In the fifth installment of the 3 Pillars Podcast, the Managing Director and CEO of Asena Advisors – Peter Harper, and this week’s guest – Andrew Auchincloss discuss the idea of governance and the fiduciary responsibilities in a family bank or family office setting and how they can provide strength for the long term.

To watch or listen to the full podcast, click the link below or just press play:

https://asenaadvisors.podbean.com/e/the-legal-rule-book-and-the-role-of-the-fiduciary/?token=a528a4b431d7a34f9f6ea6a88e64c828

 

TL;DR

Peter Harper: Any advice that works in the area of private client advisory or wealth management has seen firsthand the impact that poor governance practices can have on significant wealth. It can be mind-boggling to watch a very intelligent person refuse to acknowledge their own mortality and witness the counties that can be left behind, where an individual effectively transfers their issues to their children at death. So I’m joined today by a very good friend of mine, Andrew Auchincloss. Andrew and I have known each other now for close to seven years, worked extensively for various clients. Andrew has practiced almost exclusively in the area of intergenerational wealth transference and tax for most of his career. So, Andrew, would you mind just starting by giving folks a bit of information about yourself and the area of law in which you practice?

Andrew Auchincloss: Yes, Peter, hi. So I graduated from law school in 1989 and I joined big, big law firm in New York City, White & Case [LLP] where I was for 18 years with a high emphasis on private client practice with a big international component. I decided 2007 to go to an investment house, Bernstein [LP], where I was for six years in their wealth planning department and also in their international group. I decided to leave the industry 2013, and I went to Sidley Austin [LLP], another big firm where I was for three years, and now I’m at a boutique firm in New York City. There’s 12 of us at Schlesinger Lazetera & Auchincloss [LLP], and all we do is private client work.

Peter Harper: So, you’ve got experience on the topic, which is which is great. Yeah.

Peter Harper: So. Andrew, I mentioned briefly before we kicked off that this year the purpose of the series is to prepare first-generation, high net worth individuals that have had significant liquidity event that may not have thought through this idea of a family office or governance around material wealth. Right. That the rulebook of how they are managing wealth within their own lives and then and then for future generations. And so the purpose of today’s I wanted to leverage off the depth of your expertise, educate the listeners on some basic concepts, and then maybe dive into a bit more detail into different areas that you think might be relevant. So one of the first. Items that might be a new concept for some folks when they’re thinking through this is when they’re thinking about the idea of governance, is this concept of a fiduciary and fiduciary responsibilities. Can you sort of briefly touch on it as a concept and how we think about it as lawyers and know why folks might want to understand what it is and what it means when it comes to building out a family office or sort of wealth transfer plan?

Andrew Auchincloss: Sure, sure. So, I mean, I guess fiduciary there’s a lot of flavors of fiduciary in the world these days. Fiduciary duties arise in the context of many different relationships. But I think we can summarize them all by basically saying that a fiduciary is someone who is playing with somebody else’s money. And so it is the law of playing with somebody else’s money. Most basic example is the trustee of a family trust, the trustee, whether an individual corporation doesn’t actually – they own the property as a title matter, the trust property, but they’re not the beneficial owners. So there is a division between who the controller is and who the beneficiary is. And in that instance, there’s a lot of law, fiduciary law about what the trustee can and cannot do with that money. In the most basic example for fiduciary duty is that the trustee has a duty of loyalty to the beneficiaries and cannot do things that are conflicted. So, for example, a trustee cannot buy or sell assets on his own balance sheet to the trust: that is a conflict of interest and against the fiduciary duty. So when these families start setting up all the structures, we’re probably going to talk about, there is a huge component of fiduciary law that’s going to apply in these entities. So that’s why it’s important for us.

Peter Harper: Yeah, and I think the reason why I wanted to sort of touch on it is that whenever I’m speaking to folks that you maybe have, they might have in their own career, if there have been a senior executive role or whatever else they might have been familiar with, the idea of fiduciary responsibility to shareholders that are governed by corporations, regulations and all that type of stuff. But when you’re talking about how to prepare for the transfer of significant wealth to future generations, working out, how, what is the law that’s going to assist us as we’re going down that pathway to ensure that if I want to give money away in a certain way, that the person that I’m handing it over to is not going to waste it.

Peter Harper: Right? I mean, they’re all those concerns that I think that folks have, right, when they’re starting to think about these issues. I think that – sort of leading off that – the term family offices thrown around a lot these days, it seems that any any family that has a certain amount of money is sort of classifying themselves as such. What would be helpful, I think, for folks to understand is that putting aside the designation of what a family of offices is, what the sort of legal structures that you would ordinarily expect to see this notion of a family office operate from.

