This conversation delves into the intricacies of Qualified Small Business Stock (QSBS) and its significant tax benefits for founders. MICHAEL ARLEIN, Partner at Patterson Belknap, explains the eligibility criteria, the importance of strategic planning, and the potential pitfalls that can arise. The discussion also covers the implications of state taxes and the advantages of gifting strategies. We cover innovative approaches like the “GOAT” trust to maximize tax-free gains. Founders are encouraged to engage with legal experts early in their business journey to fully leverage QSBS opportunities.

QSBS is a powerful tax benefit for founders.
The maximum exclusion amount has increased to $15 million.
Careful planning is essential to avoid QSBS pitfalls.
Gifting QSBS stock can multiply tax exemptions.
State tax implications vary; California does not recognize QSBS.
Discounting shares can aid in estate planning.
Converting from an S-Corp to a C-Corp can preserve QSBS benefits.
Early engagement with legal counsel is crucial for founders.
Innovative strategies like the GOAT trust can maximize benefits.
Almost all businesses should consider QSBS eligibility.

00:00 Understanding QSBS: A Founder’s Guide.
02:56 Navigating the QSBS Landscape: Common Pitfalls.
06:07 Maximizing QSBS Benefits: Stacking Strategies.
08:42 The Importance of Timing: Gifting and Valuation.
12:03 State Tax Implications: The QSBS Challenge.
14:52 Entity Structures and QSBS: What Founders Need to Know.
17:37 Transitioning to C-Corp: Strategies for S-Corps and LLCs.
20:29 Who Should Pay Attention to QSBS?
23:44 Innovative Business Structures: Technology and QSBS-
26:36 Early Stage Strategies: Cloning Yourself on the Cap Table-

Frazer Rice (00:01.109)
Welcome aboard, Michael.

Michael Arlein (00:03.096)
Thank you. Good to be here.

Frazer Rice (00:04.617)
So let’s get started here. QSBS, Qualified Small Business Stock, is something that certainly all founders should be aware of. It’s a tax feature. It’s probably one of the nicest goodies that the federal government gives to people who are starting businesses. Take us through a little bit about what happens there.

For founders, you’re going to hear the numbers 1202, which is the section that is quoted here. Take us through a little bit about what happens at QSBS and why it’s a powerful feature.

Michael Arlein (00:37.496)
Sure, that sounds good.

To your point, the New York Times called QSBS a lavish tax dodge that is easily multiplied. And I happen to. I’m not aware of any other provision of the tax code that can save anyone as much money as QSBS. It’s really incredible.

I think the policy reasons behind the provisions are that they’re designed to encourage entrepreneurship. Everyone on both sides of the political aisle is in favor of. The basic premise of it is that if you create a company.You own the stock for five years. The company’s in the form of a C corporation,

It’s not in one of a series of restricted industries. Mainly service industries, that when you sell the stock, you can exclude from paying tax $10 million, the first $10 million of your gain. That’s the old rule, which I’m still dealing with, that that’s for stock that was issued before July 4th, 2025. And now QSBS has gotten even better.

So if you get stock after that date. You hold it for actually now three years, you can exclude ultimately up to $15 million from tax. So we’re now dealing with two different regimes. I’m still stuck in the old regime. Most of the people I’m dealing with got their stock before last July. But I’ll try and point out the differences as we go along.

Frazer Rice (02:29.066)
Sure, as you said, there are a bunch of things you have to jump through. To make sure that you can sort of apply and then to further comply with the rules associated with it. Things like services. Making sure that maybe you don’t have too much cash and that it’s deployed correctly. Making sure that the original stock issuance persists throughout.

What are some of the things that you tell your clients? How do you walk them through the process so that they don’t trip on themselves and lose this nice tax advantage?

Michael Arlein (03:09.676)
Yeah, there are some landmines, things that you can step on and blow it. There’s some weird rules around redemptions. Like if you have redemptions. Let’s say you create a company and then there’s three co-founders. Then very early on, one of the co-founders wants out or you want to kick them out.

And then the mechanism for that is the company kind of buys back their stock. You know, there’s complicated rules that can, you know, blow up QSBS for the entire company. I think some people start their businesses as LLCs or S-Corps or things like that, and then later convert them. And that has to be done very, very carefully with good tax advice.

Otherwise that can also blow things up. When I talk to founders, it’s pretty clear their business qualifies. They didn’t screw anything up.

Frazer Rice (04:19.626)
So the OBBBA in a sense turbocharged a little bit the tax savings. That five year requirement that you talked about. You can now get some of the benefits even as early as three years. And then the dollar amounts got expanded. In addition, and this was not necessarily OBBBA related. The ability to take one exemption and maybe multiply it via stacking continues to be a powerful tool.

For those people who are walking into your office now. How do you get them when they sit down situated so that they do that planning upfront?

Michael Arlein (05:08.598)
Yeah, that’s, you we kind of buried the lead.

The benefit of QSBS: it would be incredible if you could just pay no tax on 10 or $15 million. But what’s even more incredible is that you can stack or multiply the number of exemptions. You have using a provision of the code. It says that if you gift QSBS stock to some other person or entity. That that person or entity can take their own up to 10 or 15, their own QSBS exemption.

I’m just gonna say it’s 15. We understand that’s for newly stocked. So, classic move for a founder would be to set up trusts for children. There’s a special kind of a trust for a spouse. You can do this with sometimes people make trust for their parents, their siblings.

There are certain states where you can actually make a trust for yourself. Usually when people come to my office, the conversation is around creating entities. Typically trusts, and then gifting shares to those trusts. that

As a family, you could go from 15 million tax free to 30 or 45 or 60 million tax free. The record I had one guy who had a very large family. He married, he had kids and was very close not only with his parents. With his siblings, his nieces, his nephews, even his aunts, uncles, and cousins. He created 23 trusts, which on paper at least would save up to $230 million. Wow. Yeah.

Frazer Rice (07:08.896)
There’s a danger with that though, with those 23 trusts had to be different. I imagine the IRS would say, wait a minute, we see what you’re doing. Stacking all of these different things is theoretically nice and all, but is there a way to create differences within those trusts so that the IRS doesn’t view them as one big pot?

Michael Arlein (07:39.692)
Yeah, great question. So you can’t create multiple identical trusts. Meaning I can’t create five trusts for my child. The IRS has rules that consider those trusts as one trust and would have only one exemptions. So, one of the limiting factors on creating trust is often, who are the people you’re willing to gift to? You know, so this guy with the 23, he actually was willing to create trust for his cousins, his aunts, uncles.

Now, those individuals were the beneficiaries of the trusts, which means that they were eligible to receive money from the trust. But those trusts were designed so that when those people passed away, the money would circulate back to his children. So, you we never talked about it, but it’s possible that in his head, his plan was that he would maybe provide some benefit to his cousin.

Maybe he’d say to his cousin, hey, if there’s $5 million in this trust and you need a little money, I’ll make some distributions to you, but I’m going to request that the trustee kind of withhold most of the money. And then when you die, it’ll come back and benefit my kids. So there are nuances there.

But generally speaking, most people aren’t willing to do that. They’re not close enough with their cousins and their aunts and their uncles. So they end up maybe creating trusts, you know, for their kids, for their parents, sometimes, you know, for their spouse and maybe sometimes they go a little beyond that, but not that far. One thing that’s important is that the U.S.

Frazer Rice (09:33.472)
One thing that’s important is that the the QSBS is a capital gains tax Concept meaning you’re you’re saving on the tax. From a QSBS for Founders standpoint when the the founder sells the business, and you have to pay capital gains tax on that front. Part of the reason I’m skewing this toward founders is that there’s an gift in a state exemption of 15 million dollars.

So it’s important to get these assets into these trusts as early as possible and with as low evaluation as possible. That in many ways is where the real leverage is. Does that square with your thinking?

Michael Arlein (10:11.019)
Yeah, absolutely. We have a permanent $15 million lifetime gifting limit. $30 million for spouses. And when you gift stock into these trusts, you’re typically gifting at a common stock valuation.

People are familiar, founders are familiar with common stock valuations because they do that for purposes of issuing stock options, you know, the so-called 409A valuation. Now, a gift tax appraisal is different than a 409A valuation, but in many ways, they’re very similar.

S0 founders know that, you know, they could be raising a preferred round at $10 a share, but their 409A common stock valuation is still $2 a share. So you can get a lot of gifting done. You can give a lot of shares away.

You know, using your $15 million exemption, even if the company is very valuable. So we see founders doing this sort of gifting, you know, late in the game, even right before a transaction or an IPO. But if you had a crystal ball, or at least, you know, you were willing to take some risk, obviously, the earlier you do it, the better, because you could gift…

I mean, theoretically, if you set up trusts and you gifted shares the day after you created your company, they would be worth essentially nothing. And so you wouldn’t have to use hardly any of your gifting exemption.

The problem is most people, A, aren’t thinking about that on the day they create their company. They don’t have anyone whispering in their ear and telling them to do that. And number two, they wouldn’t want to spend the money on legal fees to set up structures because at that point they’re like, don’t know what this is going to be worth. This could be zero. This could go out of business in a year.

So there’s a trade off that I see between doing this later in the process where you’re gaining visibility into outcomes, maybe for younger people sometimes, you know, there’s visibility into their family lives. Maybe when they founded the company they were single. Then if they wait five years they marry, they’ll have children, i.e. people who they could create trust for. But the cost of doing that is that you’re gifting at a higher value.

Frazer Rice (12:46.591)
One of the considerations that people don’t understand is the state tax implication. QSBS is a federal concept that a lot of states join onto and link to. But a state like California isn’t. And so sometimes that can be an untoward surprise to people that there’s a state tax that happens that they may not have expected.

Michael Arlein (13:16.299)
Yeah, it’s kind of bizarre that California, the home of Silicon Valley, doesn’t recognize QSBS. But most states do. My home state of New Jersey, in fact, very recently joined the QSBS club and now recognizes it at the state level. There are a few other states, I think.

Pennsylvania, I don’t think recognizes it, but the vast majority of states do. But unfortunately, if you live in California, you’re probably only in quotes saving the federal tax. But the federal tax on $15 million, 23.8 % of 15 is a pretty big number.

Frazer Rice (14:01.086)
No question and absolutely worth doing. one of the things that I find happens is that from an income capital gains tax perspective, we’re on top of it with the QSBS. When we get into the estate planning world, we use the concept of discounting, meaning putting QSBS shares or any shares for that matter into other entities so that you get discounting for lack of marketability and the ability to make decisions around it.

Are there any tripwires on that front as far as putting things into other LLCs so that you don’t, maybe in a sense that in trying to really maximize the estate planning and the estate tax avoidance that you create issues that might cause problems with your QSBS tax avoidance usefulness there.

Michael Arlein (15:02.413)
Yes. Again, the rules under Section 1202 of the code for QSBS have some strange traps for the unwary and some gray areas. And one of those gray areas is around transferring interests in partnership type entities, which would mean like an LLC or a partnership. that owns QSBS.

So essentially, it’s very clear that if you have QSBS stock and you gift it into one of these entities we’ve been talking about, that that entity would take the QSBS attribute and be able to enjoy the benefits of QSBS. If the QSBS is held in an entity like an LLC, let’s say you set up a, well. Let’s say a realistic example is that you made an investment in a venture capital fund that invested in an early stage company that’s QSBS.

And now you’re a limited partner in that fund and you know that that fund is going to have a large exit in this QSBS position and that you’re going to get the benefits of that, but it’s going to exceed $15 million. So you say, what I should do is I should take my interest in this venture capital fund. I should give them to trust for my kids so that when the fund distributes those shares or distributes the proceeds from selling that company, it’ll be split among various entities and I’ll be able to stack QSPS. The transfer of an interest in a fund that owns QSPS, there’s a gray area about whether the recipient of that fund interest would actually have QSPS and it’s generally viewed as something to be avoided.

Frazer Rice (17:08.944)
In a sense putting it at risk. A question that I think pops up is that there are people who started businesses maybe pre that July 4th date that you were talking about and maybe they chose an entity like an S Corp or an LLC that isn’t sort of a good qualifying C Corp and they’re looking and saying you know what I may be able to sell this business three to five years or beyond and take advantage of this QSBS. Are there avenues to be able to change that tax elections so that you can begin that QSBS and what’s the analysis around?

Michael Arlein (17:44.972)
Yeah, in fact, a fairly common structure is, and we haven’t really gotten into these details, but it’s a great question.

So QSBS is actually the greater of $15 million or 10 times your basis. Now we ignore the basis rule for the most part because the vast majority of founders do not have basis. They create their company and they put nothing into it.

With a bank account with $10,000 in it, and they’re not contributing actual dollars into their business. And so the 10 times basis rule doesn’t actually apply.

But there’s a way for a founder to take advantage of that, and this strategy is actually called PACKING.

And the packing strategy involves starting your business as an LLC and with an LLC and then converting it to a C corporation. with an LLC, when you convert, there’s an attribution of basis to the founder based on the value of the LLC’s assets.

Theoretically, if you started off as an LLC, and before the LLC hit $75 million value of its assets, $75 million being sort of the cutoff for qualifying for small business, you have to acquire your stock before your company assets are worth $75 million. Theoretically, let’s say you did that when it was $74 million, then if your basis was $74 million,

10 times your basis would be $740 million, you would have up to $740 million tax free. So people kind of play this game. I think for a lot of companies, it’s not realistic to be an LLC because venture cap, if you’re going to raise venture funds, they want you to be a C Corp. This works for bootstrapped companies, but most companies are forming a C corporations.

You know, there is a path to convert from an S-Corp to a C-Corp and preserve QSPS for Founders. I’m no expert in that. All I can tell you is that it has to be done very carefully and very specifically. And I’ve seen a lot of people who didn’t know they needed to do anything specific and they do not qualify for QSPS.

Frazer Rice (20:45.085)
As we sort of, I’m not going to say wind down here because we may have some other topics that pop up. But when someone walks through their door, I guess maybe the way to think about it is, who does this apply to?

You said the services industry. So accounting, finance, that type of thing- NO. For those things that venture tries to invest in, whether it’s software or other processes, who is really should be paying attention to this?

Michael Arlein (21:16.491)
I mean, I think almost anyone should be paying attention to this because it may be that you don’t qualify, but often people do. And more often than not, you do. This has broad application for most businesses. There are excluded industries, architects and lawyers and accountants. But if you’re doing something in the tech world, you’re probably going to qualify.

It’s good to get some advice from the corporate lawyer who’s helping you create your business. I think one of the considerations of whether you form as a C Corp or an LLC is probably the availability of QSBS status. You know, I think stacking strategies, it’s worth having a conversation probably sooner than later with a lawyer to find out what the menu of stacking options is.

I talk to people all the time and we decide it’s premature for them to do something. And then they call me back a year or two later and all the time I’m calls from people who say, hey, we spoke a few years ago and now

Frazer Rice (22:34.013)
Alright.

Michael Arlein (22:39.913)
the time is right. So it’s good to get educated, learn what the options are. QSBS stacking is not just about giving shares to your kids. There are strategies that are specifically designed for single people where you can create these benefits for yourself and

You know, it’s too good to be missed. if you, I do talk to people who say to me, they’re usually on their second venture or third venture and they say to me, I really screwed this up the first time around.

I paid no attention to it and I was focused on my business and I just screwed it up. I literally cost myself millions or tens of millions of dollars had I done it correctly. And now that’s why I’m calling you, because I want to do it correctly the second time around.

Frazer Rice (23:33.278)
Part and parcel with that, I ran into somebody really more of what’s called a media personality. And usually the way I think of it is that the QSBS isn’t necessarily available for people whose value is centered around them as a personality or them as a brand.

But I said, you know what, the QSBS component, while it might not apply here, if your business morphs into something where you’re developing other things, slash maybe you turn into a media production company or, youbecome involved in a technology that drives other things, that you shouldn’t dismiss that.

The pivot in the business from sort of a personality generated to something a little bit more business process generated might be something to think about, not only from a strategy standpoint, not that you necessarily wanna do things purely for tax reasons, but if that’s a natural consequence, that’s something to think about. Has that ever popped up in your world?

Michael Arlein (24:31.915)
Yeah, for sure. Every business these days is technology enabled. And I think sometimes businesses that you wouldn’t think of as being technology businesses are doing enough technology things that they can claim that they’re a technology business and not a business providing a particular kind of service. So, you know, with the help of a clever accountant or a tax lawyer, this is not an area that I operate in.

I’m more about multiplying QSBS once you have it. But there are tax lawyers and corporate lawyers and accountants who can advise you how to make your business eligible for QSBS by leaning into, as you said, things that you’re doing that may be…you know, eligible versus other parts of your business that would not be.

Also, you know, you can, sometimes you see companies that are divided, right? Like, so there’s a company who provides counseling services, like, you know, they’re actually hire psychotherapists that will counsel you, you know, online, like on a Zoom. and their business is split.

There’s a medical services company that employs all the counselors and medical services is one of the excluded industries. But then they also have a completely separate business that is their technology platform. And the way they structured it, the value is really in the technology platform. That business is QSBS eligible because it’s a completely separate company.

Frazer Rice (26:28.771)
That’s a great example. part of the purpose of the question was to elicit that, is that people may say, well, we fall squarely into one classification when maybe some underlying thought might lend itself to structuring from a tax perspective that might be useful later on. OK, now as we wind down, for someone who is, at this point, starting a company when they’re forming these things, not that you, QSBS for Founders should drive the world, but how do they get involved with the discussions so that they do the right things early?

Michael Arlein (27:06.401)
Yeah, I mean, I do have a very specific strategy that I love for people who are about to form a company. And it really works best in that scenario of an early stage company that’s just about to launch.

The way I describe this to founders is that you can and should clone yourself on the cap table. So if you start off a company and you own all of the shares, you’re basically eligible for 15 million tax free. That’s great. But what if you could clone yourself and there were three Frazers on the cap table, then Frazer would have $45 million tax free. So how do you do this?

You can do it with trusts. And the beautiful thing is if you have other people create trust for you, then you can be the beneficiary of the trust and control it as well. And I have sort of branded and named this strategy a GOAT trust, which of course has the double meaning, know, greatest of all time.

Frazer Rice (28:21.02) QSBS for Founders
Right.

Michael Arlein (28:21.165) QSBS for Founders
But actually stands for gift optimized to alleviate taxes. The essentials of it are is that we would work with your parents, the founders parents, we would work with your grandma, your uncle, and we would spin up some trusts that they create for the benefit of you as the founder. You would have all sorts of control and access to those trusts and they make a gift into those trusts, probably something fairly modest. Then those trusts on the day of formation buy up some of the common stock. And so those are your clones.

You know, you’re having your cake and eating it too. You’re getting, you know, QSBS stacking for Founders. You’re getting some other benefits we haven’t even talked about. Those trusts can be exempt from a state tax and state level income tax. And you control those trusts and benefit from them. So we’ve essentially cloned you on the cap table. And that is a beautiful strategy that most people miss out on because they don’t do it. And then they come to me a few years later and they own the stock and it’s valuable and then we have to do the more traditional stacking strategies.

Frazer Rice (29:40.432)
Really cool stuff. Michael, how do people get in touch with you if they have these problems slash opportunities?

Michael Arlein (29:48.525)
Sure, well they can Google me. I have a nice web presence. We have our…Founder Focus Practice Group that I lead at the firm, which is very specifically tailored to provide legal services to founders, personal legal services. And I focus on the tax side of that and QSBS stacking for Founders. My email, msarlein at pbwt.com. Phone number 212-336-2588.

Frazer Rice (30:23.324) QSBS For Founders
That will all be in the show notes. Michael, thanks for being on.

Michael Arlein (30:26.753) QSBS For Founders
Thank you.

