Ep.11 - Entrusted - A Model For Good Stewardship in Estate Planning

Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Welcome back to the Good Steward Law and Wealth Podcast for another episode. I think this could be episode 12, somewhere around there. We are getting a lot under our belt. So it's exciting. And today what I wanted to talk about is Entrusted Planning. It's a model for good stewardship in estate planning. The basis comes from a book called Entrusted. It's by David York and Andrew Howell. So it's a pretty popular book that I have here and I reference it and read through it pretty regular to try to understand their philosophies on it. But, um, basically Entrusted is a method for estate planning and how to empower your heirs. And then recently I've been reading a book called Wealth 3.0. Um, it's a, from a financial advising standpoint, but they hit on a lot of what Entrusted does and how to mesh the financial side with the estate planning side. So I've been really excited about the concept of Entrusted planning. And to illustrate that, starting with Wealth 3.0 mentions in the book a lot about the saying that you may have heard, shirt sleeves to shirt sleeves in 3 generations. So, what that means is on one end of the shirt sleeves, you know, the first generation, the patriarch or matriarch earns the money. The second generation either maintains it or dwindles it, and the third generation loses it. It's a common expression, and I think there's even a version of it in Chinese and in most cultures that basically says, you know, if one generation's going to lose the money by the third generation. And a lot of advisors use that phrase to encourage planning, to plan ahead. And in fact, when I started becoming an attorney, that was the mode we used. We used that saying all the time. To encourage people to begin planning. But when you use that saying, you're operating out of a position of fear rather than power. So, I don't always like operating out of a position of fear. If you're motivating someone by fear just to avoid negative consequences, it doesn't really have a purpose behind it and they don't have power behind their plan. So, what I like to do and what Wealth 3.0 and Entrusted talk about is operating from a position of power where you are entrusting your family and the next generation to manage your wealth rather than use the shirt sleeve to shirt sleeve saying. The book defines entrusted as aligning principles and values of a family with tangible assets and structures that prepares future generations to build a lasting legacy. Um, it goes on to say another version of that is transferring opportunities instead of assets over multiple generations. So, all that to say, what it means is it gives you a way to take your values and your principles, combine it with your assets, and have an impact within your family for multiple generations. So, that is the entrusted model of planning. And really, I like to think about that in every estate plan that I do. We really want to make sure the way we pass things on empowers the next generation so they're set up for success rather than failure. And some of the disciplines that go into entrusted planning, they list really about 7 of them in the book that I found really interesting to dive into. One was entrusted families know who they are and what they believe. So, they know their values and they know their purpose on this earth. And the second one, entrusted families prepare the family for the wealth and not just the financial wealth for the family. So, that's education and training. They prepare kids and grandkids with education and training to be ready for what they're going to inherit and what they're going to steward. Third one, entrusted families maximize the positive benefits of financial wealth and minimize the negative effects. So that one kind of explains itself. They are being good stewards of their wealth and maximizing all the positives and the impact that it can have while minimizing any negative effects that you may see with other families or other generations that come from being trust fund babies or inheriting a lot of money. The fourth one is entrusted families focus on flint and kindling and not the fire. I really like this one because the flint and kindling is the training, the education, and passing on the values of what got the family where they are. What were the inputs that went in to build the wealth? So, if you're focusing on the inputs rather than the end result, then the fire is going to build itself. So, I really love that saying. Entrusted families are generous, so they give back to their community because they want to have an impact in their community. Entrusted families preserve and protect wealth. That's where I come in a lot of times is to help families preserve what they built through legal structures that protect them. And they preserve it for multiple generations. So, it's not something that's built over one generation and lost by the third. It's preserved and protected. The last thing, entrusted families design and implement dynamic governance. So, that is what we'll talk about a lot today is a family governance structure, how you elect managers, how you elect, you know, the next generation to take over? What is your family constitution? Maybe family values, your mission statement. You know, they always have that in place when you have an entrusted family. Um, so where does all this start? Well, it really starts with the family itself and the children. Um, there's a proverb that goes in to say, give me neither