“I think that integration is the absolute top element that is consistently missing in that the family office structure and planning is not tied into the family life, or culture, or their businesses, or their estate plans, or their tax plans. In fact, often all those plans were done by four or five, 10, or in one case that I know of, 31 law firms! So the result is it’s not integrated. It’s not elegant. You know, there are contradictory, conflicting elements,” Handler says.
Conflicts bring up the most loaded word in the high-net-worth vocabulary: risk.
“Things that achieve a tax objective can result in an estate cost. Or you can achieve a tax objective and include a prenup that creates an estate plan conflict. So doing this at a high level is challenging and requires expertise,” he says. “As a result, these families rarely have a big enough appreciation of risk management. They don’t realize the kind of risks that they’re subject to. They don’t systematically minimize liabilities, or buy sufficient insurance, or have umbrella policies.”
Handler speaks with passion, even when it’s about minutiae. Why? Because it’s important. It’s what sets the bar.
“The lack of crossing the ‘t’s’ and dotting the ‘i’s’ is highly problematic. We advocate using an implementation checklist. So it’s much more of what an auditor would do in a public accounting audit. You go through each step, tick it off, and sign it. Somebody reviews it, they tick it off, and sign it. And you can’t close the file until all those pieces are done. To give you an example, somebody makes a gift year-end. First, the asset has to be transferred, gotta be valued. We do that valuation under privilege. We then would do a declaration of gift, making sure that the donor signed it and that the trustee it went to accepted it. Now we have paperwork on both sides.
“Next, we make sure it physically got transferred by the brokerage firm that’s actually in the trust. And then we make sure that the equity ledger of the entity that it came out of gets updated to reflect that the capital came out of the account. And then a gift tax return has to be filed. And that return needs to have a valuation report attached to it and needs to, in the case of our client, needs to be generation-gifting tax allocation, in addition to just the disclosure of the gift tax. So to get that done, if you miss any of those steps, you’ve got a potential problem and a risk.”
Whew. I am exhausted just listening to that blistering account of what it takes to merely make a single gift as an ultra-high-net-worth investor. But I get how important details matter. That is my takeaway. And while I don’t know diddly about estate planning or family office structures, Handler’s command of the small details is impressive. Which is why, I suppose, billionaires hire him.
Often, his clients don’t start off with such huge sums, however; they grow into it. And that creates even more complexities. Take the case of those naked transactions, for example. This is when someone uses company stock directly—and that is important, the use of actual stock—to fund an estate planning vehicle such as the grantor retained annuity trust (GRAT). It can be a brilliant vehicle to reduce estate taxes at death. Sam Walton famously used one, so that when he died his estate had reportedly only thousands of dollars left in it and a pickup truck. The bulk of assets flowed to his heirs. But if a GRAT isn’t designed properly, it can be disastrous.
“We’ve had this happen with newer family offices,” Handler says. “One of our billionaire clients made numerous transfers and let his brother be the trustee. The brother was also the general partner of several family partnerships. And ultimately, they kicked my client off the board of the largest company in the world in its space—a public company that he founded and served as chairman of. They kicked him off his own board and disenfranchised him from his own company. And we ultimately had to pay off the uncle, who my client made rich, to get the company back. So we took back the public company, ultimately took it private in a series of difficult and complicated transactions.
“At the front end, had he not given them the stock [and instead used family partnership or family limited liability company interests], he would have retained control. He would have been able to vote that stock.”