FAMILY OFFICE MYTHS

QSBS for Founders

QSBS for Founders

Foreign Options for US Citizens Summary:

In this conversation, Frazer Rice of Next Vantage and Judi Galst of Henley and Partners discuss the increasing interest among U.S. citizens in exploring global mobility options amidst geopolitical chaos. We delve into the distinctions between residency and citizenship, the implications of U.S. taxation, and the motivations driving individuals to seek alternative living arrangements. The discussion also covers the potential for citizenship through ancestry, popular destinations for relocation, and investment opportunities in countries like New Zealand and Australia. Judi emphasizes the importance of understanding the legal and practical aspects of relocating, as well as the need for personal exploration before making significant decisions.

00:00 Navigating Geopolitical Chaos: The Rise of Global Mobility

02:55 Understanding Residency vs. Citizenship: Key Differences

06:06 Tax Implications and Motivations for Seeking Alternatives

08:48 Exploring Ancestry-Based Citizenship: Opportunities and Challenges

11:54 Popular Destinations for U.S. Citizens: Europe, Caribbean, and Beyond

15:10 Investment Opportunities: New Zealand and Australia

17:59 Emerging Trends in South America and Asia

20:50 Practical Steps for U.S. Citizens Considering Relocation

I’m Frazer Rice. We’re certainly living in crazy political times right now, and a lot of US citizens are worried about what’s happening here and abroad. And they’re starting to think about other residencies and citizenship options. I talked to Judy Gost at Henley and Partners about what is and isn’t possible on that front. By the end of this, you’re going to understand the locations that are interesting, the difference between residency and citizenship, and why that may matter as you make choices for your retirement and your location long-term, both for yourself and for your kids.

Frazer Rice (00:00.874)
Welcome aboard, Judy.

Judi Galst (00:03.022)
Thanks for having me.

Frazer Rice (00:04.244)
Well, we’re in the midst of a lot of geopolitical chaos, and I think you have seen and I’ve seen a lot of interest in United States citizens looking abroad for either places to live or other situations to either get away from the chaos or try to address some other needs in their lives. What is the state of the union? assume interest has ticked up.

Judi Galst (00:27.874)
Yes, I’ve seen more business than I could have ever predicted, but it’s not necessarily people that are leaving the United States. For the most part, most of the clients that I’m working with are doing it as an insurance policy. A lot of the conversations I have with a client start out with them saying, I don’t want to leave the United States, but I’m feeling unsettled and the way to mitigate the way that I’m feeling is to have options.

So they want to understand what if I did want to have a guaranteed right to go live in another part of the world? What is available to me? How do I pursue this? How long will it take?

Frazer Rice (01:08.434)
And we’ll get into some of the technical aspects here, but one of the concepts is understanding the difference between being able to reside somewhere else and being a citizen of another country, and then how that interacts with being a citizen of the United States. Maybe take us through the comparison of residents versus citizenship.

Judi Galst (01:28.748)
Yeah, that’s actually a really important distinction. And it doesn’t mean that one is better than the other, but they do have different benefits. And so it’s important to understand the difference. So let’s start with residents. Residents doesn’t mean the ability to have a house in another country. It means the ability to reside legally in another country. So the US passport is very strong. You can go into a lot of different countries even without having a visa. But we can’t stay there forever. We have limits, for example, in Europe.

We can go in for 90 days, but then we have to leave for 90 days before we can go back in for another 90 days. So if you become a legal resident of another country, you have the ability to live there unlimited for a certain period of time. Residency is not permanent unless there’s a path to permanent residency. So usually you’re going to have to renew it and there may be some conditions in order to maintain it. Now, how frequently you have to renew it is going to vary by the country.

For example, in Greece, you can become a Greek resident via a golden visa and that is good for five years and you’ll renew for another five years. In Italy, it’s good for two years. Then you renew for another three years. In Portugal, it’s good for two years. Then you renew for another three years. And as I said, there could be conditions. So in Greece, you qualify via purchasing real estate. If you sell the real estate, you’re going to lose your golden visa, not be able to renew it. In Italy, you qualify via purchasing stock.

Frazer Rice (02:51.925)
Right.

Judi Galst (02:55.945)
If you sell the stock, you’re not going to be able to renew it. You can get some travel rights by being a resident. Usually this benefit is not as important to a U.S. person because we already have really good travel benefits with our U.S. passport. But it can often be a strategy for someone from a country with a weaker passport, say even someone living in the United States that has only a Chinese passport. If they want to go into Europe, they have to get a Schenken visa.

So a strategy for them might be let me become a resident of say Greece and then I gain Schengen access. Not unlimited, but I get that 90 days out of 180 days. Finally, I would say that residency can have a path to citizenship. Usually it’s a pretty arduous path. For example, in Italy, you can become a resident. You have to live in the country of Italy for six months a year for 10 years before you’d be eligible to apply. In Greece, six months a year for seven years.

But there is ultimately a path in most residency programs.

Frazer Rice (03:56.755)
So let’s dive into citizenship, which my predilection on that is that it’s a much more permanent component, but it’s also a much more difficult process in general.

Judi Galst (04:05.646)
It doesn’t necessarily have to be difficult. It really depends on what program you’re doing. But you’re right. It’s a guaranteed right. It’s very difficult for a country to take away someone’s citizenship. The other big difference is that you get a passport. So in addition to gaining the ability to live in the country that you’re a citizen of, you also get another travel document. So depending upon what treaties have been done between your country of citizenship and other countries, it may really improve your mobility.

Again, U.S. passport is pretty strong. you’re U.S. passport holder, unless there’s something unexpected like a pandemic when borders close to Americans, you already have a good travel document. But it can be another mobility option. Perhaps you’re going into a country you don’t want to identify as a U.S. passport holder, or perhaps you have a weaker passport and you want to travel on a secondary citizenship passport that might improve your mobility. Where citizenship is particularly powerful is in Europe.

Because if you become a citizen of one country in the European Union, you gain the right to reside and work in any country in Europe.

Frazer Rice (05:11.104)
And just to distinguish, how does that impact UK people after they Brexited?

Judi Galst (05:16.942)
Sadly, with Brexit, the UK is no longer part of the EU. So many people in the UK are quite upset about this because no, you’re not going to gain the ability as a citizen of an EU country to live in the UK, nor are citizens of the UK now able to live anywhere in the European Union as they were previously.

Frazer Rice (05:36.992)
So let’s apply this directly to US citizens. So US citizen taxed on worldwide wealth. Let’s start with that. sure because I just got a Twitter fight with somebody who said, well, if you’re crypto, you can move away and you’re not out of the system. I’m like, that’s just no. We’ll start with that. But taxed on worldwide wealth, good passport can travel, but there are limitations as far as how long you can stay in various countries, probably around

Judi Galst (05:52.622)
Mm-hmm.

Frazer Rice (06:06.578)
Investment options, land ownership, things like that, depending on it. Where are the benefits of that U.S. person looking for another place to either reside or gain citizenship?

Judi Galst (06:20.312)
Well, it’s not a tax benefit. You started out with taxes and I know when someone, a client calls and says, you know, can you tell me what my options are? I’m really sick of paying us taxes. I’m like, well, this isn’t the right call for you. Yeah. So, but it’s important to understand. It doesn’t mean you’re going to be double taxed because that is a misconception that many people have about whether they should pursue a strategy of alternative residents or citizenship, because unlike the U S and Eritrea,

Frazer Rice (06:22.079)
Right.

Frazer Rice (06:30.08)
Puerto Rico that that’s it. That’s your best bet if you’re gonna try if you’re gonna try to play games

Judi Galst (06:49.774)
Every other country in the world, you don’t automatically become a tax resident by being a legal resident or even by being a citizen. Usually, you’re not going to trigger tax residency unless you reside 183 days in another country, but there are some exceptions. Switzerland is 90 days. Some, like New Zealand, will say it’s 183 days, but in a 12-month period, not necessarily in a year. I’m not licensed to give tax advice, so I’m giving high-level answer to this question.

But in general, just by pursuing an alternative residence or citizenship, there’s no tax consequences. And if you were to become a tax resident, many of the countries that we support programs in have treaties. So it doesn’t necessarily mean that you’re going to pay double tax, but it does mean it has to be looked at. If I am talking to a client and they really have full intention of relocating to another country, immediately I want them to have a local tax consultation, which I set up for them to understand what, if any, consequences they have to be aware of.

Frazer Rice (07:50.322)
And those consequences can change. did an episode probably about six months ago on the change in law in the UK. And it’s a different environment than it was even six months ago for people either going in or coming out of that country as it relates to their US intersection. So I think that the summary on all of that is, look, if you’re going there, A, don’t do it for tax purposes, B,

If you’re going to do it, make sure you get local tax counsel because those relationships can be complicated and will affect your planning.

Judi Galst (08:25.198)
Let’s talk about why people are doing it because taxes is not the strategy. And I would say, and my clients are almost exclusively Americans. So why are people calling me about this? There’s really four key motivators that tend to come up in the conversation. The first is because they do want another mobility option. They kind of have some PTSD still from the pandemic. They remember that feeling.

Frazer Rice (08:27.935)
Mm.

Judi Galst (08:48.226)
We could all work remotely. You had the vacation house in Italy or you had the private plane and all of a sudden you couldn’t take advantage of it because all the borders are closed to you and we could only stay in the United States. So some people are just realizing there is some risk to having one mobility option and they want to have an alternative. But I would say 90 % of the conversations I have there’s some reference to a plan B. People are feeling unsettled for so many different reasons.

You know, I talked to people whose family fled the Holocaust. It is literally in their DNA where their family thought it could never happen here. And that comes up in every conversation with them. But I have same sex, you know, couples, have transgender clients, I have people whose family lived in other countries where they saw the fall of democracy. And then I just have a lot of wealthy clients, and they’re diversifying their assets right now. And they want to diversify their mobility. They pay a lot of money in insurance and they say, Judy, this is just another line item.

Frazer Rice (09:45.896)
You

Judi Galst (09:46.703)
I’d say some are thinking not just about themselves, but they’re thinking about protecting generational opportunity and legacy. Some say, you know, I’m a student of history and yeah, maybe it’s going to take 10, 15, 20 years, but I’ve seen this happen before. And I want to know that my kids and my grandkids are going to have options to either live a life in another part of the world for cultural or educational opportunities or in a worst case scenario, because the U.S. isn’t where they actually want to be.

And finally, I’d say it fits nicely in a diversification of asset strategy, which many, many people are thinking about right now. Maybe they don’t want to hold all their money in the United States. Maybe they don’t want to all their real estate in the United States. And there can be strategies that are separate from what I do in terms of opening bank accounts in Switzerland or Singapore or other parts of the world. But really, all the programs that I do require you to move some assets. You’re either investing in stock or venture capital or private equity or real estate. So it does complement a diversification of asset strategy.

Frazer Rice (10:42.911)
Cool, so let’s think about, we sort of beat the tax horse to death a little bit here, but relocating versus renouncing. And different things, know, people probably come up to you with questions, do I have to fully leave? Do I have to renounce my US citizenship? How does all of that

Judi Galst (10:51.608)
Mm-hmm.

Judi Galst (10:58.222)
Great questions. So I’ve never had a client renounce. The US right now does not limit the number of passports one can have or citizenships one can have or how many residences they can have. Now, there is a congressperson who has just decided he wants to introduce some sort of bill that’s going to eliminate dual citizenship for Americans, although most constitutional scholars feel that’s like dead on arrival. But I have to acknowledge that.

So no, you don’t need to renounce. And frankly, if you have a lot of money, renouncing is quite complicated and expensive, and you need really good counsel to make that very, very significant decision. In terms of relocation, almost all of the programs that we support require little to no physical presence. You’re always going to probably have to go for biometrics and give fingerprints. But a lot of these programs, you don’t actually have to come back to that country again, except to renew it.

So for people that really want it as a Plan B and have no intention of really going to live in another part of the world at this stage in their lives, there’s not an obligation for you to spend time in order to maintain the ability to live in another country if you so choose.

Frazer Rice (12:08.017)
One thing that comes up that people ask me about and I only vaguely understand it is the concept of being able to get citizenship via ancestry. Comes up with a lot of people of Irish descent, Germany and Austrian especially. What’s the state of that and how realistic is it across different countries?

Judi Galst (12:15.993)
Mm. Mm-hmm.

Judi Galst (12:26.767)
It’s very realistic. And in fact, I’m doing German citizenship for myself. So for anyone whose family fled due to Nazi persecution from Germany and Austria, you and all future generations are entitled to citizenship. And my friends are like, why do you want German passport? But first of all, my kids got it. So my kids can go now live and work in Europe if they want, which is great, tremendous optionality. If you remember, I said before, it’s not just Germany. It’s any country in the European Union.

Frazer Rice (12:30.473)
Okay.

Frazer Rice (12:47.956)
Right.

Judi Galst (12:56.899)
And it’s very affordable if you actually are entitled to it. At Henley and Partners, we have established relationships with experts, lawyers in several countries that specialize in citizenship by ancestry. It’s very complex. And every country has different rules about like, it was passed down on the mother’s side, or if there was a break in the bloodline, or if it was passed a certain generation, or if there was a name change, there’s a lot of complexity to it.

But clients who think they may be eligible can contact us and we will have an assessment done. And if there is a case, we’ll refer them to someone that can help them through the process. And, you know, it can cost around 5,000, 7,500 euros versus I have clients getting EU citizenship through, you know, Malta and they’re 1.5 million out of pocket. So if you can qualify via Ancestry, I’d say certainly it’s worth considering.

Frazer Rice (13:50.879)
Terrific.

Judi Galst (13:51.311)
But don’t call me and say, like, I did 23andMe and I’m Irish. Because you do actually have to produce documents. Not a humongous list of documents, but you’re going to need naturalization certificates for the descendant. You’re going to need marriage certificates, birth certificates, and other documents.

Frazer Rice (13:55.187)
Ha ha ha!

Frazer Rice (14:10.844)
So there’s definitely an exercise involved with it, but if you can legitimately trace lineage, you may have a shot. So let’s talk about what jurisdictions are popular with United States citizens. We talked a little bit about Europe, and I’m sure there’s some, let’s call it, some that are easier than others. But then Caribbean, South America, Australia, New Zealand, maybe even Asia, what comes across your desk as being

Judi Galst (14:14.094)
Mm-mm.

Exactly.

Frazer Rice (14:40.488)
more reasonable than others maybe.

Judi Galst (14:43.246)
So I’d say clients that I’m talking to are basically going in one of four different directions. One is Europe. For residency, we’re looking at Portugal, Greece, Italy, and Malta. Those are all great programs because they require little to no time in the country to maintain the residency rights. So for people that really have no intention of spending significant time in another country, they’re really good solutions. And for citizenship in Europe, there very limited options. There’s ancestry, which we just talked about.

But the concept of citizenship by investment in Europe essentially was killed by the European Court of Justice in the spring of 2025. To give a little bit of explanation, Malta used to have a citizenship by investment program. And it basically said, do these three things, make a large gift to the Maltese economy, rent a property for six years and spend somewhere around 21 days in the country. And you will have a path.

to citizenship in Malta, which is an EU country. And the EU hated it. They felt it was transactional, that the passport was being sold, and they felt that people were being granted citizenship that didn’t show a tie to the country. And when this court ruling came out and deemed Malta’s program illegal, it essentially killed citizenship by investment programs in Europe. So I don’t think you’re going to see any European Union country have a citizenship by investment program, nor any country that wants to join the EU have one.

But many countries in Europe have provisions in their constitution that say, if you are an exceptional person that make an exceptional contribution to our country or to humanity, we have discretionary ability to grant you citizenship. And so there are some paths to citizenship via merit, specifically through Malta and Austria right now, as well as some other places. So that’s Europe, snapshot of Europe. Let’s talk a little bit about Caribbean, which you specifically brought up.

Frazer Rice (16:35.581)
Right.

Judi Galst (16:40.862)
So Caribbean is a path to citizenship. If you remember, said citizenship, lifelong, right? Not many countries have a path to citizenship. It’s very fast. It’s very affordable. What does it give you? So there are five countries in the Caribbean that have programs St. Kitts, Antigua, Grenada, Dominica, St. Lucia. It gives you citizenship in one of those countries. A passport, another passport that you can travel on. Right now, it’s pretty strong.

You can go into Europe with it, the UK, Ireland, not unlimited, same as the US, limited amount of time. Although I’m not sure the strength of the Caribbean passports is always going to be.

as strong as it is today. Europe doesn’t love these programs. And I wouldn’t be surprised if the Caribbean passports tend to get weaker. However, for a client that says to me, this is purely an insurance policy. I want to cover my kids and my kids are in their 20s because a lot of times these program kids are going to need their own investment if they’re over the age of 18 or 21. Caribbean wouldn’t be a bad place for us if we felt we wanted to get out of town for a little while.

Frazer Rice (17:23.23)
Sure.

Judi Galst (17:50.031)
The Caribbean’s a great solution for a very affordable amount, maybe 400,000 for family. You can get and make an investment in real estate that you can sell in five or seven years and your entire family can gain citizenship. So that’s Caribbean. I can pivot to something else that you want to ask a question. OK, so I actually love the program that New Zealand has out right now, especially for a high net worth person.

Frazer Rice (18:05.342)
Okay, no, let’s try Australia and New Zealand.

Judi Galst (18:18.414)
I think every high net worth person should do New Zealand. And for a couple of reasons. First of all, it’s purely investment driven. You have to move a lot of money. So it has to be for a high net worth person because they’re going to move three million US dollars to be invested in private equity, venture capital and private credit in New Zealand for around a three year period. And children up to the age of 25, provided that they’re single and not working full time can be included in that investment.

There’s very little time that the family needs to spend in New Zealand. As soon as you move the money there, you gain the right to live unlimited in New Zealand. But the main applicant only has to do 21 days, and the other family members only have to enter and exit for one day in the first year. At the end of three years, provided you didn’t invest in things that have a longer holding period, but from an immigration perspective, you can liquidate your investment. And then you can become a permanent resident.

So you have a lifelong right at any time to relocate to New Zealand, or you never have to go back again. English speaking, good healthcare, good education. You could have a life there, unlike I don’t think people really want to envision spending 10 years in the Caribbean. But 10 years in New Zealand, you know, there’s many industries and many things that you could be doing. And you could have a quality of life, maybe not akin to the United States, but good. So I love the New Zealand program.

Australia used to have a citizenship by investment program. They do not have one any longer. There is a route that they extend to people, which they call sort of like a talent visa. So there are certain sectors that are important to Australia and they would very much like to attract talent in those sectors. Usually it’s younger talent. So when I’m talking to a client that’s over 55, it can be difficult to get you approved for it.

But I’ve had people over 55 that have gotten approved. And if you have the background that Australia deems valuable, they’ll grant you a five-year visa for you and your family at no cost. Children have to be under the age of 18 or financially dependent up to age 23 to be included. But this is a visa that’s only good for five years. And if you don’t contribute to Australian society, it’s not getting renewed.

Judi Galst (20:38.082)
But I’ve had people from Hollywood, I’ve had songwriters, I’ve had producers, directors, people in private equity that specialize in sectors that are important to Australia. People in finance have been approved. So it’s worth considering if the idea of being able to live in Australia means something to you. Interestingly with that visa, you can also live in New Zealand.

Frazer Rice (20:58.095)
Okay, it’s one of those things too. If people aren’t forcing you to say, don’t hate me because I’m beautiful, that might not be a good route, but if you are talented or bring something to bear, it may be worth taking a stab at. Is it reciprocal? If you’re in New Zealand, can you go to Australia? Got it. So let’s pivot to Asia and or South America, which you hear about Singapore, you hear about…

Judi Galst (21:16.194)
No. Good question.

Frazer Rice (21:27.131)
Other different sort of haveny types of places where people place their wealth or establish family offices and South America I think is, know, think about like Uruguay and places like that which, you know, have the reputation of being the Switzerland of South America. What’s the state of play there?

Judi Galst (21:44.527)
So I have actually had a few clients that have done residency in Uruguay. They don’t have a formalized program, although I think a more formalized program is going to come out of there. Henley and Partners actually has a government advisory line of business, so we design a lot of these programs and we’re very active in South America. There’s a lot of interest in South America to have citizenship and residence by investment programs, so I think you’re going to see a lot coming from that region in the near term. But Uruguay does have a path to residency. You have to spend time there.