riches or poverty, give me daily bread. So that's kind of like the flint and kindling that goes into the fire. The riches will take care of themselves. Give the daily bread, the income that sustains the family, provides for them, and enables them to maintain it through generations. Warren Buffett says it a different way, you know, the famous investor. He says, leave kids enough to do anything but not enough to do nothing. So he's talking about empowering them, giving them opportunity, but not enough where they can just sit on their hands and not have value to society. And really, I think about it like a hierarchy of needs. You, when you do an estate plan, you don't always have to be thinking about, oh, I want to pass on something to the next generation. You know, the first level of your hierarchy is provide for you and your spouse. Make sure you have the income and the wealth to live your life. And then the second hierarchy is when you have kids, you got to make sure you have that same income and wealth to provide for the kids and make sure they're fed, they're clothed, that kind of thing. But then the third hierarchy, when you really get to where you're going, is your job as a family is to educate and deploy children into the world to be good citizens. So, that's kind of the hierarchy of the entrusted planning. So, when we're talking all this estate planning, we're not always talking after death. We're talking while you are living. Our primary responsibility to our kids is to give them the tools they need to be self-sufficient in the world. And those tools can be a lot of different things. Money is a tool, but so is education. So is passing on values, religious beliefs. It could be entrepreneurship. It could be personal finance. All those are tools that enable our kids to be self-sufficient. And that's really what we're doing here is rather than an end-all be-all of assets, we want to pass on tools that can help them in the future. And those assets can then be used for impact if they have the proper tools. We did an impact study with my law firm after 1 year in business just to see were we actually making a difference. And just basic numbers, just say we had over 100 clients or so that did estate plans with us. And if you add up all their wealth, it was well over $200 million that they did. With us in their estate plans. So, that means over $200 million is passed on responsibly to the next generation. And when you look at it at a per inheritance per estate, it's over $2 million per estate. So, think about the impact that that $2 million in a community can have per family because that money is usually staying in the community. It's going into a small business, it's going to churches, it's going, you into the economy and having a bigger impact because those families that you passed on the wealth to are prepared for it and they have it in a protected manner. So, the impact can be pretty big. But a lot of people start thinking, well, if I really want to have an impact, why don't I just leave everything to charity? And I think charity is a great thing because you're able to pick out something you're passionate about and leave money to that organization. But I see charity as an end-all be-all. Once you leave the money to the charity, it's theirs and it's done growing. It's done having its impact beyond the lifespan of that money. So, what I really like to do with families is talk about how you can leave the money in a better way to have a more lasting impact. And there's a book called Your American Legacy by Stan Miller. And he goes into charitable giving pretty in-depth in some unique ways. And one way to do that that I really like with the family is set up a family donor advised fund or a family foundation where your family is on the board of this foundation or this charitable organization because it's your money. So, every year you're deciding where to give this money, but that decision takes place at the family table, you know, maybe Maybe you meet every year around Thanksgiving and you implement a tradition. You serve the same food, you serve, you know, you go to your family cabin at the same location, or you sing songs or whatever it may be, but you implement a tradition that the whole family is involved in. And that means the younger generation is watching the older generation decide how they're going to have an impact that year, where they're going to make gifts. And it doesn't have to be a lot of money. It could be, you know, that you start out with $1,000 in a donor advised fund and each year you decide how you're going to give that. But what I really like about this model is it implements a tradition that could last generations because the whole family is involved in it. And what he said and he advised doing is maybe when the kids turn 12 or whatever age you want, they come prepared with a proposal that year for how they want to give the money. So, it brings the kids into the situation and they're getting to experience the power of giving. And the impact it can have. But not only that is you're growing the wealth, so you're still managing it. You're not just giving it to a charity and being done. It's an active way of setting up charitable giving that can last for families for generations and generations. So, I really advise doing that. That was a bit of a side note, but charitable giving comes up a lot in what we do. So, there's a way to entrust your family in the charitable giving process. But when we get down to the technicalities of all this is how do you set up something that entrusts your