are going to sign any letters, contracts, et cetera, to continue engaging you for the family. And so that is a power of the trustee, they can hire CPAs, they can hire, you know, housekeepers, they can hire just like any person, right. To be able to help beneficiaries and manage assets so you can continue to manage those assets. So if you can't be the investment advisor capitalized, I would not go out of your way to go try to find one to replace what hopefully, you know, you want to do that job instead. Your client you should think of as not just the beneficiaries, but the trustee if they're different from the beneficiaries. Remember, beneficiaries can be the trustees. There are certain, like tax rules about that. But generally speaking, most beneficiaries do end up being trustees for family type trusts. But you can also then go out and find a corporate trustee, etc. Corporate trustees be very careful, right? Because again, they also probably want to manage assets. So this is where there's a whole industry of trustees who say, hey, I don't want to actually manage the assets with you. I just want to, you know, guide the plan. So I understand like budget concerns, etc. How the beneficiaries want, you know, the assets to be managed. But I very much want to cooperate with you. I want you to stay on the accounts and you know, et cetera. So this, this is about you broadening your network as an investment advisor to have one of these corporate trustees. But again, remember, not every family will end up with a corporate trustee. In fact, I would say few would in the grand scheme of things. So it's still about a person to person relationship. So who are going to be the trustees? Is it the same as the beneficiary, et cetera?
- [19:32]
B
Perfect. Anything else that we need to think about is advisors to help kind of manage this relationship. And I honestly, I'm the person that kind of like hates this. Like how do we keep all the assets here? Like, I think like if you're a really good advisor in general, you're doing really good work, you're being extremely valuable. Like most times, like with me, like my clients are trying to get me to work with their parents or the parents are trying to get us to work with the kids. Right. Like, I think I hate the idea of like what schemes or things do we do to bring them in? It's more so like just try to be a really good person that cares about the client and do good work for them. And if that happens, most times it's going to come back to you.
- [20:10]
A
Yeah, I think my always, my one practical sort of like rule is if your client, the person who has the relationship, who maintains a relationship with you. If that person died, would you be the call that their spouse or kid, you know, thinks to dial? Or might you find out, you know, months later and you don't want to be in the latter category. And it will come to you naturally what you do, hopefully, to try to be in the first category rather than the latter.
- [20:43]
B
And I think you know that by do they reach out to you in life events? Like, are you one of the first people to reach out to when they are pregnant or when they start a business or when they get a new job? Right. Like, if you find out retroactively about things in your client's life months later, you're probably going to get replaced down the line because if the main person isn't thinking about you in these, the secondary people in the family are definitely not. So I think what you said is a really compelling way to to think about it. Okay, perfect. I feel like that's everything that we needed to hit on today, everybody. Appreciate you listening. Don't forget to rate and subscribe to the podcast and we'll see you back for another episode here in a couple weeks.
- [21:33]
A
Sam.