Frazer Rice (21:58.611)
Mm-hmm.

Frazer Rice (22:12.893)
Judi Galst (22:13.251)
And they don’t tell you exactly how much. Yeah. But most of my clients went with the expectation that maybe they’d have to stay for 30 days and they ended up getting the visa approved faster. You have to go back every year for a period of time or not renew renewing it. But yes, there is a path in Uruguay and more in Central America. People are doing Panama.

Frazer Rice (22:36.637)
Costa Rica.

Judi Galst (22:37.773)
Costa Rica is really interesting, very affordable. know we wanted to talk a little bit about the range, but in Costa Rica, you can gain temporary residence by demonstrating you have $2,500 a month in passive income. Many people will have that with interest and dividend income. Or you could invest $150,000 in real estate. It’s a temporary residence for two years, and then you renew for another two years. But at three years, you can transition to permanent residence.

As a temporary resident, cannot work for a company in Costa Rica, so you’d have to be able to work remotely. And then once you become a permanent resident, that requirement disappears. Once you are approved, you do have to pay into Social Security in Costa Rica that gives you access to health care. So it’s about $300 per application per month. But Costa Rica is very interesting, I think.

Frazer Rice (23:26.67)
As we go back, pivot back to Asia, are there any countries with Singapore or others that are possibilities for people in the US?

Judi Galst (23:33.722)
So Singapore is a possibility. However, you have to move a family office with over 200 million there, or investment levels are around 30 million, and you have to relocate, and the ability to renew it is contingent upon how much time you spend in Singapore. So I would say a very niche client could do Singapore. A more affordable option might be Thailand, which you can get a residence permit very…

Frazer Rice (23:44.125)
Mm-hmm.

Frazer Rice (23:52.605)
To be sure.

Okay.

Judi Galst (24:00.782)
Inexpensively. mean, a five-year permit for $25,000.

Frazer Rice (24:05.159)
Wow. And to round out our tour of the world here, Middle East countries, maybe the UAE, you hear about that as a place where a lot of Europeans go to move their wealth. Is that becoming popular with United States citizens?

Judi Galst (24:16.463)
Mm-hmm.

Judi Galst (24:22.381)
Golden Visa in Dubai is very popular. Honestly, not so much among Americans. It’s usually people from other parts of the world. mean, my firm has 70 offices around the world and we do a lot of UAE Golden Visas. I don’t have a huge amount of interest from Americans. I’ve done a couple of them. It’s not hard. You do have to spend time, like 30 days as part of the process there.

Frazer Rice (24:26.525)
Mm-hmm.

Judi Galst (24:46.703)
You can invest in real estate at 550,000, but there’s like 19 different visa types. You can set up a company. If you’re a member of YPO, Young Presidents Organization, they’re deemed talented and they don’t even make an investment. So, you know, it’s an option and we could certainly help it. But to be honest, I don’t see huge demand among Americans.

Frazer Rice (25:03.259)
Interesting. So let’s round this out a little bit here. For a U.S. citizen who is feeling unsettled or is just curious what’s out there. They want the ability to go live in Madeira, buy a place there. And to be able to go unfettered or something like that. What’s a good thought process or sequence of events for them to go through in order to make that happen?

Judi Galst (25:31.344)
I mean, we don’t charge for consultations. So I don’t know if you’re going to share my email at the end of this, but just hit me up. To me, any client conversation is about educating. This is generally a new topic for someone. It’s very rare that someone calls me and they really understand what is available to them and also what would be a good fit for them.

They may not understand if they want to include their children. There are going to be some that are going to be better fits for them than other based on the ages of the kids. They may not understand how much time they have to spend in a country to make it happen. How much it’s going to cost, and just learn about it. Learn what your options are. I can usually pretty quickly. Once I understand a client’s objectives, tell them. This is a strategy that I think makes sense for you and exactly how it would

Frazer Rice (26:14.206)
And it strikes me too, that for people who are exploring different places, it’s probably a good idea to have visited them first before just jumping in, jumping in feet first and sort of solving a problem without understanding what actually implementing the solution looks like.

Judi Galst (26:21.111)
Yeah.

Yeah.

Judi Galst (26:29.177)
For sure. I because many of the clients that I work with are of higher wealth, they usually have done a fair amount of traveling. So the idea of envisioning, know, residency in Italy, they’ve been to Italy. But when I talk to clients, especially about the Caribbean, where they might be investing in real estate and they have to decide between which country makes the most sense, I always tell them they should try and go because it can be a lifestyle decision. And they want to see where they could actually envision themselves if, in fact, they triggered this insurance policy.

Frazer Rice (26:58.59)
Judy, great stuff. Here it is. Put your email out there in case people want to reach out and find out more.

Judi Galst (27:05.099)
Okay, amazing. So my email is my first name, Judy, J-U-D-I dot my last name, GALST, G-A-L-S as in Sam T, at henleyglobal.com, H-E-N-L-E-Y, global.com, or you can give me a call at 646-856-3712.

Frazer Rice (27:29.406)
Great stuff. We’re going to have that in the show notes too so people can look on webpage, etc. to get that information. Thank you so much. It’s something, you know, when you’re at the desk and dreaming wistfully about what life looks like, what you’re done working, if you’re done working, my calculation is I’ll be able to retire when I’m 127. But it’s great just to sort of envision what that looks like. the expertise is out there. Thanks for being on.

Judi Galst (27:56.047)
My pleasure.

HENLEY & PARTNERS

DAVID LESPERANCE ON CITIZENSHIP DIVERSIFICATION

DAVID LESPERANCE ON US EXPATRIATION

#familyoffices #citizenship #residency #residencybyinvestment #citizenshipbyinvestment #austriancitizenship #newzealand #portugalproperty #portugalresidency #uscitizens #stkitts #malta #eucitizenship #wealthcitizenship #Californiawealthtax #puertorico #puertoricotax

In this episode, 10 Family Office Myths exposed (and debunked).

Welcome back and Happy New Year on the Wealth Actually podcast. I’m Frazer Rice. We have a fun show today where we talk about 10 myths in the family office space. Mark Tepsich, who runs the family office governance practice at UBS is here as we dish into the ideas and concepts that are misunderstood in the family office world.

This conversation delves into the complexities and myths surrounding family offices, exploring their structure, governance, and the unique challenges they face in wealth management. The discussion highlights the importance of understanding the specific needs of families and the role of family offices in managing complexity and preserving wealth across generations. It also addresses common misconceptions about family offices, including their necessity, governance, and their relationship with institutional investors.

Family offices are established to manage complexity in wealth.
Not all family offices are the same; each has unique needs.
Governance frameworks are essential for effective family office management.
Many family offices outsource functions rather than internalizing them.
The myth that 85-90% of family offices shouldn’t exist is false.
Shirt sleeves to shirt sleeves is a debated concept in wealth preservation.
Family offices need to adapt to the evolving needs of families.
Investment functions in family offices are often secondary to administrative roles.
Family offices are driven by complexity rather than just size.
The future of family offices may involve more direct investment opportunities.

00:00 Understanding Family Offices: Myths and Realities
02:02 The Complexity of Family Office Structures
04:37 Debunking Common Myths About Family Offices
06:17 The Role of Outsourcing in Family Offices
07:54 Generational Wealth: The Shirt Sleeves Myth
10:51 Flexibility vs. Permanence in Family Offices
12:48 Governance and Decision-Making in Family Offices
15:49 Investment Functions in Family Offices
18:05 Size vs. Complexity in Family Offices
20:09 Family Offices vs. Institutional Capital
21:19 The Aspirational Nature of Family Offices
23:30 The Relationship Between Family Offices and Institutions
25:36 Technology in Family Offices: Current Trends
29:03 Family Offices and Private Equity: A Comparative Analysis

family offices, wealth management, governance, investment strategies, family dynamics, myths, financial planning, family wealth, complexity management, family governance

Welcome board, Mark.

Hey, Frazer, good to see you again. Appreciate the opportunity.

Likewise. So let’s get started first. We’re going to go into some of the myths around family offices. But you really participate in kind of an interesting subset of that in terms of helping families design and govern them. What exactly does that mean on a day-to-day basis for you?

Yeah, good question. So, you know, it means a couple of things, right? So if you think about a family office, you have families that are at the inception point, right? Where things are getting too complex for them. They need to set up some sort of infrastructure. And it’s really like, what is a family office? What can it do for me? What are the pros, cons, and trade-offs? Where do I start? What’s the infrastructure, the systems? Who do I hire? How do I structure a compensation? So you’ve got families maybe coming at it.

From post liquidity event, maybe coming at it from, we need to lift up, lift out this embedded family office out of the business to, hey, we’re an existing family office. We’ve got, you know, we’re evolving, right? The family’s growing, their enterprise is changing, the world around us is changing. People are leaving the family office, the next gen’s getting incorporated into the family office in some way. We’ve got some questions that could be, how do we engage the next generation through the family office?

How do we make decisions, communicate around our shared assets and resources, which could be a portfolio, maybe even a business, or hey, how do we come together and hire? What is this profile of this person look like? Who should we hire and not hire? What’s the structure of their compensation, carry co-investment, leverage co-investment? What’s the tech stack look like across accounting, consulting, reporting? Now, how do we insource and outsource?

So it’s sort of. I like to call it organizational capabilities. So, you know, sometimes it’s soup to nuts, like starting from zero, other times it’s, we’ve been around for a long time, but we have a couple of questions. So that’s kind of my day to day. And, you know, I’ve been living this really since 2008 pre-global financial crisis.

So we’re going to go into, I think, some of the craziness of the family office ecosystem where we have people who wear many hats, people who wear masks, some people who are jokers and other people who are really good technicians and provide a lot of great insight. One of the things you were talking about is that the different types of mandate can be different. And I think maybe one of the first myths we should tackle is the

The bromide that if you’ve seen one family office, you’ve seen one family office, which is thrown around at every family office conference and everybody chuckles for a minute and then it sort of washes away and no one cares anymore. What do you think about that statement?

So I don’t necessarily think it’s true. And here’s what I mean. Let’s make an analogy to this, right? A business needs certain core infrastructure to just operate, right? And using accounting back office, you know the inflows, the outflows, you know, if you’re make a decision, these are the steps you have to go through. And so a family office, right?

It needs to incorporate that, but it needs to incorporate it with the family and the family enterprise that is existing for that family, right? So, yeah, each family office is different because each family is different, but that’s like saying you’ve seen one business, you’ve seen one business, right? The strategy could be, the culture could be different, but, you still need some core operating infrastructure. And again, there’s accounting infrastructure, and that’s the basics, right? So there’s a curl of truth, but largely I think that it is false.

Well, and at the same time, yes, families are different, but in general, families are trying to get to the same place, which is, know, they want to steward the wealth. They want to make sure it benefits the family and the other constituencies.

And they want to make sure that it’s preserved over time. And those functions, you know, it’s very infrequent. You’d find the functions not there. And so how you get from A to B may be different, as you said, but there are a lot of universal truths to setting one of these things up.

So one of the other myths that we’ve come across is the idea that 80 to 90 percent of family offices shouldn’t exist. is, people and families set these up for, let’s call it the wrong reasons. Maybe it’s fear of missing out, maybe it’s great cocktail party chatter, maybe it’s an overdiagnosis of their needs. What do you think about that?

Again, false. know, family offices are largely a function. They largely exist because there’s a market scale here. And what I mean by that is when you look under the hood at a family office, you’ve got basics of an accounting firm. You’ve got basics of an investment slash wealth management firm. You’ve got the basics of a legal slash tax firm. And then you’ve got essentially everything in between. And when you look at professional service firms out there,

They can’t provide all of those under one roof, whether compliance or regulatory reasons. But the other reason is because no business model out there can really scale the complexity that each one of these families has. So yeah, you could outforce a lot of this stuff, but at the end of the day, family offices often exist because of a market failure. so, false, 85 to 90 % of family offices should exist.

One of the other things, I’ve been around enough of these getting set up, is that the family office, if we get into sort of a technical structure, such that you set up a structure so that you’re able to deduct the expenses related to administering the wealth around that, that’s a valid reason to do things in addition to the organizational component. So I agree with you that there’s, to say that they shouldn’t exist is sort of belying the notion that these functions should take place internally. And I think you spoke to that. And I guess that gets to another myth, which is that family offices should internalize all of these functions. You just talked about it a little bit, that that’s not a great business model either.

No, mean, yeah, so, you know, 85 to 90 % of family members out there, you just use that statistic, outsource a fair amount of things, right? And what that means is let’s just use tax counsel, for instance, right? This is something that these issues exist in every family office, they exist for every individual, but at the end of the day, should you have, you know, a tax counsel in-house in a family office that’s only doing, you know, income tax advisor work? Probably not.

For 95 % of family offices because the frequency just isn’t there, right? So, you if you look at general councils alone, right? So they should have a broader mandate than income tax. should have well-transferred estate planning. Every family has those issues, but do they have the frequency to warrant bringing that individual, that professional and the rate, the cost? Probably not. a lot, you know, most family offices outsource a fair amount of whether it’s investment management, manager selection and due diligence. So false. Most fair amount offices do outsource a fair amount.

One the things, this is one of my favorite controversial topics in the family office ecosystem of vendors that are out there is this notion that shirt sleeves to shirt sleeves is a myth. that the, and for those who don’t know what that means is, know, the first generation has generated the wealth, the second one enjoys it. And then the third one for a variety of reasons is ill-equipped to carry the wealth forward. And then everyone kind of goes back. It transcends culture. It’s lily pad to lily pad.

You know, there’s a British version and a Russian version and whatever version. But the advice ecosystem around this is such that there’s a lot of debate about the statistics that have, quote unquote, proven that. And I can listen to that and say, yes, those may be very narrow. But there is a myth out there that shirt sleeves to shirt sleeves is a myth. Maybe you have some comments on that.

Man, this is a tough one. I will say this will probably be the toughest one. So I think once a family becomes wealthy, right? And you can kind of define that as, the wealth, meaning the financial wealth will last a few generations with really out, with really nobody working, right? Let’s just define it that way. It’ll last a couple of generations if you make some not dumb decisions, we’ll call it.

I think such as the financial markets today, right, as long as you’re diversified, you will stay wealthy. Does that mean you are going to have the same amount per capita over time? Maybe not, right? So if you look at it today, is a nuclear family of four, and you look at it 50 years from now, and the family is 30 people, right? I don’t know what the growth rate would have to be on those assets.

So I think the family will remain wealthy whether they remain, you know, on a per capita basis, right? That’s a different story. I think what this is missing, however, I think the numbers kind of overshadow what this is getting at. I think when you look at it, when you take a step back, that first generation wealth creator, right? Will the family continue to be builders and entrepreneurs down the road?

That I think that’s the question. Will they continue to kind of reach their full potential? I think that is that should be the focus. I’m going to punt on this one. I think it’s TBD and it’s there’s no set answer. I think the idea that the returns, To get back to your point is that as you go from generation to generation, the complexity increases, I’d say geometrically. Whereas the assets in many ways are going to be designed to increase linearly. And so at some point it may be 14 generations down the line when you’ve got 300 people that you have to take care of, are those assets gonna be in place to be able to support the level of living that people expected in generation one, two, and three?

I think that’s the equation we’re all trying to fight. And so I’d say while Shirt Sleeves to Shirt Sleeves isn’t necessarily a prophecy, it’s definitely something that has to be addressed. So I’m gonna say that the fact that Shirt Sleeves to Shirt Sleeves is a myth, I think that’s the myth.

So that’s where I draw my line in the sand there. think there’s an equation you constantly have to fight. Okay, so here’s another one. Family offices are designed to be permanent. I happen to think that they start out trying to be permanent, but in actuality, they really have to be more flexible and flex with the needs of the family, even at the first or second generation.

Yeah, I would agree. Often they’re established for a good reason, right? That reason is complexity. Whether that complexity continues to exist for the family is a different story, right? You might have a business being sold. The family might just say, “hey, we don’t need to do all these direct investments, these alternate investments. Let’s just keep it simple, keep it passive.”

I don’t think they’re designed to be permanent. I think families don’t really think about that too much. They want to exist for probably the existing generation that’s leveraging it and they wanna transition it, to your point, be flexible over time. But I don’t think anyone like a business, right? If you think about a business, the business generally speaking, it’s meant to exist in a perpetuity. That’s why you have a business, right? It’s not a sole proprietorship, but a family office, I think it’s TBD, right? So, you know. I don’t think anyone’s setting up a family that will say this is going to exist a thousand years from now. And I think if they came out and said that, think that it would add question and motivations.

Maybe we may be welcoming the Martians, we may be speaking Mandarin. There’s a thousand things that could happen in between here and then, that’s for sure. Here’s a myth that I think you and I are both going to agree is one, which is that family offices, for the ones that we think are going to try to persist, don’t demand necessarily Sarbanes-Oxley or high-end governance.

I think as family offices mature, meaning as the family evolves, they do need some sort of decision-making framework. Especially if they’re going to really come together and act like somewhat of an institution. What I mean by that is, under the hood of a family office or under the hood of a family, let’s say there’s 10 family members. Let’s say there’s 20 to 25 trusts within that.

You know, you could come together and pull your assets, right? And pull your resources. That’s part of the reason for having a family office. And so you just have a larger pool of capital. When you’re doing that, you do need governance. Okay? But if you’re gonna have, it’s just like, hey, we’re gonna have our separate portfolios. We’re not gonna come together and have pooled investment vehicles. You might not need an investment company, okay?

And there might be good reasons to have an investment committee. In fact, many the investment committees I see, they’re not like college endowments where, we got eight people or nine people on here. We need to agree at least have five people to agree to allocate to this manager or change the allocation or change the IPS, depending on where that authority resides.

I often see many investment committees for families, hey, we’re just collaborative in nature. We’ll get together. We’re going to have a meeting and talk about different strategies. Different advisors, things we should be doing. But if they’ve always had to agree at the family business level, they might not wanna have that same construct in the family office slash investment portfolio.

If they’ve always struggled, know, come into agreement at the family business, now they’re gonna like, hey, we’re gonna recreate this dynamic. don’t have a binding construct. In fact, we ran a report, it’s coming out hopefully in the next couple of weeks. on family enterprise governance and a component obviously is the investment committee.

70 % of the investment committees out there are advisory in nature, meaning they don’t make binding decisions. They take it back to the trustees or whoever the authority is and they say, hey, here’s what we think, right? So individual family investors, whoever that is, co-trustees, it’s a, okay. So I do think governance is important, but it depends on what you mean by that, right?

Should there be an IPS in place? I 100 % think that each family investor should have an IPS in place. The biggest mistake I see there is, hey, we’ve got this shared pool of capital. We’ve got 50 trusts. We’ve got one single IPS, right? I think that is a big mistake. don’t think that’s good governance. So it really depends on what you mean, but I think, yes, there should be some decision-making framework that you’re following. Otherwise, what exactly are you? Adhering to it, right? Like, what is your framework? What is your decision making tree?

On top of that, possible myth. Family offices are built on a robust investment function.

I mean, yes, there are some that are like that, right? You know, there’s a big names out there, MSD, Pritzker, so on and so forth. Those are the exceptions rather than the rule. Most family offices, 85 to 90 % are formed to manage the complexity, right? So again, otherwise you’re gonna have all these outsourced providers and that just doesn’t make sense when you’re trying to make a decision, because you need all the different parts to come together.

They’re often built as administrative functions first, rather than, we’re gonna go start the next, you know, a private equity firm. that’s false.

The, as I like to say, probably to the boredom of a lot of people who talk to me a lot is that a lot of these really are built on a bookkeeping or an accounting spine. You’ve got to manage the inflows and outflows of everything and keep track of what you have or else you can have a great investment function, but things are going to spill all over the place.