family and empowers them? Well, we can start with kind of the history of trusts themselves. So most of what I do is trusts. How did they start? You know, it started way back. I think I was reading 1780-something, you know, way back in England when they set this up. What they needed to do is, you know, men own land or farms, but they would have to go off to war. Or crusades, and they'd leave their farms there. And they'd always come back and the farms would be gone or taken over by someone else. So what they started is entrusting someone to manage the farm for them while they're gone. But even then, they'd come back and that person they entrusted either didn't do their job or took it for themselves. So then they developed what is called the trust law. So basically, the courts got behind it and said, you can name a trustee to manage your land for you while you're gone. And it is their duty to protect it. But the key to all that, it really wasn't about the legal structures. It wasn't about the land itself. It was about naming a person. And they held that person responsible. So you had to name someone you trusted, but it was about that person. Today, kind of the law has evolved more into it's all about the legal side, the wealth side, and less focus on the trustee themselves. But the trustee is where the real magic happens. And that's how, that's where the word entrusted comes from, is a trustee that you entrust with your wealth and your assets for your family. So, you have to train that person, you know, that person, that trustee has to know your family values. You, they, you have to have a mission statement, you have to give them a reason and something to look at as they manage the wealth. Why are we doing all this? Well, it's to align with our family values and our family purpose, and this is our mission statement. So, every time the trustee or trustees make a decision, they look at it. Does this align with the goals that we set up as a family? And it's a great way to entrust and empower someone to have an impact on your family. And that starts with the technical side is a family structure. So, you have to— name leaders and a way to elect leaders. Maybe when you pass away, you name your kids as the trustees, but when you get to the next generation and there's 12 grandkids, how do they elect a leader? You need to have a management structure for electing a leader. That's number one. Number two, you need to implement a governance system. This is like our constitution. This is how we elect those leaders, but also how they are governed and managed and kept in line with checks and balances. And the third one is you got to have goals that are flexible. So, the goals are your values and your purpose, but they have to be flexible to be amended and molded the way society shifts, economic things shift, taxes shift. Your elected family leaders can then take the goals and use those as a guide. And this really can occur with families that we've done this with is annual meetings. They have this family structure set up and then they have annual meetings when someone may need— maybe they need to elect someone new. Then they have an annual meeting, you know, at their family cabin, or they rent a house on the beach somewhere and have these family meetings to elect new members and decide how the wealth is going to be managed. One way I think about this is like a relay race. You know, you have a 4-person relay team and on a track relay race, and at one point, each person on that 4-person team is running by themselves. It's their job to run the race, and they are alone in this race. But at some point, they reach closer to their teammate, and there's a point where they're both running together. So that's the exchange zone. You know, they're both running together before they hand off the baton. And then when they hand off the baton, it's that other person's turn to run the race by themselves. But the key there is the exchange zone. So, if you're having these family meetings and the governance set up, the younger generation is involved in all these decisions and they see it played out by the people ahead of them so that it creates that exchange zone, that time of training to where they're able to pass it on to the next generation in a successful manner. And this is how I set it up with a lot of my trusts that we mentioned, you know. Sometimes with the trust, we name a trust, a co-trustee at age 25 so the kids can have someone there with them, work in that exchange zone for how many ever years we deem appropriate before they pass on the baton and say, now you're your own trustee. So a lot of times I use age 25 and then 30, so they have that 5-year exchange zone there. And that's where that concept comes from. And one quote that I like to read from the book, It's actually a poem. So, let me find it here. It's, if you look it up, there's a poem called The Bridge Builder. I'm not going to read the poem, but the concept is an experienced and successful person stops his journey to devote the time and effort necessary to create a structure that will make it easier for those who come after him. That's a bridge builder. So, you're building a bridge. One thing that comes to mind is a lot of people come to me and don't have a plan in place. Someone never took the time to build the bridge and set up the structure. So, I don't want any of my clients to be that person. So, we need to plan ahead and set up the structure for success. And what does that look like? Most of the time, it looks like, um, a trust is what we deal with because