Andrew Auchincloss: Right well, it’s actually hard to generalize as to what’s out there, because families are very, very different about this. You’re absolutely right. The first-generation wealth, it’s often hard to convince them that they need to prepare for what has become an extremely complicated world. Right. I mean, you’ve got taxes. You’ve got all kinds of choices with structures. You’ve got some fundamental questions as to how wealthy you want your kids to be versus what are your philanthropic interests. Sorting through this all on yourself would be extremely difficult. And so the idea is to build a team of professionals and maybe some employees who can help navigate this. The structure that that team takes is actually, in my experience, varies hugely. You see some families who literally get one employee. It’s a very trusted person in this. One person basically runs all of the accountants and all the lawyers and the investment advisers. You see other families set up offices with a hundred people. I’ve dealt with one family, that one hundred person family office that included art curators for their art collection. And so there’s a big, big difference. The key for people listening to this is you need to find the right structure for you and for your goals, because doing it on your own at this point is just too hard. And the world has become too complicated.

Peter Harper: Yeah, I agree with that. And as I talk to folks about how to be focused on longevity or thinking through this and saying, well, when we think about our legacy, whether that’s the maintenance of a multigenerational business, that we want to still be around in 100 years time, or it’s just ensuring that the family can still benefit from the wealth or the capital we’ve got today for multiple generations. A lot of these different folks will touch on the importance of buying through multiple generations and maybe that engagement happening through philanthropy or it’s happening through education. What in your experience, I mean, is there anything that you think’s more powerful – a more powerful tool than if your objective is for something to sustain, to be self-sustaining and exist after a benefactor is passed away? What do you think in your experience of what you’ve witnessed is amazing?

Andrew Auchincloss: Oh, you mean so sort of family that has a business that they want to pass on.

Peter Harper: Or they have had the liquidity event and have sustained it and now they’re saying, OK, we want to put these rules around this to make sure that: One, the wealth is sustained; and Two that the family members are interested in actually being engaged in whatever the family’s up to.

Andrew Auchincloss: Right. Well, so I, I would say that if there’s the liquidity event and the wealth is going down to the next generation “G2” let’s call it and then also then “G3”, depending on what the client wants. My feeling is pretty strong that you want the next generation to have a separated wealth. You don’t want everybody feeding on the same pot because that puts them in each other’s hair in a way that is very, very destructive to their personal relationships. In my experience now, you still I still have clients who say I don’t I want everyone to be together. I want them meeting. I want them investing together. I want my family to stay together. Which case you work with that. But I think if that’s liquid and it’s divisible, the next generation and the third generation will be much happier if they’re dealing amongst themselves with fundamental questions around investment and spending and all of that kind of thing.

Peter Harper: Yeah.

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Andrew Auchincloss: The philanthropy piece might be the component where I try to make the whole family stick together.

Peter Harper: So you might set a foundation or whatever it is. We’ll have everyone in the same strategy long term. But there is going to be assets carved out. Yeah.

Andrew Auchincloss: Right. Now where this is not possible, is if you haven’t had the liquidity event, where you still have the operating business that generated all the wealth is still in the family.

Andrew Auchincloss: And by the way, many families treat that business as one of the children or even more important in some cases than the children. It is the thing and the hope is that generation after generation, the family will work in that business and so forth. So now you can’t really separate it out because you got a single thing. Now you’ve got to be very, very careful about how this thing is going to be governed when the matriarch or patriarch is gone, who can call the shots. And here I try to encourage people to be realistic. Do not kick the can down the road, make some decisions. Usually, this means putting one child in more control than the others. That has a huge number of implications, some of which are good, some of which can be bad depending on who the child is.

Peter Harper: Yeah, I mean, it’s a really, really solid point. I feel like any time that it is pushed out and people don’t want to make the decisions, all you’re doing is taking the decision that you maybe didn’t have the gumption to make yourself – you’re pushing that on the people that may not have the right aptitude or the desire to make it without creating tension.

Andrew Auchincloss: Right. I think we can also say that you want your team, however it’s constructed, you want the generations below you to be steadily educated on how all this complication works. You want them when they deal with the trust to have some sense of it. You want them when the investment advisors come in to have some sense of what they’re talking about. You know, I don’t know how much tax law you have to pick up, but it’s very, very useful for the “G2” and “G3” to have some rudimentary knowledge on this stuff. So hopefully your team is bringing them into discussions earlier rather than later on some of these things.

Peter Harper: I know there is a million different ways that this can be crafted. You know, when I think about a liquidity event, it can be really dramatic, right. For certain people that have never really spent a lot of money with advisers, and when I say a lot of money, because the risk profile for that individual can change very rapidly. Right. So they might think that they can manage the same challenges that I had with one person. But in my experience, the depth of the challenges expand sort of rapidly. So, I mean, do you agree?

Andrew Auchincloss: Back to the point that the world is complicated and it’s too difficult. I believe tycoon’s – the great captains of industry of the turn of the 19th century in the United States. Now, with a single lawyer, I mean, the tax law was nothing.