I’ll never say, yeah. mean, and that actually goes back to good governance, right? So I always say, it’s not provocative. I’ll say, listen, this is not a provocative answer, but you need to create that first. And most of the people that are considering this rate are business owners. So they’ll intuitively get that. In fact, that function might exist somewhere at the business, but it’s really not organized. And without that function, like, it’s hard to make a decision, right?

If you’re going to allocate 20 % of your portfolio, to private equity drawdown vehicles. got cap calls, capital commitments, distributions, like that needs to be budgeted and forecasting, right? So a lot of these families will have, one nuclear family can have three to four homes, 10 bank accounts, 20 entities. It’s not like a single piggy bank that you could take cash out of and move it every which way, right? Those are owned by different vehicles, different trusts, different assets and things like that, so.

Here’s a myth that I espouse which is Family offices and whether you have one or not is driven solely by size whether you have five billion or two hundred million or something like that that if you aren’t a certain size you shouldn’t have one and if you’re Of a certain size you must have one.

That’s a myth. It’s driven by complexity first. I’ve seen, I’ve spoken to people that are worth two to $3 billion. It’s concentrated in a few stocks, meaning like they were early stage employees, right? They’re still in it. They’re getting a healthy dividend at this point. Guy talked to couple years ago. He had two homes, two cars, probably 95 % of his network was tied up into two separate securities that were probably traded.

And he’s like, I don’t think I need a family office. You want to know what one was, what it could do from. And I’m like, listen, if you don’t have the complexity, it probably doesn’t make sense. Okay, if you can make a decision within whatever framework you have, whatever complex you have. Now, the other, you know, there is a cost factor to it, right? It gets easier to start a family office, meaning hire a couple of people, if you’ve got the… asset base for it to make sense on a cost perspective. So most of the time it’s driven by complexity, but cost does become a factor, right? If you’re worth a hundred million dollars, you’re to go hire 10 people. That probably doesn’t make sense.

Right. Well, on top of that too, if you, and there’s a sort of the difference between a family office driven by a liquidity event and meeting that’s, that’s all you have versus a family office that’s tethered or sorry, a family business that’s tethered to it, that is also generating cash flows to help pay for things that that’s a big part of the decision. Because if you’re hiring people, you know, a CIO minimum, absolute minimum is probably $500,000.

They’re going to need people, you know, you’re looking at at least 3 million. just to get the thing up and running before you start figuring out what you actually have to do. And so the concept that the size is going to dictate completely, it underscores sort of that cost component that you described there.

This is an interesting one and I like this concept to talk about. Family offices are like institutional capital as investors.

Again, myth, there are some, again, there are some that are like institutions. They have the size and the sophistication. Oftentimes you see them, they’re former PE or hedge fund founders, right? That just aren’t doing any more of it. They made their wealth in the financial ecosystem, in the markets. And so they’re very sophisticated. But by and large, I mean, they’re sort of quasi-institutional, right? So I’ve seen multi-billion dollar family offices that

Again, they’re more of the administrative hub rather than, we’re gonna be splashing around and playing in the markets and using a lot of leverage and doing a lot of control equity investments. So by and large, it’s the myth. 85 to 90 % are institutional-like. They are there to fill a need and that need is complexity management.

Here’s one on a different angle, which is family offices are the goal for people in the wealth management industry to work for, meaning family offices are a great aspiration for people who work in the industry and that that’s universal.

Myth, I think it’s an option. I think it’s interesting. I think it is a growing opportunity for folks that work in, you know, maybe wealth management or investment management or the financial ecosystem. But you didn’t, again, family has been around for a long time, but they’ve really only became, you know, kind of popular post global financial crisis with the rise of PE because of ZERP. You know,

I’ll talk to a lot of people that are like in the hedge fund ecosystem looking for a change, right? And I say like, listen, like these opportunities for you are out there, but it depends on the family. It depends on their compensation philosophy as on the culture that you’re going to have to live within. There’s a lot of key man risk. Is it an opportunity? Yes. But again, it is, it is family office by family office.

I tell people too, it’s for people who are used to having lots of clients or lots of institutional support that is going to be a shift. It’s different to have one client. It’s different to have a scenario where the business of a family office, the business model of that particular family office can change on a dime. And if you don’t share the last name of the family you’re working for, you could be in a tough spot.

Yeah, “we’re gonna build out a sustainability impact portfolio. We’re gonna build out, we’re gonna have a direct investment initiative. We’re gonna allocate whatever, a few hundred million dollars to it.” That person, that professional gets there and then a year or two or three years goes by and the strategy changes because a family member too had to change a heart. And then it becomes, okay, why am I here? Where am I gonna go now? So again, they could be great opportunities. I had a great experience.but it really just depends on the family.

Here’s one, and you’ve got UBS over your shoulder there, so this is dramatic foreshadowing in some ways, but I think it bears talking about. It’s that family offices shun the large institutions, and that they want it bespoke, they want something peculiar all the time. What do you think about that?

No, I mean, it goes back to the earlier myth that, you know, basically we’re saying family office should, family office do outsource a lot, right? So again, most family offices are five to eight people, right? I call it family office island, meaning you’re there on the island and you’re like, what is going on outside of the island or off of the island? You know your island really well, right? You know the family, know all the facts inside and out, but they are, I mean, there’s a reason why all these institutions, including UBS, has built out the resources to cater to family offices, right? I’m the perfect example. They brought me on to help our clients build family offices, right?

They would not do that if it was gonna cannibalize their business. So they could be great clients and other times it’s like, hey, we’re very insular and we’re gonna keep everything close to the vest. Again, it’s family office to family office. But by and large, they’re great wealth clients.

No, and they also, you know, they need institutions to partner with of size, whether it’s at custody or lending or any number of other functions that are out there. Sometimes, you know, the RIA space is such that, you know, they try to be all things to all people and the appeal of being in, you know, the billionaire space.

It takes a lot of people and a lot of effort and frankly a different business model to deal with that and to just sort of wander in and say we’re great and we can do these things. I think that’s a short road for a lot of institutions.

Again, like we are brutally honest too. And I’ll, and here’s what I mean by that. Well, like we’re rated a lot of things, but I’ll say like, listen, there’s things that we can’t do for you. We can’t be your accounting back office, right? Like we just don’t offer that. We don’t have it. We’ve got a couple firms that would do that. They’re pure plays on it. So they’ve got to be good at it. but you know, use the various institutions for what they’re good for. They’re, know, again, that’s why you’ve got a family office. You can kind of pick or choose and be agnostic as to what you’re using them for.

If we wind down here a couple of last ones: The tech that family offices rely on is going to be best in breed.

I, listen, I have this power station all the time with family office meeting, like what, what, you know, what tech providers should we be looking at? Listen, family office have grown in, right over the past 10, 15 years that there’s not a question. they’re historically, right. had to use in a family office, had to take basically institutional tools, try to repurpose them for the family office and they just, they’re just kind of clunky, right? The family office is still a cottage industry.

If you’re trying to sell the family offices, you’re selling the two firms with five to eight employees, right? So the tools are going to continue to get better. But in my opinion, they’re always going to lag the institutional tools and kind of sophistication. But that’s also because institutional tools are very kind of narrow and deep, whereas the family office tech tools, you’ve got the accelerated reporting, but it needs to link to the accounting.

That’s an issue. And so the family of standard day is left with like a bunch of disparate fragmented systems that have a challenge talking to each other. With that said, AI, I’ve been talking to a lot of these sort of mom and pop shops, I’ll call them. They’re firms that are trying to incorporate AI to break down these walls. So it’s not fragmented disparate systems. I use the analogy of it’s like jailbreaking an iPhone. I don’t know where this is gonna be in a couple of years, but I think the tools are going to continue to improve. But again, you’re probably not going to take a family office tech tool and deploy it at institutional scale. So if that answers your question, I guess it’s a measure.

First of all, I think it’s going to take a long time before something, quote unquote, replaces Excel, which is still a powerful tool that is flexible and does what it says it’s going to do. And people use it sometimes at their own peril to be the underpinning of everything. the one thing I would add is that the mom and pop software components, I think, have a lot of great ideas. The total market to sell into that, though, does not necessarily make for a great software business.

As you say, to get those tools that are specific and required at the family office level to be profitable, you got to figure out a way to sell that into something bigger. I’m not sure there is anything bigger.

Yeah, I mean, you’d be better selling it to, you know, small businesses, right? So, I mean, the tools are going to get better, but there’s been a lot of interest recently in the past couple years. I don’t think, I think most of them are not going to survive. I don’t want to say there’s only going to be a couple winners, but on the Consolidated Reported Front, I really think there’s only going be a couple winners because you need scale.

And again, family office, if you’re looking to make a decision, you’re like, well, okay, well,
5,000 users use Adapar and 50 use this other platform. So which one are you gonna choose? You don’t wanna onboard to the one that has 50 and then three years down the road, they’re out of business, or there’s fold or something like that. So with scale comes a little bit of security that at least you know that a lot of other people are using. You could point to that.

Last question. Family offices will rival PE firms in terms of influence in the investing market?

85 to 90 % will not rival PE firms. That’s not what they’re set up for. That’s not the goal of most family offices. Again, it’s complexity management. Will some rival PE firms? Yeah. But again, you… Listen, I’ve seen some family office go out there and raise their party capital. When they do that, they’re not a family office anymore. They might have a component in there, but they’re private equity firms.

What you’re getting at is private equity firms are raising a fund every couple of years. Can a family office do that? No, because once they do that, they will be a private equity firm. So PE by and large has an infinite capital source, as long as they are good at what they do, right? So with that said, you know, there’s a lot of entrepreneurs that are are post liquidity events have played in the direct investment space, they really wanna do it. They’re still young, right?

They’re billers, operators created. They wanna do it from a different vantage point. They’re coming to a realization: “that w”We need to start a fund.” I really love that story because again, they’re founders and operators. They didn’t come from the financial ecosystem first to do this. So I think they’re putting a different spin on PE. I think it’s great for the PE industry as a whole, by the way.

And I think, if you’re a founder or a business owner, you might have an easier time taking an equity investment from somebody like that, who’s known in that specific industry that they made their money in, who’s had to make payroll. And they probably have a different timeline than normal PE that’s looking to flip every three to five years.

So I think as an investor, I think that would be an interesting investment opportunity, right? And so it’s like, okay, well, part of my PE allocation, you know, This might look interesting. I hesitate to make, you know, I’m not an investment person, so.

Great stuff. Mark, how do people find you and reach out?

I’m on LinkedIn. I would attempt to just spell my name with my email address at ubs.com, but it’s very lengthy. You just hit me up on LinkedIn. But, Frasier, I appreciate the time. This was great.

I’ll have that in the show notes and as a final parting, we sort of listen to people say, the family space is getting loud. I’m not sure it is. I think the vendors are more loud than the family offices are. I don’t know what your experience is there.

100%, the family members themselves are still quiet. You don’t see them out there on LinkedIn. It is the ecosystem to your point around them that is getting loud, right? It’s LinkedIn. It’s like, you know, every time I’m on there, it’s like somebody’s got something to say about families, which is good. Again, if you think about every boom in history, they attract people, right? You could say the same thing about AI, right?

But again, it’s become loud, but that’s the industry. It’s not the family offices themselves.

Great stuff. Thanks, Mark.

Thank you, Frazer. Appreciate it.

FAMILY OFFICE DEFINED

MORE ON FAMILY OFFICE DESIGN WITH ED MARSHALL

We have Mike Monaghan on the show today and covering the “Birth of an ETF.” He’s going to talk about the Founders ETF and its new launch. We’re also going to talk a little bit about what it takes to get an ETF up and running. From a compliance perspective, remember, there’s no guarantee of future performance.

Frazer Rice (00:00.986)
Welcome back, Mike.

Michael Monaghan (00:02.616)
Frazer, it’s great to be back.

Frazer Rice (00:04.4)
You are at an interesting point in time right now. You’re about to start up Founders ETF and I think you’re about to get trading authorization to get going. Maybe tell us a little bit about the process to set up an ETF. Then we’ll dive into the strategy a little bit.

Michael (00:21.25)
Yeah, absolutely right. We should start trading on the SIBO Thursday, so two days from now. And we’ve launched our first fund, the Founders 100, that owns the 100 best founder-led companies. I’d be happy to go through some of the process that it takes to set up an ETF.

Frazer Rice (00:40.014)
Love it. ETFs are the main way to go now in terms of getting an inveestment cvhicle up and running. What has your experience been around?

Michael (00:52.014)
Yeah, so ETFs have become the primary investment vehicle for a few reasons. Let’s outline those reasons. Then we can go through some of the steps that it takes to set up an ETF. So on the advantage side of an ETF, they’re typically a bit lower cost than traditional mutual fund products. Importantly, they’re tax advantaged. So there’s no gains or losses that occur during the normal ETF growth phase.

Everything that happens within the ETF is done with what’s called an authorized participant. So you do exchanges. And so there’s no capital gains that are assigned to the investors. As long as they hold the ETF, a tax trigger only occurs when they actually sell the ETF.

Finally, it’s a great way to get exposure to the market. So whether you want to own a broad market index, one of the legacy indexes, or a vehicle like ours. That gives you in one single trade, rather than having to guess who’s going to win. Is Nvidia going to win or Palantir who’s going to win? You can own a hundred of the best winners in the market in one single stock ticker. In our case, FFF.

Frazer Rice (02:07.364)
So let’s dive into that theme a little bit. As you said, it’s the top hundred founder led companies. First and foremost, public I assume, private, you’re not diving in those waters.

Michael (02:20.59)
Correct. So these are the hundred best publicly traded founder led stocks. And we generally fish from the 200 largest founder led publicly traded stocks. So a lot of these are names and founders that are very well recognized. Whether it’s Elon at Tesla or a Mark at Metta, Larry at Oracle, Rich Fairbanks at Capital One. These are all very well known founders.

They’re great entrepreneurs who are leading highly scalable, very high performing publicly traded stocks.

Frazer Rice (02:53.914)
So let’s define founder a little bit. Obviously we have sort of the cult of personality around high-end CEOs. It sounds like you’re identifying companies that have been founded. The people who are running them not only founded them, but they scaled them. They have now gotten them to a level of maturity. That’s different from the typical public company that we find in the S &P 500.

Michael (03:19.104)
Yeah. So first let’s define a founder. Then let’s talk about why we think the founder led companies outperform a traditional S&P company. We define the founder as being a chief executive leader. It could be chief executive officer, could be chief technology officer. Sometimes that say a scientific or medical company, would be the chief scientific or chief medical officer. And that person conceived and founded the company, took it from zero to one.

It’s their imprint that has guided it over its 10 or 20 or 30 year period. That’s taken it from a small private company to a venture backed company to a large publicly traded company. And so the idea being the person that founded it continues to run it to this day. We talk about the fact that we own an Nvidia that Jensen still runs. But we don’t own Intel. We own Meta because Mark still runs it, but we don’t own Google.

We own Dell computer because Michael Dell still runs it. But we don’t own Apple. We own Capital One because Rich Fairbank still runs it, but we don’t own American Express.

Frazer Rice (04:25.86)
Got it. So lots of things to get into here. How does it a company get on your radar screen? And then ultimately, how does it get off of it?

Michael (04:35.806)
Great question. the getting on the screen is fairly mechanical. We look at the 200 largest by market capitalization founder led stocks. So we look at all U.S. listed. So it could be listed on the New York Stock Exchange or NASDAQ, but it has to be U.S. listed. We then look at the 200 largest. And from there, we select the 100 best using a quantitative factor model. So I’m

have a Sanford Bernstein background and so do some of the folks here. And so for folks who are familiar with Bernstein’s research, we use a Bernstein factor model to pick the best, the hundred best names out of the 200 largest. That’s how they get on our radar. And to get off is quite simple if they retire. So if a CEO announces he’s retiring, per the prospectus, we have 90 days to sell the stock. once we, so for example, Mr. Buffett recently stepped down from Berkshire Hathaway.

And so we sell Berkshire Hathaway on his announcement and no longer own the stock.

Frazer Rice (05:38.0)
things like corporate mergers or divestitures or maybe even a reclassification of stock where the founder stays on in some capacity but their decision making has been reduced. How do you analyze that?

Michael (05:54.326)
Yeah, so there is some human overlay judgment calls here and the founder has to be an executive officer leading the company. So they can’t just run a division. They can’t just be chairman of the board. They have to be the executive in charge of running the company.

Frazer Rice (06:14.0)
And if for, I guess one of the exits possibly would be if, and I don’t know if this is even possible, but if NVIDIA were to take over Meta and there isn’t room for Jensen and Mark in the same suite, how do you analyze something like that?

Michael (06:34.253)
So in the business combinations where you have two founder-led companies or a non-founder-led company swallowed up by a founder-led company, as long as an original founder remains, it remains in the portfolio. So we’ve had some stocks that had, say, three to four co-founders. And as long as one of those co-founder remains, it remains in the portfolio.

Frazer Rice (06:58.352)
So one of the things that’s a bee in my bonnet is the concept of having shares where, in a sense, they’re super majority or voting components and then shareholders that have less decision making authority to act as a check and balance around the company. Is that something you’re not really that worried about or is it something that may be a factor that’s important later on?

Michael (07:24.525)
So we actually think that’s one of the opportunities that this exists. Like one of the things that we haven’t talked about yet is why is all this alpha there? Why is this uncaptured alpha there for us to go get? And we think historically in the past, active money managers have sometimes shied away from these founder led companies because to your point, Frazier, oftentimes the founder has managed to have super voting control, 10 to one shares, 101 shares. So they completely control the company.

And some of these larger active money management complexes have said, well, we as the shareholder, we need to be able to have a vote and we’re going to underown these stocks. We have the opposite view. We think these founders are special. So we think that by the time a Mark or a Elon has driven their company into the public markets, they’ve showed that they know how to set the vision, ruthlessly execute and generate value for the shareholders.

And so we’re not concerned by super voting structures. Oftentimes those are the stocks that we want to own because it’s the founder that’s in control and setting the direction of the business and generating high returns for the shareholders.

We view it as you either believe in them and you own the stock or you don’t believe in them and sell the stock. We’re not interested in other people’s getting on the board and monkeying with the decisions of the founders.

Frazer Rice (08:30.255)
Is this it? What is it about the founders, especially for those that go from zero to one, then to scale, and then to shepherding a mature business? What makes them better and what drives the alpha that you’re trying to seek? In terms of putting together a portfolio of these types of companies?

Michael (09:02.891)
Yeah, so the great ones tend to be a bit irreverent. They tend to be highly visionary. They tend to be charismatic communicators and relentless in their execution ability. They’ve got a great ability to pivot if a change needs to be made. And rthe moral authority to set a tone to generate very high rates of return. We see it sort of over and over and over in these founder led companies. And if you look at some of the studies that we’ve done.

There’s a study that Bain Capital, Bain had done years ago in combination with Harvard Business Review, founder led companies tend to outperform non-founder led companies in say the S &P 500 by 3X. So it’s this personality type of high vision and high execution tends to drive outsize returns. And it’s a bit of a self-selecting process.

If you think about it by the time any of these founders that we own or talk about have got to the public market. They first had to identify an opportunity to go after. They had to develop a great product by listening to their customers. And they’ve shown that they can scale all the way from a series A round, B, C, D, all the way investing and generating high rates of return in the private markets.

They get to the public markets, continue to do that. And now you get a little bit of an effect of a echo of that, of now all of sudden you’re in the public markets. If you get enough scale, you have this highly effective business. Now you’re getting relatively cheap capital that you’re feeding into your business through the public markets. And now you continue to grow.

Frazer Rice (10:42.096)
Just to summarize at least what I’m hearing is that they’ve gotten to the point of becoming public. They’ve been able to say no to losing control in exchange for either putting some liquidity back in their pocket or otherwise moving on. And so they’ve almost ratified their vision and message and they keep going. And by the fact that they’re public, there’s enough liquidity for everyone else out there in terms of their investments. So it ends up being a win-win.

Michael (11:11.157)
I think so. That’s what we see.