there's 3 forces that really erode financial wealth over multiple generations. Um, the first one is division of assets among generations. Second one is transfer taxes. And then third is just business or financial risk. But I can show the impact of that with, we talked about just the division of assets itself. So take a family. Um, let's see how I ran this example with, there's someone, a family that has $30 million. So it's a ton of money. Husband and wife, they have 4 kids and then maybe their 4 kids each have 4 kids. So, if you just look at the breakdown of that, by the time you make it to the third generation, so the great-grandchildren, I think it's 1/64th if they each have 4 and 4 kids, then each grandchild only gets about $460,000 from that $30 million. That's a big difference. And it just shows you how wealth divided can dwindle pretty quickly. And that's just dividing the wealth. That's not even considering estate tax planning. So, um, when we look at estate tax, honestly, that is almost cut in half. When I ran the numbers on that same family, if you take in a 40% estate tax, which would happen with zero planning on a $30 million estate, then each kid only gets about $270,000. So from $30 million down to that little number, which is still a big number but not compared to $30 million, then you can show how much impact poor planning can have. So, what I like to do when I think about planning is how can we keep the assets and the wealth together? That way it's growing, but still empower the proper people. And one good method for the entrusted planning is creating a trust, but within that trust, it's first built on the family governance that you set up. So, a way to elect trustees, a way to elect a board of trustees. We want multiple people with different backgrounds. In a way to elect them in a way that's never at a standstill. It can't have a deadlock. You know, we have a system where everyone has a vote and we're electing someone the family wants. So that is how we elect trustees is an ongoing system based on the governance that you set up. And what is in that trust? Well, it usually is a family LLC. So a family business that owns all the assets, maybe it's real estate, Maybe it's other businesses, maybe it is investment accounts, you know, whatever it is, a family LLC owns that. The board of trustees can appoint a manager to manage that LLC, make the day-to-day decisions, and then that manager answers to the board of trustees who is answering to the trust where the values are set up. So it's a governance that can last for generation to generation, but an even bigger impact that it can have is that Family LLC can make loans to the family members. Maybe you have a young 30-year-old heir who wants to start a business or wants to buy his first home. Well, sometimes, like here recently, rates are pretty bad and it's hard to get a loan that fits, that's viable. So, he could go to the Family LLC and present his business plan to the board. The board could look at it and say, we like that idea, we will loan you the money. At low to no interest. So it's a way to build wealth for each family member, and this can act as somewhat of a family bank. There's a— I think it was either a book or an article about the Vanderbilt family that, you know, Vanderbilt was one of the richest men in the history of the world. And here recently, is within the last 20 years maybe, that they had a reunion for the Vanderbilts to get together. And there was tons and tons of heirs, but only one of them was worth more than $1 million. And don't quote me on this, but I think it was Anderson Cooper who just happens to be a Vanderbilt heir, and he kind of built his own money. So it had nothing to do with what he inherited. But that shows you that wealth can really dwindle quickly if not managed effectively. And the Vanderbilts weren't because they gave it all away. It's just because they weren't good stewards of the wealth. But then you look at the Rockefellers and their wealth has made it generations because the Rockefellers are still around today and still very wealthy. And it's because they set it up in a way to where the family legacy could be passed on. And they really bought into the family bank motto to have an impact. And now, each Rockefeller is productive. I don't know about everyone, but they're productive in the world. But they're also big into charity, politics, whatever it is. So, they're able to have an impact in the way that their family sees valuable. So, that's really the entrusted planning. And I just wanted to lay out that model. I highly suggest anyone go get the book Entrusted and read through it because every plan we do, we want to set it up in a manner that empowers the next generation. I don't want to come out of a place of fear. We want to implement training systems, family governances that can work for the family while you're living, but also for the next generation and the generation after that. If you're interested in any of that, I'm happy to sit down and talk with people on how you set up the trust, how you set up the family governance, and workshop some ideas of how do we even decide our family values. Do we have a family retreat and sit down and decide those values and mission statement? I have templates, you know, all kinds of things that can enable you to do that. So, um, that's the, the model here, and I encourage anyone to read the book Wealth 3.0, Entrusted, um, and explain how we can be good stewards of our wealth. Thank you for listening.

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