Peter Harper: Sure

Andrew Auchincloss: With a single lawyer, they could organize their billions of dollars and have it all makes sense. That’s just not possible today with all of the possible tax points, philanthropy. And by the way, the complexity frequently drives the discussion when people get really overwhelmed by the complexity, you find they’re trying to answer questions based on the complex situation. I always encourage people to have a time out here, assume there’s no tax law, there’s nothing. Can you tell me what you would do in a tax-free world? And often you get a very, very illuminating comment as to sort of what the real goal is. And it’s just been distorted by all the complexity. But, yes, you need advisors to help you navigate this. Yes, they seem expensive. But in comparison to the problems avoided, I mean.

Andrew Auchincloss: You know, obviously, you and I are in this business, so we think it’s a very good investment.

Peter Harper: No, no, sure. I mean, I think that’s the biggest thing, right? I mean, the purpose of these podcasts is really to bring forward discussions that folks have never really had to think about, right. So as I think through this, it’s you know, if I go from paper wealth to liquidity, that’s 50 million or more. And prior to that, my cash flow is pretty weak. There’s a whole bunch of different I mean, really liquidity events, just an acceleration of cash flow. So you’re going, okay, well, I’ve got this money. Now what? Right.

Andrew Auchincloss: Yes, and you and I have to deal with international people all the time who, you know, beyond the domestic context, their lives are even more complicated because now they’ve got to figure out where are they going to be, where they’re going to be tax residents. Are they going to change for the liquidity event? Is there any opportunity to? What are the treaties say? So, yeah. So you and I are in a particularly complicated version of this problem.

Peter Harper: It’s great

Peter Harper: I think – I mean, if you’ve had experience that I think would be impactful around family governance structures and folks that are outside of them, that are marrying into the family.

Andrew Auchincloss: Yeah, I was going to say, I mean, in my ideal for a client is for them to have all of the benefits of wealth with as little title to that wealth as possible. because title to the wealth brings with it all kinds of creditor risk. Risk on divorce and other kinds of things where if you had the benefit of the wealth without the title, then a lot of those other questions are minimized or go away. And my happiest client is a very wealthy man who actually owns nothing. So, yes, he is the beneficiary of a very large trust. So for him, it’s very important that he understand very clearly how the trusts work.

Peter Harper: Sure.

Andrew Auchincloss: And what that really means. And so the trust structure I see most often with wealthy American families are these very large trusts. They have to have some cons. There’s some downsides to them in certain circumstances. But for the most part, it is a brilliant solution to a whole host of tax problems and governance problems. They’re very frequently used.

Peter Harper: Let’s say there’s money that’s being sort of doled out around the family or there’s they wish to assist and wish to be some degree of assistance, let’s say a family member, next-gen wants to buy a house or something like that, is it often the case that rather than handing money out, this little money lent out?

Andrew Auchincloss: Oh, yes, we will always be careful. So I call this a lot of people call this asset location. Right. You have the balance sheet of a family and who owns what. The size of the balance sheet is one thing but where things are in the balance sheet is a hugely important matter. So you want to educate the younger kids when they buy houses there should be a discussion around how best to do this, what entity should own it. Are there, you know, just confidentiality and privacy are the reasons to have houses in an LLC or are the reasons for a family trust to try to own them. What are the downsides to that? Yes, but you can achieve a lot of goals for family just by being careful about where things are on the balance sheet.

Peter Harper: And do you find expedient confidentiality? Do you find that has a major benefit because it stops folks from even starting a claim. Like, let’s say there was an opportunity for someone to start a claim and sue someone. Right.

Andrew Auchincloss: I think confidentiality is mostly from making it difficult for people to find things just by Internet searches or database searches. If someone is thinking about suing you and they really want to know where you live, I mean, they can find you and they can watch you go in and out of the house. So it doesn’t really stop the dedicated lawsuit, but it can be very, very useful just to keep certain things out of the public eye.

Peter Harper: So, if you’re focused around asset protection and confidentiality, is there any state in particular that your clients favor over others?

Andrew Auchincloss: Yeah, the states that most practitioners in New York that I know, high-end practitioners, we’re very fond of Delaware as the jurisdiction. The other states you hear about are New Hampshire, South Dakota, Nevada, there’s a few others that are trying to get into this. And these states are having a little bit of a competition as to who can have the most attractive laws for well-heeled clients to do their entities in. The states sell themselves very hard on the fine differences between their laws. I find that those fine differences aren’t so meaningful. I’m mostly interested in how good the court system is in those states because if there’s a blow up, I want it going to competent judges and competent court systems. So Delaware does very well on that. Can’t really comment on the other states on that subject. I know that California practitioners like Nevada very much so. I assume there’s a lot of good experience with Nevada.

Peter Harper: That’s helpful. That’s great. Andrew, thanks very much for joining us.

Andrew Auchincloss: Great! Peter, it is always a pleasure. Always a pleasure. All right. Take care.