Frazer Rice (11:13.316)
So one thing that I’ve been sort of reading about and thinking about is the concept that the number of public companies is becoming less, well, it’s decreasing, and that many people are able to stay private for longer. Do you worry that your universe is going to get too small to provide sort of a canvas for your ideas here?

Michael (11:37.549)
Let’s talk about three phases of that. We don’t, we actually see the data showing that there’s more and more opportunities within founder led. So let’s look at history and then let’s move to the future. So historically, probably about the time you and I joined the securities business, they would actually take the, to your point, they would take the founder, they would kick out this charismatic founder.

They would put in some mid-level proctor or GE middle level manager to be the you know, the suit in the room to take the company public. And that was sort of in the late nineties and people figured out that wasn’t such a good idea. So if you actually look at the chart, there’s more and more founders staying and leading their public, their, their publicly traded companies.

That’s number one. Number two. Yes. We have seen some companies stay private, obviously Stripe, SpaceX, but we are now seeing, for example, SpaceX coming to the public markets. Eli is talking about coming next year. so we, we haven’t seen it so far impact the pool with which we can fish in. And as I mentioned, that’s what we saw historically.

In the future, think, Frazer, I think we’re going to start to see a conversion of public and private markets, meaning these private mega cap companies have liquidity. And I think that you’ll see more and more ability to trade those stocks almost in public liquidity. So I think these two markets are converging. So I think that

Not only do we have plenty of founders in the traditional public markets, I think that the liquidity and the big privates is going to converge to a public market style shortly anyway.

Frazer Rice (13:13.232)
You’re in a curious time as far as launching an ETF around this concept. I know a lot of people are wary of Mag-7 and ultra valuations and issues related to that. How do you respond to that concept that a lot of the growth has taken place in seven, maybe seven out of the hundred that you’ve chosen?

Michael (13:33.356)
Yeah, so that’s a misconception. We see Mike Saylor get on TV and wave his arms around it, but it’s not really true. First of all, what’s interesting, if you tear apart the Mag-7, it’s actually the Mag-3. The outperformance in the Mag-7 has come from Meta, Tesla, and NVIDIA. So it’s not just the Mag-7, it’s a founder led. And now you say, well, that’s a small sample set. Let’s look at a bigger sample set. So if you look at the NASDAQ 100, for example,

It’s actually the 20 founder led companies have driven most of the outperformance over the last 25 years. And what I’m about to tell you about the S &P 500 probably won’t surprise you. It’s the 37 founder led companies that have driven most of the outperforming the S &P 500. So the outperformance is coming from founders, not from any specific part of the market. And one of the things that we think is great about this ETF is to avoid concentration.

I know you’re really familiar with the concept of active share and that’s how different you are than the S &P 500. We have an 85 % active share to the S &P 500. So if you own the founders 100 ETF, you have much different exposure to the market than say the S &P 500. And so we think it helps reduce some of that concentration. We’ve done some things to make sure that we are diversified. First of all, we do own 100 stocks.

So really good diversification across that. And then number two, while we run a market weight portfolio, we cap. No stock can be bigger than 7 % of the portfolio, so we don’t get out of balance at any point. So we think that we mitigate some of those concentration risks and we allow people to invest in innovation without being over concentrated to any one name, say the MAG-7, for example. So we think that we’re giving our investors really good exposure to innovation through the founders, but not exposing them to pre-existing market concentrations. And then finally remind everyone

It’s not the MAG-7, it’s not the NASDAQ-100, it’s not the S &P-500, it’s the founders within each of these are what are driving the outsized performance in those analytical groups.

Frazer Rice (15:36.218)
So from a diversification standpoint, obviously not everything in one name, the 7 % cap you described, do you have sector concentration guidelines as well?

Michael (15:45.749)
We don’t have sector concentration guidelines, but if you look at the nature of the portfolio, we were fairly well diversified. We’re slightly overweight tech and financials versus say the S &P, but we own healthcare stocks, own consumer stocks, we own energy stocks. So we’re giving you a broad exposure to the market.

Frazer Rice (16:05.924)
Let’s talk about leverage for a second. I know a lot of people are trying to juice returns by piggybacking off of other people’s money on that front. Does that have a place in your ETF?

Michael (16:17.004)
So there’s no leverage in the ETF. We sort of believe in get rich the slow way. I like to tell people that it’s very hard to make money in the stock market over the short term, but it’s not particularly difficult over the very long term. think Mr. Munger and Mr. Buffett used to talk about this. the idea being, leverage can impact you in times that are not favorable.

So we believe in just owning the stocks unlevered, let them compound over very long periods of time. And we think that by doing that, we and our shareholder, we think our shareholders can generate wealth over very long periods of time.

Frazer Rice (16:54.98)
So tax efficiency, the concept of holding period, does that play into your process at all?

Michael (17:04.316)
So remember within the ETF, as long as you’re managing your trading properly within the ETF, there’s no tax implications inside of it for your shareholders. Your shareholders only would be impacted at selling. So assuming they hold the stocks for over a year, any gains would be long-term capital gains treatment.

Frazer Rice (17:27.024)
And when you’re describing the investor profile that you’re looking to attract here, who is this for?

Michael (17:35.916)
Yeah, so the person that, you we really think it’s appropriate for you if you have a five year or more holding period and you want to have long-term capital appreciation. You know, if your goal is to be exposed to the best minds and public securities, that’s the founder led companies, and you want to compound your wealth over a very long period of time and have a high probability of outperforming the traditional broad market indexes, this ETF is designed for you.

Frazer Rice (18:04.705)
And as you’re sort of outlining that profile and for those people who are trying to figure out where this fits in from an equity allocation perspective, you’re in charge in many ways of the spoke of a hub and spoke component of people are really sort of looking at indexes as the base of their equity portfolio. What are you looking for? What kind of benchmarks do you sort of measure yourself against?

Michael (18:35.007)
Yeah, so we think this is absolutely a core holding. So if you’re looking to build out you or your client’s portfolio, we think this should sit at the core. It is on the growth side, so it’s core growth. We think that it is a one-for-one replacement for, the NASDAQ 100. Or, for example, somebody holding the triple Qs. We think this is a better holding than the triple Qs. So we benchmark ourselves against them and against the S &P 500. Ee look at beating those two broad market indexes, generating better risk return for our investors.

Frazer Rice (19:13.019)
For those listeners that are out there and want to find out more, what’s the best way that they can either get a hold of you or maybe even better, do you have a ticker symbol ready that people can discover?

Michael (19:25.215)
Yeah, absolutely. So the ticker is FFF. So that’s the FFF ETF that we’ll trade on. And investors can find that at their favorite brokerage firm, whether they’re Schwab customers, Interactive Brokers customers, Fidelity customers, trades under one ticker, just like a stock.

Frazer Rice (19:44.365)
And let’s take, we have a few minutes to go here, which is great. Your experience in terms of establishing the ETF, maybe a couple of some of the touch points when you went from vision to execution here, what was the process?

Michael (20:00.106)
Yeah, so ETF has a few basic processes that are regulated under the 1940 Securities Act. And so a lot of those rules are set up to protect the end investors. So for example, the securities live within a trust. So we set up our own trust. Some people use a mingled trust.

We thought it was better for our end investors to have our own trust that we set up that has an independent trust board that oversees to make sure that we’re executing our strategies as we’ve outlined in the prospectus to make sure that we’re Doing the best we can for our investors.

You’ve got to set that up There’s a few firms that do the plumbing for the for the ETFs would say US Bank is probably the largest player. So US Bank provides our our fund custody and fund administration and then there’s just a few other vendors in the space that sort of help with all the plumbing to make sure that the ETF runs smoothly. So it’s probably a six month process if you stay really focused to get all of that set up.

Frazer Rice (21:03.313)
You get that set up, how do you approach the Schwabs and the Fidelitys and the other platforms to make sure that people can access, buy, sell, whatever they want to do with your ETF?

Michael (21:14.347)
Yeah, that’s a great question. So the online brokerages typically put you on the platform as soon as you’re listed on a major US exchange. So you’ve got to get listed on NASDAQ, NYSE or CIBO. We chose CIBO.

So again, on the traditional online brokers, you’re there day one. And then the big wire houses, JP Morgan, Goldman, Morgan Stanley, BAML, they typically have a few hurdles that you’ve got to get through, whether it’s daily trading liquidity assets under management.

And over time, as you run the wickets through their process, you’re added to those platforms.

Frazer Rice (21:48.721)
We live in a political age and a time when there’s just chaos everywhere, different types of rules in order to allocate capital. If you’re an investor trying to guess what’s happening politically, et cetera, that are difficult, you must be positive as far as the environment for founders to find success in this country and beyond. Is there anything that you’re looking for to make sure that those conditions hold?

Michael (22:18.225)
Yeah, we don’t really look at the macro or political backgrounds. think over very long periods of time, U.S. innovation outperforms. so we sort of we think that, again, one of the great things with investing in founders is they keep adapting as the background changes behind them. So we think over very long periods of time, the U.S. has great economic growth. And for those people that have worried about little blips along the way, we think the founders are the absolute best at mitigating those blips.

Frazer Rice (22:48.334)
I like to say you bet against America at your own peril and it sounds like from a founder perspective it’s still a great place for them to locate their businesses and grow them here.

Michael (23:01.042)
Absolutely.

Frazer Rice (23:02.971)
Just to reiterate, FFF is the ticker symbol for people to find it. any other contact points for people to find you if they’re interested in what you’re putting together.

Michael (23:15.613)
Yeah, so we have a great website at FounderETFs.com. can go check out there or anyone’s happy to email me, just michael at FounderETFs.com. Happy to chat with anyone who has interest about the portfolio, the strategy, or what we’re building.

Frazer Rice (23:32.197)
Well, great to have you back on, Mike. Thank you for putting up with my attempt at looking like Steve Jobs. It’s 25 degrees in New York here, and I am the stupid one who’s not in California or somewhere warm. appreciate you taking the time to be on and talking about your new product.

Michael (23:48.011)
Yeah, it was great to be on here. Really a huge fan of your podcast and just the level of guests that you’re able to interview and help educate your viewers.

Frazer Rice (23:56.849)
Mike, thanks for being on.

Michael (23:59.061)
Thanks a lot, Frazer.

Previously with Mike Monaghan

ETF EDUCATION ARTICLES ON ETF.COM

BROOKE SUMMERHILL has written a new book to address “Divorce and the Wealthy Woman.”

In this conversation, Brooke discusses the complexities of divorce, particularly focusing on the financial aspects that wealthy women face. She emphasizes the importance of understanding one’s balance sheet, hiring the right professionals, and navigating complex assets during divorce. The discussion also covers the emotional components of divorce, the significance of having a supportive team, and the benefits of open conversations about finances, including the role of prenups.

Frazer Rice (00:01.186)

Welcome back, Brooke.

Brooke Summerhill (00:03.378)

Hi, thanks so much for having me. I’m so excited to be here. Let’s chat about the most fun topics in the world. Divorce and finances, right?

Frazer Rice (00:09.952)
Well, and codified in your new book, Divorce for the Wealthy Woman. I have already started, and I think it’s a winner for a bunch of reasons. The big one really is addressing a viewpoint that I think has been missed by the financial books generally speaking,

Brooke Summerhill (00:15.794)
Mm-hmm.

Frazer Rice (00:31.086)
It really corrects a problem, I think, around information asymmetry in finances generally. And unfortunately, we’ve both been around it from a divorce perspective. Tell me what, first of all, let’s let our listeners remind themselves of your practice. And what do you do there? And then what was the book trying to accomplish?

Brooke Summerhill (00:53.554)
Okay, so hi, I’m Brooke Summerhill. I do specifically for the last like 15 years in finance. Specifcially in the last five specifically in divorce and finance for wealthy women. So I’m not very creative my book specifically and my podcast is literally called divorce for the wealthy woman. I love being able to understand the perspective of someone going through divorce,not feeling the fire, and creating a years long fight.

I help alleviate the stress of divorce and go through the finances, the emotional aspect, I’m in financial psychology. I’ve been doing that and I plan on continuing doing that. It’s a fun, fun, fun career path for me.

Frazer Rice (01:40.526)
One of the great things I think about your book is it starts where I start. You really have to be comfortable with what your balance sheet looks like.

Take us through a little bit about your experience in helping wealthy women get acquainted with something they weren’t familiar with initially. However, they have to get familiar with it real fast.

Brooke Summerhill (02:03.014)
So typically, you go to a lawyer . You’re about to get divorced and it was blindsided in your face. my god, what is going on? He wants to get divorced or she wants to get divorced. Doesn’t matter who you are, heterosexual couple or not. It does not matter.

You might not know where the finances are, right? And you’re going to a lawyer. You expect them to help you out, but you don’t even know where the assets are. You don’t know it’s on the balance sheet. So the first step is breathing.

Let’s not get into this sympathetic nervous system. No fight or flight, freeze, thaw, and let’s not go there if we can’t avoid it. And really just breathe and understand it’s going to be OK.

That’s the first thing I want to just point out is you can do the work on yourself without having to do hard interval training. You can just breathe. So you’re going to breathe and understand, OK, the balance sheet. I can figure this out. You got it.

And you might need to hire someone like myself who’s a certified divorce financial analyst, you might have your lawyer help you. You might ask your soon to be ex if they’re willing and amicable to understand the balance sheet. You might go to a financial advisor, wealth manager, your family office and ask some questions.

So this is a time of learning and it’s okay that you don’t know where everything is. And the balance sheet is terrifying for most people. 98 % of us have money anxiety. It’s okay. Breathe.

Get help and support where you can. The foundation is the balance sheet. If this is the only thing you take from today, is just breathe and know that the foundation is your budget, your expenses, what’s coming in, what’s going out.

Can you figure that out? Even though you might not know where your assets are. Do you have Bitcoin? Or have different properties? Do you even know if there’s liens, mortgages, loans on them? That all will get figured out. But you’ve got to know what you’re spending.

I would say, you tell me if you have a different experience. But most clients do not know their budget. And that’s OK. Doesn’t matter your wealth, income, anything. Most people, at least in America, do not know what they spend every month.

So that’s the foundation is to start theirs. Understand, what are you spending? Just keep a little log. It can be old fashioned. And I have plenty of technological apps that can help with this. But keep it old fashioned. Just write down, what are you spending? And keep that for a week.

Brooke Summerhill (04:28.752)
That can help you in your divorce process and remember to breathe. There you go.

Frazer Rice (04:32.91)
And it’s part of my process, I think, is to just understand what you’re spending. And then the next step is really understand where it comes from to help support that spending. It’s like analyzing someone who earned 100 million dollars from this movie. It’s like, OK, that’s the headline. Now it’s a lot different in reality. Certainly taxes, how it’s paid to you.

We’ll get into this in a second, and sometimes it’s not in cash.

Sometimes it’s in different types of assets. Whether it’s stock or maybe you own homes, and it may not be necessarily liquid right up front. It sounds like we’re parking our cars in the same garage on that front.

Brooke Summerhill (05:19.154)
Absolutely, absolutely agree with you.

Frazer Rice (05:22.114)
So maybe let’s go through some of the complex assets that you think about that come up in any, not all divorce situations, but definitely in many of them. Many times people have grown their wealth through a private business. so even, you know, the number that is settled upon in the divorce settlement may not be readily available from a cash payout perspective. How do you take people through that?

Brooke Summerhill (05:47.473)
Oof. So I have an entire chapter on businesses because majority of my clients, I’m going to be very sexist here and say majority of my clients, husbands in a heterosexual relationship do own a business or have just been bought out of a business or are starting a startup or have something behind the scenes that they’re aware of or maybe not even aware of. So businesses are huge thing. That’s why I put a chunk of it in my book because

The biggest advice I can give is hire, I’m going to be a repetitive throughout this whole podcast today is hire the right professionals if you can, because you don’t know what you don’t know and that’s okay. You’re going to breathe through that and acknowledge you don’t have to be an expert in divorce. But when you have a business reading, listening to podcasts, doing all of those exercises are wonderful and hiring an expert.

So getting someone who’s understanding the finances in a divorce specifically, so business valuator, or just having a consultation. That’s enough to understand, this, I need a forensic accountant, because I don’t know anything that’s going on within this part of the businesses that I’m a part of, but I’m not really a part of, or I need a business valuator. Let’s just have a consultation. It could be really a non serious, non threatening, non emotional way to start it.

I’m just going to have a consultation to understand, do I need this business valuator? I would just at least have those conversations to understand more about your husband’s business or your business in general on what are the numbers behind it? Because it is very complex, just as you’re saying. Businesses, absolutely, you want the right experts involved.

Frazer Rice (07:30.506)
And sort of as a broader business, or not really business, but sort of as a broader sort of contextual situation here, the type of wealth, whether it’s private funds, people who are invested in private equity or hedge funds or stock options or RSUs for people who are in the tech world, things that are held in trust, there’s the concept of carried interest and real estate and concentrated stock.

This is to go back to your comment that there are people out there that can help you. Understand those assets, I guess for lack of better word, can and can’t do. As far as either provide cash flow or are easily divisible in a divorce settlement. Does that square with your thinking on that?

Brooke Summerhill (08:13.522)
Absolutely. And my role is to really divide assets in a creative way that benefits both parties. They can move on, clean the slate, know, not have fights for years to come. So when you talk about dividing assets, that is spot on. Get the right professionals involved, understand your options and the scenarios, and then you can drive the car with control off the right highway scenario, or you can continue down that highway to another off ramp.

If that suits you in that creative solution of dividing the assets with complex assets like RSUs. And RSUs, restricted stock units, we can go into some of these definitions that are complex, or we can just say, reach out to us if you have questions on what is RSU or what is stock option, or what is these terminology things that you guys are saying. Because it’s very complex and scary, but it doesn’t have to be if you get the right professionals involved, understanding your options.

Frazer Rice (09:07.564)
So let’s pull back a second in terms of assembling your team. If you’re going, you’ve been side swiped by sort of potential for divorce, you’ve hired a divorce lawyer probably right off the bat. But that you really, in my opinion, you need more than that. We talked about the financial advisor to help you work through what’s owned and how it’s owned and what cashflow it can throw off and whether it can support you or not.

I would argue that this is a good time to reengage a trust and estates planner because when you go through a situation, know, divorce situation, the things that you have in place don’t necessarily apply in the same force that they did before and definitely need a look.

Your accountant, of course, if you don’t have one, it’s probably worth it to get started thinking about that because how you receive assets are gonna be important and how you pay taxes on them.

You’re gonna be on your own going forward. And so it’s gonna be important to understand those ramifications. What other people do you have in your cabinet there?

Brooke Summerhill (10:10.547)
Okay, so if we’re on a yacht and we have crew members, we have to have a few of them like you mentioned. I would say nowadays, if we go into the differences of litigation versus arbitration versus mediation versus collaborative divorce, there’s different types of lawyers that we would hire.

So we can go into that, but we’ll just say, you’re gonna hire the right attorney for you to help you with the divorce process, understand the law, and it’s not going to look the same for everyone because you might not need someone who’s going to litigate and really be your advocate every second when you can hire a mediator that can help you both get creative and neutral setting wise, get you divorced faster potentially. You hire the right divorce arena lawyer, advocate or mediator, someone in that nature.

And then yes, you absolutely need the accountant, CPA, tax attorney, sometimes the complex assets require hiring some consultants within the tax arena to understand what the private equity actually means within the contracts because they don’t even understand it. It can be very convoluted. So hiring the right teams with a tax standpoint is very important within the state that you are in or that business is in. That’s just another arena. The other crew member you want in a lot of

Frazer Rice (11:16.046)
Definitely.

Brooke Summerhill (11:36.691)
times I’m the one who’s bringing them in is absolutely trust the states. You might need a whole team and a crew around that because if you have dynasty stress that you didn’t even know you were signing off on for your children, you know, five to 10 years ago, you need someone to understand what that means. Or if you have an estate plan that is in the midst of there’s a lot of creative solutions here that you need the right team members. So trust in the states, like you said, big, big, big deal. Then we have therapists.

Frazer Rice (12:05.454)
No, I was just going to dive in and say dramatic foreshadowing talking about the emotional component of this. so divorce is a dramatic situation. To me, being a good user of professional services is using the right person for the right situation. I’ve gone through it and had friends go through it. I’ve had clients go through it where

Brooke Summerhill (12:06.792)
Go on.

Frazer Rice (12:27.212)
Sometimes they go through and they use the divorce attorney as their therapist and that’s an expensive and not very productive way to do that. Whereas having a therapist in your crew and using that person who’s trained for that and can get you from here to there in that journey of recovery.

It’s an important part and one that shouldn’t be neglected, especially when you’re facing… maximum stress legally and maximum stress emotionally and if you’re trying to sort of manage the firehose of information in order to make good decisions.

Brooke Summerhill (13:03.731)
Absolutely. Well said. I agree. So therapist is a tool. Parenting coaches, I utilize that a lot of the times. I’m a divorce mediator, but I don’t like to practice it because I like to stay in my financial analyst realm and helping women on that end. And so I’ll bring in, you know, divorce coach and a parenting coordinator.

So there’s a lot of little rules that you don’t think about that might be necessary to help a mediator, to help your divorce attorney and you, as the client understand what’s best for you, your children and your emotional setting during this financial whirlwind. And you mentioned financial advisor. I’m going to just put a little caveat there. It cannot just be a general financial advisor.

There’s tens of thousands of those all over the United States. I absolutely have a bias here, but it has to be someone who is specialized in divorce and someone who understands complex assets.

You cannot go with someone who is non-experience in the higher to ultra high net worth realm because they will not grasp what you need as quickly or as efficiently as someone who’s done this for years in that bracket. It’s definitely something that I like to point out all the time.

Frazer Rice (14:19.245)
No, and it’s absolutely just such truth right there because the assets are complex, the machinery around it can be complex and whether you can or can’t do things, you have to understand that quickly.

The tax ramifications of even dividing assets can be net less to everyone involved. And so we’re going to talk about modeling settlements in a second.

But then the other thing I tell people is that sometimes people walk into these situations having done trust in the state’s planning in conjunction with theoretical asset protection planning, maybe in lieu of a prenup or something like that.

And that’s not necessarily a sure thing. Family law is such that judges can take a look at certain situations and say, hey, you know what, this isn’t equitable. We’re going to go in a different direction here and you may owe it anyway. And so to have that

I hate the word holistic, but I’m going to use it here. The broader view of not only how the numbers work, but how it relates to the different legal and structural things in place. It’s vital to have, especially at the numbers that we’re used to talking about, because those mistakes, even unintentional ones, can be really expensive.

Brooke Summerhill (15:29.523)
expensive is the word there. It could be extremely, extremely devastating to not only you, but in the future, your children are going to most likely be part of that legacy or your philanthropic endeavors.

And if you’re making mistakes, even with your team unintentionally hiring the wrong people that don’t understand the complexities or the tax ramifications, that’s devastating for not only you, but yeah, yours to come and your family and charitable giving.

Frazer Rice (15:57.071)
So once we compartmentalize, it seems to be an important thing here. You have to be able to sort of put different things in different boxes as you step into the different components of settlement that are in place here. So let’s say you’ve got the emotional part kind of addressed in the sense that you’re working on those issues that you need to work on to come out the other side. You’ve got your team together from attacks and legal and trust in the states and divorce settlement.

Now, to me, is the notion where you have to step in and say, OK, this is now becoming a bit of a business arrangement where you have to model a settlement that is going to work for you and it’s going to work for your soon to be ex-spouse so that, as you say, you can move on rapidly, but in an orderly fashion. So you come out the other side and have something that’s workable so you can move on in both of your situations.

from the modeling settlement part of it, how much do you go into that cashflow planning, knowing what you cost and making sure that those things are funded so that you can enjoy your life going forward?

Brooke Summerhill (17:03.271)
Think that is the foundation of the house. think that again, I have a bias coming into it, seeing what can happen when it goes wrong and I’m coming in after the divorce and helping with money coaching. really is devastating to see, wow, you took this, this, this, this, and they didn’t model what would happen with your cashflow if you didn’t take this, this, this. It’s devastating.

Why I do what I do is really to be that precursor to look at those options before you make decisions. And there’s others that do what I do, you know, as a certified divorce financial analyst, we model out scenarios with the cash flow. So you have to understand your expenses and income and what’s going to be coming in and out basically. And that’s okay. Again, you are like most people and you don’t know what it is.

You can hire someone to help you through that and really work on it in a very easy and manageable step-by-step manner, where once you understand what you’re spending and what you need to live off of, then you can model out those cashflow scenarios with the different assets coming through.

And the software that I utilize makes it really easy and more fun and crisp and clean. Calculations are not hard. We’re not doing it by an Excel sheet, managing it every second for hours. It’s just, let’s look at this scenario for five minutes. And then

Frazer Rice (18:21.423)
you

Brooke Summerhill (18:26.939)
Again, let’s go off the highway. You’re steering the car. You have the foot on the gas. You tell me your values. And client, let’s go see if this highway will match. Let’s look in my software and see. Will it match your values if we took this scenario versus this other scenario? So she, for me, it’s a she.

She’s getting to make those decisions. But I’m there in the passenger seat making sure. You’re not going to come to someone in six months to a year and be devastated because you don’t have the cash flow. You’re going to take the right settlement.

Or present it to your student to be X, where it’s best for both of you. You both can move on and not fight in court year after year. Because you didn’t get what you deserved, right? That’s resentment building. We don’t need emotions in it if we can make it part of the business thinking process.

Frazer Rice (19:12.751)
No, and it’s important to underscore the difference between owning assets versus generating cash flow. You can be wealthy on paper, but if you’re having trouble getting the tuition payments made. Or if that hasn’t been discussed as to where certain financial requirements are being taken care of either at one spouse level or the other, that’s when you end up tripping over things that might have been dealt with with a little bit more organized approach going forward.

Brooke Summerhill (19:44.787)
Absolutely, hire the right team members to help you through that. Because if you’re listening right now and your anxiety is spiking a little bit. Because you’re like, my gosh, I don’t know, I don’t know, I don’t know, it’s okay, breathe. This is all you need to hear is hire someone or at least consult with some people in this divorce world and you’ll get through it.

Frazer Rice (20:04.719)
So the part that I know least about, I don’t have kids. from a parenting and support component, I can sort of look from afar and have an opinion on it. But it’s quite a bit different when you have your own kids and you’re making sure that they’re taken care of, that their five, 10, 20 year plans are squared away going forward.

The emotional component of shared parenting, the establishing a schedule post divorce, those types of things which seem obvious in some ways but aren’t because suddenly you and your soon to be ex-spouse are going to be having different schedules and different priorities, etc. How do you take your clients through that?

Brooke Summerhill (20:46.653)
OK, great question. That’s a whole chapter in the book as well, children. And that is a difficult journey for most clients right at the start. And it gets easier. So if you’re listening to this and you’re just thinking of divorce.Oor you are just hit with papers and you are about to go through a divorce, or you’re in the middle of it and you still feel like it’s crunchy and it’s really difficult and you’re walking through mud in a way, it gets easier. It really does.

The first step is again, you can hire the right professionals. So hire a therapist for yourself. And it’s better than just friends and family because friends and family might fuel the fire. That is a mistake that I see a lot of men and women make as they divorce. So hiring a therapist for yourself, then parents and coaches, parenting coordinators, those who can really understand where you’re at and level with you to make those decisions or hiring the right mediator or divorce attorney.

Work specifically with those who have children because it gets way more complex with children, especially when you have bigger assets, then you need to understand what’s going to happen with the cash flow for schooling. mean, private schools, let’s just say you have two, three children, you’re going to have hundreds of thousands going out a year for just schooling, curricular, extracurricular activities, right? And things like that, you need to prepare who’s paying for that.

And it’s non-emotional, but it is very emotional, right? So we want to say it’s non-emotional, but it is absolutely going to be in preparation, hiring the right professionals around you, and knowing it will get easier. Because when we look at this from a standpoint of, OK, how do we talk about with our children? How do we work through this, our scheduling? All these things can be a lot easier and simplified if you have the right professionals guiding you on that path.

Frazer Rice (22:34.211)
One of the things I liked about your book is that even if you’re not getting a divorce, I think a lot of the things that you have in place are very useful in terms of a spouse who knows less about the financial situation.

This book in many ways brings, in my opinion, kind of a good framework from which to discuss things and how to ask questions.

There’s another book I just read which I like called MONEY TOGETHER by Doug and Heather Bonaparte and so this one I’m going to recommend pairs extremely well with that in terms of building, just really building a knowledge base. For those who aren’t in DEFCON 5 and are facing a divorce and so on and they’re able to maybe get to you ahead of time to say, you know what, everything’s good. But I don’t feel comfortable.

How do you talk to those types of people?

Brooke Summerhill (23:31.44)
My favorite part of the role is if we can be preventative because if we get in at the right time in our thought process of thinking maybe about divorce, most likely you could shift your mindset and understand more about the finances and gain confidence and clarity and then that control can just whirlwind into, I know my options and I want to stay married.

Like I’m happy in this. really uncovering and discovering what your values are around money and yourself, understanding your own memories around money and how you deal with money. So your money scripts as, okay, how did you deal with money as a child? That’s some of the questions I go into is, okay, and are those still popping up right now?

Have you seen some patterns and behaviors around money as a kid and as a teenager and as a young adult that are still affecting you now? And do we want to shift some of those behaviors and patterns so that you can stay in this relationship?

And also we want to uncover the finances in a way of, let’s be open and understand. Maybe we bring in your spouse to these conversations so we have an open conversation about where the money is, how you’re going to be living the next few years with your values.

Together you guys can build that relationship. Because most of the time, one of the person in the relationship does not want to deal with the money, or they’re scared of the money, or there’s some kind of script around money that’s scary. And so they put their head in the sand, or they turn out the light and they don’t deal with it. The other person is more in control of the money, right?

That person is making the money or dealing with the finances. So if we can bring them together during marriage, when they’re thinking of divorce or before that, that’s the best part. And then they can see they’re gonna be okay as long as they both understand it and have the support.

Frazer Rice (25:17.327)
As we wind down here, we’ve gone from divorce during marriage and now before marriage. Preenups, I in general, if the discussion can happen, I like the idea of having them. And I think frankly, it accelerates good discussion ahead of time anyway and helps get that information to both spouses. And as you say, give them confidence within the relationship. That’s such a great, I like that narrative a lot. What’s your predisposition there?

Brooke Summerhill (25:48.308)
There’s so much stigma around having a prenup. There’s so much stigma. There’s so much potential though in my mind in a positive light of having these tough, scary financial conversations. If you have a prenup or if you’re thinking about a prenup, if you guys can be open around the finances, how can you not both benefit from that? Talking with a lawyer or with someone in the financial realm with the lawyer paired in a room, having these really, really intense conversations.

And I say intense because it’s about money and that’s usually intense at the beginning and then it gets easier. If you can do that, how are you not gonna be set up for success? And you’re gonna most likely be well prepared for that marriage and stay married. I wish there was some research I could say, like this is the statistic. If you have a prenup and you actually, you didn’t just do the prenup because your parents are the wealthy ones and you wanna keep the money in the family.

It was for the right reasons of I wanna understand my asseets. I want you to understand your assets, I want to understand that we’re in a marriage because we love each other. Here’s the financial ramifications of this and that. And you guys have open conversations well before marriage conversation, like not the day before the marriage, right? And have it be an open dialogue with professionals. I think that’s a wonderful way to keep you both in this beautiful marriage for long term, where it’s healthy. That’s I agree with you having a prenup and that’s in my book too is

Frazer Rice (26:59.907)
Got it.

Brooke Summerhill (27:14.621)
Preenups can be a very, very positive tool. And in divorce, on the other side, understanding what you signed before you get divorced, or if you are thinking of divorce, understanding and going to the right lawyer, maybe the one who drafted it, who you trust, is a very good idea, too. Beware, they will most likely have to talk to both of you. you guys, long story short, go to the right attorney, make sure if it’s a neutral person that you both worked with, which is rare.

That should be a red flag. But if you both worked with the attorney, you both are in the room understanding the prenup before you get divorced so that you understand the ramifications of what you chose to do and what you chose to sign. So divorce, you need to know the prenup. But before you get married, get a prenup and have those really tough, scary conversations upfront.

Frazer Rice (28:01.871)
Terrific. Brooke, so glad we got to catch up again. What is the best way for people to find your book and otherwise find you?

Brooke Summerhill (28:10.887)
You know, I think nowadays Amazon is really an easy target to type in right there. Divorce for the Wealthy Woman is my book. And my phone number is in the book. My email is in the book. I’m very open. People have questions, conversations to be had. I’m right there for you. So they can reach out on my website. Just type in Brooke Summerhill. You’ll find me or buy the book online and learn something new.

Frazer Rice (28:36.111) – Divorce for the Wealthy Woman
All of that will be in the show notes. Great stuff, Brooke. Thanks for being on.

Brooke Summerhill (28:40.519) – Divorce for the Wealthy Woman
Thank you for having me.

PREVIOUS DISCUSSIONS WITH BROOKE

BROOKE’S FIRM

Wealthy families are discovering Tennessee’s legal and tax ecosystem as a key component for their long term wealth strategy. I spoke with ANDREA CHOMAKOS from Pendleton Square Trust on Tennessee around these advantages that the Tennessee Wealth Ecosystem provides in the context of other states’ legal systems and economies. We cover directed trusts and Tennessee situs, and even a tip like the Community Property Trust, which is interesting in both prenuptial tax planning and estate planning contexts.

Frazer Rice (00:00.814)
Welcome aboard, Andrea.

Andrea Chomakos (00:03.128)
Thanks, Frazer, happy to be here.

Frazer Rice (00:04.696)
Well, glad to have you on. Always happy to talk to friends of mine at Pendleton, talk about Tennessee and trust administration generally. Our listeners are probably pretty well versed as far as the idea of trusts, but I don’t think it hurts to go and talk a little bit about what the trustee function normally entails as we talk about what is interesting about Tennessee and other jurisdictional issues.

Andrea Chomakos (00:29.358)
Absolutely. So Frazer, it’s great to be here and share some conversation with you and your audience. While I have been in the professional fiduciary role for several years, for several decades before that, I was a practicing attorney. So I would often have conversations with my clients and drafting their documents and asking them decisions about who to appoint as a trustee. One of the very first conversations we would have is what does it mean to be a trustee?

As I have now come over to the other side, broadly stating that the trustee has the responsibility to administer the trust for the sole benefit of the named trust beneficiaries in accordance with the trust terms. That seems like a lot of really big words that don’t make a lot of sense to the average person. I get it.

When I was practicing, a lot of my clients, their reaction would be, okay, so you’re just telling me that this person is the person who makes the decisions about distributions and that’s great. I can go, you know, no big deal. And the reality is, yeah, the reality is it is a big deal. Because it’s more than just making distribution decisions or making them in a vacuum. You have to look at the broader picture.

Frazer Rice (01:41.228)
It’s more than that though.

Andrea Chomakos (01:55.598)
But it also entails managing the trust assets and investments. It means making those important distribution decisions and understanding the impacts those are going to have not just in the short term but the long term. Filing and paying tax returns for the trust. Communicating with trust beneficiaries, providing reports and accounts. And even all of that sometimes seems like not that big of a laundry list but

Let me give like an example that I ran into. Everybody loves a good example. So when I say a trustee is responsible for investing and managing all of the assets of the trust, that also means the protection and preservation of those assets. And it’s incredibly common to see a trust hold some real estate, oftentimes a residence that a trustee or a beneficiary lives in.

Frazer Rice (02:24.58)
That’d be great.

Andrea Chomakos (02:51.094)
And you may say, OK, well, no big deal. Like if something happens, we’ll just get it fixed. Well, it’s more than that, right? You need to really understand what that means and the risks you’re taking and the potential liability you’re taking if you don’t manage those issues in a way maybe different than you would if it was just your own house. So I was at a prior institution and

that institution was serving as co-trustee with a beneficiary who resided in some trust-owned property. And lo and behold, you know, got a call from that beneficiary saying, hey, there was a leak with one of the pipes in the house. So I just went out and got some duct tape and put that around the pipe to stave off the leak, but now it’s gotten really bad. And you’re just sort of like, well, wait a minute. Like that’s.

Frazer Rice (03:34.276)
Hmm.

Andrea Chomakos (03:47.573)
As a trustee, that’s not an appropriate response to fixing a leak, it’s not a roll of duct tape. So it’s things like that that trustees are responsible for.

Frazer Rice (04:00.004)
One of the things too that’s happened in modern legislation is that those three functions you talked about, the investment, the distribution, and the administration have been in many states you’re able to, we like to call it bifurcate them, so that you can put an expert maybe in the investment role, maybe a family member with a corporate trustee in the distribution role, and then a corporate trustee in the administration role who, you know, they’re used to doing the paperwork and the tax filings and the eye dotting and T-crossing.

And in your, I guess in your experiences, we’ve gone through that. How have trust companies evolved to take into account this new flexibility?

Andrea Chomakos (04:42.254)
Absolutely, think you hit the right word. I always say the same thing, Frazier. It’s a bifurcation of those duties and responsibilities. And so there are more trust companies who are embracing what we call the Directed Trust Model, where the corporate trustee is handling the administrative functions.

So the reporting, the trust beneficiary communications, filing the tax returns, all of those very important functions, but ones that oftentimes are overlooked, their importance is overlooked. And other people are given the role of either distribution advisor, and sometimes the corporate trustees in these roles will make distribution decisions.

But certainly the investment function is one. And as you see arise in individuals, families, using private equity for investments, other alternative investments, you see them using RIAs, multifamily offices, to manage their investments that, and those entities don’t have that trustee function. There are more corporate trustees who are filling that role. And I think that we’re only going to see that market increase and that demand increase.

Frazer Rice (06:11.196)
I don’t think I could agree more with that statement. I think the idea of people having all of those functions under one umbrella really ignores just the way wealth is being managed these days, whether it’s sort of peculiar assets or even, you know, regular run of the mill stocks and bonds, people have their advisors and they don’t want to necessarily give that up to take advantage of trust situs and professional trustee services.

Andrea Chomakos (06:21.998)
Listen.

Frazer Rice (06:36.524)
As I talk to people around this topic, the culture of a good trustee, and especially sort of a good corporate or a good administrative trustee, there are a lot of things that go into that. In your experience, what is it that makes a good sort of corporate or administrative trustee for particular family?

Andrea Chomakos (07:01.422)
There’s I mean, that’s a great question. And it should be top of mind for all clients. Right. I think there’s a couple of things. One is the institutional professionalism that a corporate trustee, independent corporate trustee provides, as well as the skill, the background and then the lack of conflict of interest. So when you think about an administrative trustee that’s not managing the investments, we have no dog in that fight as they say about what’s going on with the investments, how they’re being managed, how they’re being allocated.

We, Pendleton Square and others are here to serve the beneficiaries, to facilitate communication, to help beneficiary wealth education, to continue the continuum of family values and conversations, as well as be some be a person who can sit there alongside them and educate them about the trust, about the wealth, about the impact the distributions from the trust are having on their own estate, on their own lifestyle, and really honing in on the things that they’re really good at. And I think predominantly it is that being free of conflict. We don’t have any other interest in the trust.

Frazer Rice (08:28.252)
I think the concept of staying in your lane is important. I think in the old world where the big trust companies did everything and they would allocate resources to that because doing everything required good integration and so on, it made a lot of sense. But nowadays, as we talked about the bifurcation just now, the provision of the administrative trustee functions and the distribution committees, et cetera, that feels more like an accommodation.

Andrea Chomakos (08:30.913)
I’m sorry.

Frazer Rice (08:56.696)
than a sort of focus for them. And so these trust companies that have developed, the new ones that are less worried about the investment function, that that focus is now a strength in the sense that people hire experts in that field in order to get what they need from an estate planning perspective or a site of choice, et cetera, but then to really effectuate that culture we just talked about.

Andrea Chomakos (09:26.956)
Yeah, I mean, think there’s a couple of nuances there that you touch on that always resonate with me. And so one is.

Trust business, it’s a business, we all have to admit that it’s a business, but is it relational or is it transactional? And at its core it’s really relational. You’re working alongside a family for hopefully multiple generations and as an institution you can carry forward that historic bank of knowledge in the grantor’s intent, the family values as you’re administering the trust.

But in many larger institutions, because of just structural considerations and constraints, sometimes you have a lot of turnover in personnel. You have some loss of historic knowledge and information. And you have a compression of what it takes.

not just the skills, but the technology and what it takes to execute on trust to meet the needs of the beneficiaries. And so sometimes those decisions get kind of kicked down the road to a committee that maybe only meets once a month or every couple of weeks, since you may not have an immediate decision. having a more nimble corporate trustee who recognizes that and values the relational side of the trust business is…

really ideal and really the flip side of the coin I think the thing that a lot of clients and some of their professional advisors advocate for is don’t name an entity name a person as trustee and that’s where I think the staying in your lane part gets really complicated. A lot of opportunity for you know the wheel to drift over to the other lane and

Frazer Rice (11:29.816)
Well, as you alluded to before, institutions that have a trust capability but have a lot of other things going on, found that, I use the analogy, sometimes the anaconda of maybe the commercial bank or the investment bank finds the sleeping bunny of the wealth management arm and then by extension the trust company. And then you start getting things, start getting business metrics applied to that part of the business that maybe aren’t.appropriate for the 50 to 100 year nature of what’s going on there.

Andrea Chomakos (12:00.526)
Sure. Yeah, absolutely. And the reality is that the profitability margins in the wealth business in general, and then when you push it down to the trust business in particular, are even close to the margins of financial institution sees from their lending line of business. Because that’s what banks are. Banks are, they’re in the business of lending money, taking in deposits and lending it back out. That’s how they make their money. And so

Frazer Rice (12:28.281)
Right.

Andrea Chomakos (12:30.712)
When you look at an institution, whether it’s Pendleton Square or someone else that is solely a trust company, what we’ve said is we know our lane and we’re sticking to it. Because we’re just gonna do it really well. That’s all we’re gonna do.

Frazer Rice (12:45.902)
So in general estate planning circles, there are lot of favored jurisdictions. Many people know about Delaware, sometimes from the corporate law standpoint, Nevada, South Dakota, et cetera. But Tennessee, especially in the last five to 10 years, has become one of the real top jurisdictions for trust planning and general wealth planning. What are the parts of Tennessee’s attributes, whether tax or legal structure, that makes it appealing these days?

Andrea Chomakos (13:15.838)
I think there’s a laundry list, Frazier. So as a former state planning professional, I went through an exercise probably about six or seven years ago with a client looking at different jurisdictions for them. Specifically, they wanted to establish some trusts and were interested in going outside of their home jurisdiction, which is a state that does not appear on any of these lists.

Frazer Rice (13:41.572)
I live in one, so yes, I can empathize.

Andrea Chomakos (13:44.663)
You really do live in one. At any rate, we briefly looked at Tennessee, we ended up going to a different jurisdiction for other reasons, but let’s start going through the list. And if you even take out specifically what I think Tennessee’s state laws have done well, if you’re a planning professional or a client, these are some of the things that you’re generally gonna look at.

Number one probably should be, doesn’t always hit number one, but number one probably should be state income taxes. The state income taxation of trusts is very complex and sometimes it cannot be entirely avoided just based on where a grantor resides, where some beneficiaries reside, depending on each state’s laws, which just FYI to the listeners are not uniform between states and very complex and

If you want to have a separate podcast about that, happy to. I talk about it all the time.

Frazer Rice (14:43.716)
No- I’m, acutely aware of being from New York, which really hamstrings you sometimes on that.

Andrea Chomakos (14:46.318)
Yeah, no bueno. So, but, you know, Tennessee does not have an income taxation on trust. And when you look at the ability to, and there is the ability in many circumstances to extricate a trust from the tax grips of one jurisdiction and move them out of that, you know, people…overlook the importance of state income taxation.

That can be anywhere you’re in a jurisdiction where it can be as high as like 12 plus percent. That’s a big drag on a trust’s return if you’re having to pay out 12 percent every year and just in state income taxes. The next thing that a lot of people look at is how long can this trust last?

The legal terminology for that is the dreaded rule against perpetuities. I’m not gonna get into the rule against perpetuities, nobody wants to hear it. But basically, let’s just distill it down, like how long can my trust last? Can it last 100 years? Or 360 years? Can it last indefinitely? For some clients and families, they want to take advantage of that and have that trust last for as long as possible. Because if structured properly, that means wealth can transfer

Frazer Rice (15:38.838)
I’m getting it.

Andrea Chomakos (16:03.886)
for an infinite to an infinite number, indefinite number of generations without estate taxes. So Tennessee’s law is a little bit unique and I’ll distill it this way. If a trust is established in Tennessee, the default rule is a 360 year term for the trust. can last for 360 years, which is probably, you know.

five to six generations, maybe seven, depending on the longevity of your family line.

Frazer Rice (16:37.092)
By the way, the US is going to be 250 years old next year for context.

Andrea Chomakos (16:41.836)
Yeah, that great context. I love it. I love it. So, 360 years. But two years ago, Tennessee modified its statute on this point to say if a trust is moving to Tennessee from a jurisdiction where it had previously been administered, that allows for a longer duration of trust, including an indefinite one then that would be recognized by Tennessee.

In other words, you’re not shortening the duration of your trust’s longevity by moving it from a jurisdiction like Delaware that allows indefinite trust terms. By moving it to Tennessee, you don’t lose out on that. Which I think is a really interesting and important point and shows and demonstrates how proactive Tennessee is in updating its trust laws.

Frazer Rice (17:36.613)
The flexibility that Tennessee gives the practitioner. In terms of being able to decant or modify or change trusts. That started out doing one thing but life evolves, people evolve, the family’s needs evolve, and sometimes these things need tinkering. Tennessee, as I understand it, just continues to have a pretty broad array of tools in the toolkit.

Andrea Chomakos (18:00.417)
It sure does. I think I’ve been impressed with, as a practitioner who’s licensed in North Carolina that does not have as flexible of laws as Tennessee does. It’s really nice to be able to take advantage of Tennessee’s flexibility to modify trusts. A lot of times just from an administrative perspective to say, hey,

This was always at, always anticipated, this trust always anticipated a corporate trustee that invested the assets and handled everything. But now it’s appropriate for us to look at this bifurcated structure we just talked about earlier. In Tennessee, you can do that. You can modify the trust to bifurcate that trustee structure by an agreement of the beneficiaries. You don’t have to go to court. And you don’t have to do anything funky or elaborate to accomplish that objective.

Frazer Rice (18:56.396)

One of the current bees in my bonnet is around the intersection of post nuptial planning and longer term trust planning. And I know that there’s a community property feature to Tennessee’s law that is interesting in certain components of that.

Andrea Chomakos (19:15.278)
Yep, absolutely. I think to put in context for folks, a lot of people talk a lot about the estate tax. The reality is that the estate tax exemption has more than tripled in the last about 12 years. And from the time I started practicing law,

When I started practicing law, the estate tax exemption amount was $600,000. And it will be $15 million in six weeks per person. Per married, know, spouse and a married couple, so 30 million. For man people, including wealthy people, estate taxes are not as much of an issue as maybe income taxes. And so a lot of…

Planners, attorneys, advisors, CPAs are focusing more on income tax planning for clients in concert with their estate planning. And a nuance to the basis step up rule, so people know. When you die and asset is included in your estate, that asset’s basis adjusts to fair market value as of date of death. So that, everyone knows that.

For community property, because property that’s classified as community property, it’s considered owned by both spouses. Not like jointly with the rights of survivorship, but more as like they both own 100 % of it. When one spouse dies with community property, it gets a full step up in basis. Even though the spouse inherits 100 % of it.

So doing tax income tax basis planning with low basis assets. If you’re not in a community property jurisdiction, which is just a handful of states, you can implement that same benefit. By establishing a community property trust in a jurisdiction like Tennessee.

With that trust agreement, you are creating a community property interest in that asset. You contribute it to the trust. The trust terms can provide specifically what would happen if the married couple dissolved their marriage and who would get that asset back.

So for instance, if it were a separate property asset, you can contribute the property to a community property trust. The asset to a community property trust and get the full set of a basis. Howver, the trust agreement could provide if the marriage dissolves, that asset goes 100 % back to the contributing spouse.

It can address both issues, because a lot of people have that issue, and I get it.

Frazer Rice (22:08.361)
It’s a nice feature to have. When you’re doing your estate planning or pre/post nuptial planning, it’s a good idea to have both sets of expertise in the room. You can have one document that’s at odds with what you’re thinking is supposed to happen in another document. That creates a real unwind situation. See it. See it all the time.

Andrea Chomakos (22:30.869)
Mm-hmm. Yes.

Frazer Rice (22:33.253)
We alluded to some of the things that Tennessee does to stay modern in the trust jurisdiction wars. The Nevadas and the Delawares, et cetera, that make constant revisions. Tennessee stays on top of it as well. Are there any other features that you see in that that are on the horizon or that just taken place?

Andrea Chomakos (22:58.35)
I’m not aware of anything on the horizon. Another adjustment to the statute late last year, is a provision around grantor, irrevocable grantor trusts. In that situation, the grantor of the trust reports all the tax attributes of that trust on their own personal return. They will have potentially, usually most likely, tax implications from that and tax liability.

We estate planners, I still consider myself a state planner, always said like, that’s great. That’s a gift tax free gift, know, paying the grantor, paying the tax on the trust. Assets, but sometimes the grantor gets to a point where that’s a little heavy for them to bear. Many estate planners like myself would not draft a trust to include a tax reimbursement provision. Not in the trust back to the grantor. There had been some IRS rulings that were all over the place about whether that created a problem

The IRS has seemed to kind of backed off of that. In particular when there’s an independent trustee who doesn’t have the obligation to make the payments but can in their discretion reimburse the grantor for the taxes. That seems to be a pass muster with the IRS.

So Tennessee has now included a statute in their trust code. It tatutorily gives trustees the ability to reimburse grantors for their tax liability. That can be really beneficial for a grantor who’s maybe hitting that pain point. However, she doesn’t necessarily want to toggle off grantor trust status or could not without some other adverse tax consequences. And the trust agreement doesn’t include that reimbursement provision.

By resitusing in Tennessee and having the independent trustee, they would have the automatic right to get those tax reimbursements. So, a nice feature for people in those circumstances.

Frazer Rice (25:03.319)
Nice feature. So as we wind down here. What is the best way for people to find out about Pendleton? Yourself? If they want to know more about the Tennessee features? Or otherwise need a corporate or administrative trustee? What’s the best way to find you?

Andrea Chomakos (25:22.85)
That’s great question. We have a really nice website, Pendleton Square Trust Company dot com. We have a great insight page which has a lot of this information we talked about. It has a lot of posts and blogs and insights on the Tennessee advantages. I’m listed on there. You can always find me on LinkedIn, Andrea Chomakos, C-H-O-M-A-K-O-S.

I’m the only Andrea Chimekis in the world, so pretty easy to find me. Yeah, yeah. So always happy to respond to a reach out either through Pendleton Square. Or through LinkedIn and always happy to have the opportunity to share this great valuable information, Frazeer. Thanks for the really insightful questions.

Frazer Rice (25:54.493)
There are multiple Fraser Rices in the world, which always surprised me, but alas.

Frazer Rice (26:17.925) – The Tennessee Wealth Ecosystem
Thank you. All of your information will be in the show notes. Andrea, thanks so much for being on and say hello to my friends back at Pendleton for me.

Andrea Chomakos (26:26.326) – The Tennessee Wealth Ecosystem
I sure will. Thank you.

BUILDING A TRUST COMPANY WITH BETSY BROWN

PENDLETON SQUARE TRUST

Musician and label owner, Blake Morgan, discusses the Music Business and the importance of “Reputation over Fame.”

Ever wondered how musicians really make money? It’s a tough journey filled with losses and small wins, but it’s all about persistence! In this episode, Blake Morgan shares that every small gamble counts, and eventually, one big win can turn it all around.: “The people who are “for real” have no choice.”

Frazer Rice (00:01.135)
Welcome aboard, Blake.

Blake Morgan (00:02.946)
Good to be here.

Frazer Rice (00:04.111)
Well, it’s really nice for you to be here. You were nice enough to invite me to your show, your residency downtown. And I was glad to reconnect and remind myself how talented A, that you are and B, that musicians are. And it got me thinking about business and how musicians and the world of music works these days. So it’s a treat to have you on there.

Blake Morgan (00:27.714)
Thanks so much. I’m glad you could make it to the show and it’s great to talk to you again.

Frazer Rice (00:32.155)
So let’s start at the beginning. So if you’re a musician, you’ve been bitten by the bug, you’re talented, and you get that wonderful curse, what are the ways that musicians really make money and support themselves? I imagine it goes from a spectrum of busking and performing and having your guitar case open and taking…

donations from there on up to the professional musician and then to the actual creator of the music itself. How do you think about that?

Blake Morgan (01:01.858)
Right. So, you know, I think I’m thinking about your audience and finance people and business people, you know, right off the bat, of course, for starters, the marriage between commerce and art has always been, shall we say, an interesting one, or it’s been it’s been a conflicted one. And it’s mostly been conflicted for the artists. But the reality is, you know, I think

Frazer Rice (01:22.747)
Sure.

Blake Morgan (01:32.897)
in a lot of ways and I do have something of an eagle eye view because I’m an artist, I’m a songwriter, I’m a record producer and I’m a record label owner. And so whether you’ve had a career and are having one like I am or like the person that you’re imagining who’s just getting, who’s just starting out, I think your experience basically it’s very similar to quantitative finance.

in that you’re acquiring a lot of small bets that rarely pay off, but when one does, they make up for all the other losses. And every part of being a musician is very much that experience. So when you’re first starting out, whatever that means, if you’re making, if you’re building tracks on your laptop, if you’re, you know, I think the days of busking on the street are,

probably behind us because I don’t see it very much, honestly, in New York. And we can talk about why we don’t see it very much later. But the reality is however you’re getting into it, you’re immediately in a position where you know you’re going to be taking a loss. And what you’re hoping is that there will be a payoff at some point so great that it will pay for all or most or some of your losses that you’ve

Frazer Rice (02:30.203)
Right.

Blake Morgan (02:58.414)
crude. And the truth is that really never ends. And I think that that really also kind of never ends if you’re a superstar. That’s really that’s that’s that’s the gig. I don’t see I don’t see billionaire investors usually sort of hang up their investment coat jacket. I don’t know what it is, but I don’t see them hang up their cape and say, I’m out. You know, they’re still trying to somehow leverage what they have into something else.

Frazer Rice (03:20.279)
Bye.

Blake Morgan (03:27.822)
And so that’s the financial part of it, which is that, you know, I think especially now, if you were talking about the beautiful curse, like I think especially now there is this feeling in music that musicians make music, you know, for fun. And I’ve never, I’m not a musician who makes music for fun. I’ve never met a musician who makes music for fun. We make music because we’re compelled to. That’s the beautiful curse. It’s not because, hey, I’ve got

I’m thinking about doing this and it’s just the people who are for real have no choice. And so I often say that my relationship to making music, and this was true when I was a kid, when I was just starting, my relationship to making music is exactly like my relationship to breathing, which is that I really like doing it. But if I didn’t, it wouldn’t matter because I’d still have to do it to be alive. It’s a part of who I am, right?

Frazer Rice (04:21.403)
Sure.

Blake Morgan (04:23.894)
And the thing about breathing is we aren’t in a position to being like, how’s the breathing industry? How am going to leverage my breathing into some sort of better form of breathing that would keep the lights on? We’re all doing that, I guess, with our lives in some form. But that’s that awkward marriage of commerce and art, which is that our strength as artists, as musicians, comes from the fact that we have an absolute bedrock. We are compelled, a bedrock need.

to continue to make music no matter what, no matter what’s thrown at us. And then that’s also exploited because the people who exploit us know that we’re still gonna do it no matter what, in whatever form that takes. So that was like 20 pounds of answer to a one ounce question. But that’s the real truth, which is I think if you’re starting out, you really are hoping that

you’re gonna you’re gonna start trying things basically to get some kind of a career off the ground, some kind of path forward to be able to make more music, some path forward where you’re gonna be able to make music where you wouldn’t want to have to do something outside of your own profession. People don’t tend to set out to be in a profession with the overwhelming feeling like they’re gonna have another profession that they’re gonna have to have to pay for their bills for their actual profession.

Frazer Rice (05:52.611)
No question. How do you graduate from hobby to commitment in many ways?

Blake Morgan (05:53.39)
So.

Blake Morgan (05:58.734)
Exactly, exactly. And so right out of the gate, you’re hoping that your ideas and your talent and your perspiration and your inspiration are going to be enough to leverage the next moment and the next moment and the next moment. Moments where you know, and you know, a 13 year old who’s trying to write their first song or pick up a violin and practice, they know that they’re going to lose and lose and lose.

and lose and they’re hoping that somewhere down the line they win and that pays for these losses and this is financial a financial truth and an emotional truth to like I’ve taken I often say to people like I’m a good humored person generally speaking but like I’m 96 % scar tissue at this point and so I still the joy offsets the scar tissue right I don’t want to be bitter and and and I’m and I’m not but

Frazer Rice (06:47.62)
you

Blake Morgan (06:56.969)
The moments of artistic wonder and satisfaction, just like the moments of financial hope, like, my God, this actually is hitting or this actually works. This really gets the monkey off my back to be able to do more of this, right? It’s very, very much the same, whether it’s financial, emotional, or temporal. The time you’ve put in to try to do something pays off when it works.

Frazer Rice (07:26.731)
So this massive investment, time, emotion, skill, dollars, et cetera, what are the ways that you start to get into the green and turn it into a situation where you’re actually sort of making money on what you love here?

Blake Morgan (07:47.832)
So if there was an easy answer to that, I would hope that you would have it and you could teach me what it was, but there’s a complicated answer to it. And it’s harder than ever. Art and music are devalued more than ever. The rungs under the ladder of where I’ve been able to get in my career have been kicked out. It’s harder for people to get to where I am. The world has changed because of piracy and streaming and

Frazer Rice (07:52.89)
Right.

Blake Morgan (08:16.043)
now AI and you know, we can touch on all of these things. But I do think that there’s an important panacea that will lift every facet of this. And in a world where we’re seemingly fixated on followers and likes and streams and these kinds of numbers, the reality is the place that I get paid

As a label owner, as a record producer, as an artist, as a singer, as a guitar player, as a bass player, as a piano player, all the jobs I have, the place that I get paid is that I have a reputation. And we live in a fame-obsessed business, music, and a fame-obsessed culture, but reputation and fame are not the same thing. And…

When you’re in, for lack of a better way to describe it, when you’re living in sort of in a Mad Max world, the music world has turned into this kind of wasteland in a lot of ways, unfortunately. When you can prove that you know where the fresh water is and you have some fuel for your car, you know how to evade the raiders on the highway, when you actually have a reputation.

Frazer Rice (09:28.603)
You

Blake Morgan (09:35.278)
there’s any numbers of ways that that winds up being valuable. And that could be a reputation of just being an incredibly professional singer who on short notice can go and sing a national anthem. That can be a reputation to say, we’ve been trying to make this record for months. We can’t get out of our own way. We’re screwed. We need someone who actually is from the before times who knows how to make a freaking record as opposed to just generating one. Right?

Frazer Rice (09:48.581)
Mm-hmm.

Blake Morgan (10:04.683)
Why would you go to a doctor? You’d go to a doctor because you need something. You can’t do it yourself. Home dentistry, bad idea. Home lobotomy, bad idea. And then you’re going to say, well, which one of these doctors has a reputation that I could trust to put this part of my life in their hands, right? So I think that’s always been true for musicians to some degree, but as other opportunities to make money.

Frazer Rice (10:12.187)
Home, home, home heart surgery. Yeah, not great.

Blake Morgan (10:32.961)
have really just evaporated. think for me personally, in my musical life and in my music business life, as a label owner and a label runner, it’s our reputation that matters most. if I’m gonna be honest, like we don’t really look for artists. We don’t look for business opportunities. They come to us and I don’t mean that in any other way than the exact words I’m using.

It’s the reputation that’s the calling card, and you can’t have one until you build one. And so there’s an irony where all of those speculative bets that you’re making that turn out to be losses, along the way, if they’re consistent and they paint a picture of a vision or a plan, in whatever way you’re a musical artist,

Over time, that’s the temporal part of it, over time, they have a chance to create a reputation and consistency. I think in music, three really important parameters are originality, quality, and consistency. And it’s the consistency that people drop the ball on. And it’s the consistency that is where the money is, because you have to be able to be counted on, whether you’re a session player or a label president.

Frazer Rice (11:47.013)
Sure.

Frazer Rice (11:55.772)
So many parallels in my sort of world too, where it’s, you know, sometimes you work on things that don’t amount to much, but the experience, it helps. It may not be immediately profitable, but somewhere down the line, maybe a future client, you know, has some sort of problem and either the connection you made to try to solve the previous issue comes to bear or, you know, just one guiding word puts them in the right frame.

Blake Morgan (11:58.891)
Of

Blake Morgan (12:19.948)
Sure. And we understand this and I think we just sort of inherently understand this in your part of the world. We would also understand this from a very, very good poker player. A very good poker player wins like 52 % of the time, 51%. There’s luck involved, there’s force majeure involved, but there’s also knowing that you’re going to over time

eke out that 1 % along the way of wins versus losses.

Frazer Rice (12:55.077)
So when you’re putting, as you own a label, you’re a successful musician, you grew up in it, and you’ve sort of absorbed the arrows of being in the industry from that view. Right. The evolution of forming a label and being there for musicians and providing the comfortable environment from which to.

Blake Morgan (13:08.197)
Hence the scar tissue, yes.

Frazer Rice (13:21.26)
have them develop what they’re doing, then you’re not in it for a hobby either. You need to be able to eat and live and be in New York and that type of stuff. Maybe take us through that journey a little bit.

Blake Morgan (13:32.47)
So I think the cliche is necessity is the mother of invention. And that’s true. For me, it was desperation. Desperation is also the mother of invention. And I had a big record deal at the beginning of my career. And parts of that really worked out and parts of that really didn’t. Bizarrely, the artistic part of it really worked out. I made a record I loved with people I loved. The record did well. It started my reputation. It didn’t do particularly well commercially or really at all.

but it was really good. And so immediately I was an artist who had made a really good debut record on an upstart label with major label distribution founded by Phil Ramone. So there’s reputation too. Phil Ramone. Well, he’s got a huge track record. and this young guy who’s starting out, he’s made a really good record with Terry Manning who made Led Zeppelin III, right? So there’s reputation there. And it was critically acclaimed.

Frazer Rice (14:15.612)
Mm-hmm.

Blake Morgan (14:30.134)
people definitely recognize that for a first time out, I hit the ball soundly, you know? And then some business parts to the label. The good part is that the label didn’t really know what it was doing. And so I got to do some things artistically that really paid off. The bad news is they didn’t know what they were doing. And so from a business standpoint, they made some poor decisions that also hurt the health of the record out in the world.

Frazer Rice (14:36.901)
All

Blake Morgan (14:59.242)
And soon after that, about a year or so after that, I really had to fight my way off that record label. And I did. Unacrimoniously, it was very complicated. was very painful for me because to follow through on that baseball, you know, image, you know, I felt like I was hitting white balls for batting practice. I was really getting somewhere. And then it felt like, I’m I’m back in the minor leagues. What do I do?

Frazer Rice (15:10.457)
but complicated and laborious and…

Blake Morgan (15:29.376)
And I, you know, my management at the time was like, we’re gonna get another record deal. It was very difficult for me because I actually knew that I’d gotten pretty lucky with that deal because I was able to do what I wanted to do artistically and it had worked. I felt that it was gonna sort of be the same thing. And I did get some offers, but they really weren’t A-list offers from A-list labels. It was gonna feel like a step down. And I was walking down the street here in Manhattan with my mother and I said, you know, I’m producing all of these demos for all these other artists.

you know, if I had any guts, I’d just start my own label. I wouldn’t ask permission from anybody to do this. And all the mistakes that would happen would be at my own, and I could learn from them, right? Our victories would be sweeter. And all these demos I’m producing, what if they weren’t demos? What if they were records? And we just figured out, I don’t know anything about how to do this, but what if I just had any guts, that’s what I would do. She said, yeah, you know, if you had any guts, that is what you would do.

And it wasn’t hostile, was just sort of like, okay, gauntlet thrown. I remember standing on the corner of Fifth Avenue and 11th Street and I put my hands on my knees and I just went, there’s gonna be like, all that scar tissue I had, you know, right? And that was really what it was. I really just didn’t have a choice. I didn’t feel that I was gonna get a record deal that was going to propel me forward. Really at the end of…

Frazer Rice (16:29.884)
Exactly.

Blake Morgan (16:55.116)
some of my rope and I did showcase the very last label showcase I did. My lawyer called me on a Friday at 6 p.m. and after days of not being able to get in touch with him and he was like oh yeah well you know the fallout from the showcase like listen man I don’t want to tell you to stop doing what you’re doing but you know hey you know all right cool all right man and I was like okay hung up the phone.

And I think that conversation with my mother was like the next day. Right? So it really just felt like I was out of options. And that’s a very, that is a place that any musician listening to this and any musician I’ve ever met is familiar with in one form or another. The orchestra I’ve been playing with is going out of business. My band’s breaking up. What do I?

I, my recording studio burned to the ground. Whatever the emergency is, it feels like, my God, this is it. This is that evolutionary moment where I can’t, I can’t move forward.

Frazer Rice (18:00.668)
Yeah, you’ve got to cross the Rubicon because you’ve got 10,000 troops about ready to stab you in the back if it doesn’t work.

Blake Morgan (18:06.922)
Right. Exactly. And so I started a label on my laptop on like a Wednesday. It had the right spirit. And all those people I was recording with in those early days, we put out records. We printed CDs and we posted it online. And this was prior to the streaming era, but in the iTunes era, you know, the download era.

And it’s grown since then and basically the commitment has never stopped, which is trying to elevate the music of artists I believe in, records I believe in, and trying to find a Mad Max way to keep that work alive and keep the artists who are making that work alive so that we can make more stuff, so that we can actually operate in our profession, right?

Frazer Rice (18:57.8)
When you start the label and you’ve got artists that you’re supporting and helping them create and they’re looking at you to be the business end and really the distribution end, I guess. How did you learn that part? I mean, you knew a little bit from your previous experience and some of the scar tissue that you built up over that. How did you get to the point where you could get the music distributed, make that sort of saleable? And I guess the follow-up question is, then the streaming

component kicks in and you have to kind of relearn a whole different thing.

Blake Morgan (19:29.269)
Sure. So how did I look the first part of your question? How did I learn that I started with two things. The first is I learned immediately from the mistakes that the record label I had been on had made. They had put me on the back cover of Billboard magazine. They spent one hundred thousand dollars to put a full back cover ad for me on Billboard to make a splash. And they thought I’d be thrilled. And I was horrified because the cost of that one ad that would be in that magazine for one week.

Frazer Rice (19:42.129)
Mm-hmm.

Blake Morgan (19:57.91)
could have put me on the road for two years. So financial responsibility, we’ve got to rub two nickels together and come up with a plan. So I learned from all of their mistakes. And I tried to answer every question that I had about how I was going to do this with what would I want if I was an artist on this label? wait a minute. I am an artist on this label. So what would I want my label to explain to me? What was so painful to me with the lawyers and managers and labels that I had worked with in the past? Lack of communication.

lack of transparency, lack of clarification. What does that mean? Having artists in all the meetings. Even to this day, Monday, we have all of our artist meetings, 11 o’clock, 12 o’clock, one o’clock. And once a week, I talk to every artist I work with and explain to them what’s going on. Right? And that’s good business sense because then the artists know and you’re building trust and you also are on the same page about what the plan is. In terms of

How did I get our first real distribution? It was reputation. A small distributor with larger distribution behind them cold called and said, you’re putting out this record that you made with Leslie Gore. Do you have physical distribution for it? And I said, no. And they said, would you like some? I was like, well, what would that look like? We started talking. And that led to digital distribution once the streaming era began.

you know, somewhere in 2011, 12, something like this. We rebranded our label from Engine Company Records to ECR Music Group because we started signing smaller labels. We’d grown to a certain size and these labels didn’t know what they were doing. And they saw that we were doing, what we were doing was working even just 1%. Well, can we help, can we get, so once again, it’s reputation and it’s exemplifying

forward motion at whatever speed that is, know, Tom Waits once said there’s no status quo in the music business. There’s you’re either moving up or you’re moving down and Even if you’re moving up One mile an hour or one millimeter higher You’re moving up and people can feel that and so it was really reputation that got us our first legitimate distribution which kind of broke us into the the new shape that this label

Blake Morgan (22:28.135)
was in and now we’ve been with the Orchard for years. We left that smaller distributor and the Orchard is, you know, is Sony Music. So it’s major label distribution for this fiercely independent boutique record label in Greenwich Village.

Frazer Rice (22:43.288)
So one of the things growing up sort of did some work really more academic on the music industry and you know the distinction between you know the sort of performing and where the revenue comes from that the mechanicals used to be CDs and records and so on and now streams and then the copyright the songwriting the let’s call it the sheet music or intellectual property behind the song

and then the merchandise, is sort of a spillover way to make money with, you for a musician. As a label owner and the, I guess the first question is how does it really break down in terms of, you know, selling of streams, and which is how most people consume their music now versus the use and exploitation, and I mean that in a good way, of the copyright slash sheet music.

How do you think about that in terms of sort of your overall strategy?

Blake Morgan (23:41.323)
So it’s different for every artist because every artist’s reputation is different, where they’re at on that ladder is different. There used to be a playbook that you could run and it would vary based on audience reaction, based on an artist. There used to be at least some kind of playbook that you could run that you would tailor. And I guess there still is, but not really. It’s more like a cheat sheet or a bullet point list and you’re really trying things.

Frazer Rice (23:51.484)
Mm-hmm.

Blake Morgan (24:10.622)
And I often think of an image of a balloon animal. You know, it’s like you squeeze, where if you squeeze it here, you know, it pops out over here and then you squeeze it here and it pops out over there, you know? And trying to make money in the music business is exactly like that, except it’s the opposite. It’s the downward pressure squeezes here and squeezes here and you’re more and more compacted. So the old revenue streams, even Spotify when they launched, they’re like, you don’t have to make money or

and certainly piracy, the Napster crisis was like, don’t need money on this, just sell t-shirts. And this is an argument back from 2006 and 2007. We’re not going to revisit that. streaming, just so your listeners understand, the math with streaming is it takes a million streams to generate about $3,500 of total revenue. A million streams, $3,500.

Right? So you need something like four or 500,000 streams a month to make minimum wage. It’s a minimum wage job. And by the way, 400, 500,000 streams a month is a large number. So that’s not a legitimate revenue stream. It’s something. Right. It’s nowhere close. It’s something.

Frazer Rice (25:33.02)
No more clothes.

Blake Morgan (25:38.632)
Now if you’re an artist who is built up

something of a following where Where and I mean like if you’re an artist from the before times if you grew up in the major label system And you’ve gone indie if you grew up, you know And you are someone who can do smaller shows where you’re selling vinyl or CDs or t-shirts or something You can still do that, but that’s not break the bank money either that’s something else

So again, what you’re really doing is you’re cobbling together all of these different things, and then you’re hoping for, my God, my track is in a major television show. It’s in a movie. It’s in the trailer of a movie. You’re trying any way to push back against this reverse balloon animal of pressure, because each of these revenue streams, the revenue from songwriting, the revenue from performing,

Frazer Rice (26:31.536)
Right.

Blake Morgan (26:38.954)
80 % of small venues in this country have gone out of business. 50 % of professional musicians have gone out of business in the last 10 years. 80 % of professional songwriters have gone out of business. And this is all prior to the arrival of AI, which is an existential threat, to all of the means that musicians use inside their profession to continue to move forward so that they can do what they most want in that profession.

Right. So there isn’t a really clear answer. But here with the label and just in my own career as president of the label, but also as an artist, you came to see me at a very well attended show in Greenwich Village. I’m not making money at that show. I got to pay my band. The venue takes a cut as they need to. You have to publicize the show. We spent more money publicizing the show. Then I could possibly make it the show even before I pay my band or pay for rehearsals. Right. But what am I doing?

I’m making a speculative bet. It’s quantitative finance. I know I’m going to lose money at that show. But the reputation from the show will build it in a way where someone’s going to want me to produce their record or they’re going to want to come or an artist of a different size is going to want to come aboard the label. Or one of our artists recently, the National Hockey League called and wanted her to sing the national anthem at All-Star Games for their All-Star tournament.

So there it is. It’s like you’re making all of these bets that are losing, boom, something happens. Okay, well that paid for that. It’s a good example of that, you know? But each of those streams that you mentioned, each one of them hasn’t dried up completely, and it is different for each artist, but every one of them has dried up substantively, if that makes sense.

Frazer Rice (28:28.526)
So we’ve already busted through what I thought would be a great time limit here, because I could talk about this for three hours. But let’s dive into the AI and maybe some of the technological aspects that threaten other creative pursuits by introducing, let’s call it cheap skill, into the creative process. How do you defend yourself against that? How do you, on one hand, think AI, you know,

brings lots of people into it, but then the value of authenticity and what I would call quote unquote actual skill skyrockets if you position it correctly. How are you thinking about supporting your artists and defending them going forward?

Blake Morgan (29:09.022)
Well, think, sure, you know, this is not my line, but I think it’s the best line that I’ve heard to describe AI. The underlying purpose of AI is to allow wealth to access skill while removing from the skilled any ability to access wealth.

Frazer Rice (29:30.917)
the

Blake Morgan (29:32.36)
That’s it. And to pretend that it’s anything other than that is really just to pretend. Right. We don’t need music teachers. We’re just going to have AI teachers. We don’t need you the proponents. Of this advancement. I’m making air quotes for the people who aren’t watching this. You know they know exactly what they’re doing right. But that’s what it is right. It’s it’s to give it’s to give.

Frazer Rice (29:53.584)
Right.

Blake Morgan (30:03.464)
It’s to allow wealth to access all of the skill that we’ve spent our lives accruing while removing from us the ability to accrue wealth. And the second part of that does not have to be necessary. I mean, the first part doesn’t have to be necessary either, AI is a tool that can possibly change the course of our species in a positive way.

but it doesn’t have to rob us of our humanity. And I do think that that is very much what’s happening. Everybody knows that there’s about 100,000 tracks that are uploaded every day to streaming services, 100,000 tracks every day. But there’s another 150 to 200,000 tracks that are now being uploaded every day that are just generated by AI.

This is bad on so many levels. It’s bad for musicians. Bad for recording studios. It’s bad. But I’ll even skip over all of that. It’s just bad for us. Because the greatest power I have as an artist is that I have the power to make you feel something. And I use the word make because I mean it. I have the power to get you to have a feeling involuntarily by a piece of music if I know what I’m doing and if I do my job well.

And part of the feeling is your understanding as a listener that I’ve experienced something that speaks to something that you’ve experienced. Our humanity is brought closer. Music unites us.

Blake Morgan (31:46.408)
And when you listen to an AI track, however deft its mimicry is of the Beatles or the Stones or of Nina Simone or of Beethoven or of anybody, that is fundamentally lacking because it wasn’t generated by an individual or a group of individuals who had a human experience and who are then speaking to that experience and speaking it out loud so that you can experience it so that you’ve shared something so that you become united. And that’s what’s

the most dangerous thing in music. And of course it’s dangerous financially and of course it’s existentially from a how is this all going to work standpoint from a business perspective. But at the heart of any healthy business is some piece of humanity that then draws people to that business and makes them want to do it. And you know I think that that people talk about AI in terms of theft.

and in terms of mimicry and you know what it actually reminds me of, Frazier, it reminds me of that 70s movie that Charlton Heston was in, Soylent Green, and I don’t mean to spoil the movie for people, but if you haven’t seen the movie by now, it’s been out for a while. It’s 50 years old and it’s a dystopic vision of the future in this movie where people are starving, but the city and the government is feeding people with a substance called Soylent Green and it comes in these tablets and these little bars and everything.

Frazer Rice (32:54.492)
It’s 50 years old. think people can find it out.

Blake Morgan (33:13.581)
And it’s revealed towards the end of the movie that Soylent Green is actually made out of people. And that’s the famous line, you know, it’s, it’s people, it’s made out of people. Well, that’s what AI is doing. That’s what these people want to be doing. It’s not so much that they’re stealing us. They are, they’re feeding us back to ourselves.

Frazer Rice (33:21.638)
It’s people,

Frazer Rice (33:34.652)
No, and you can’t algorithm a soul, which is, think the…

Blake Morgan (33:35.953)
It’s so… Exactly, exactly. And the people who think that you can, I’m sorry, because I’m a big fan of humanity and I’m a big fan of empathy. It’s very difficult to muster some humanity and empathy for the people who think that that’s a good idea. That these people who think that you can algorithmically produce a soul.

are the very people who were so unbelievably boring in junior high school and high school that they never formed a band and they never went to theater workshop and they never decided to try stand-up comedy and they didn’t go to the cool party and they really, it’s like they have this chip on their shoulder, but it’s not a chip on their shoulder because they wish they were cool too, although boy do they wish they were cool too. The chip on their shoulder, and I actually said this at the show that you were at, I think the chip on their shoulder is that artists and musicians specifically

Frazer Rice (34:18.172)
the

Blake Morgan (34:26.503)
especially when

You have a business mind and a cogent approach and attitude towards your own career as an artist. We have a unique power, which is that we really can unite people. We really can reach across barriers and bring our humanity into focus and bring what makes us human and what makes being alive

really worthwhile talk about a quantitative bet, right? For all that we all go through, we’d still rather be alive, generally speaking, than not, you know? And so I think that that is the existential threat to them, which is that we have this incredible power, whether we’re wealthy or not, whether we’re famous or not, to really make a difference in some people’s lives through music. And AI is not going to be able to do that.

But what AI is going, and no matter how smart or good it gets, it’s not gonna be able to do that. But what it is gonna be able to do is it’s going to be able to systematically remove the pieces that a musician is able to put together to form a career and to form that reputation and to form simply a methodology where you can keep the lights on and you can keep going. And that’s an existential threat.

to our business, just as it’s an existential threat to, you know, I know it’s a lot, but it’s not a hysterical thing. It is an existential threat to our humanity, which is what we’re all talking about. And it doesn’t have to be in a Terminator kind of way. It has to be.

Frazer Rice (36:15.842)
even worse, it’s death by a thousand cuts and you don’t see it coming. And all of a sudden you’re left with the carcasses of a lot of creative industries. I would even, you know, whether it’s law or accounting, maybe they don’t get a lot of credit for being, you know, fun and exciting, but, you know, we look in these spaces and AI is here to eat our lunch. And, you know, I’m not impressed with it yet, but I know it’s coming.

Blake Morgan (36:18.899)
Death by a thousand, that’s right.

Blake Morgan (36:41.277)
Right. think I think that objective truth and knowledge and expertise are good things and they’re all under attack. There is a violence being perpetrated against them. Expertise is a good thing. I remind people all the time. The word elite is a good thing. Elite is a good thing. An elite basketball player is that’s a good player. An elite surgeon. Once again this is a good thing. This means the best of. It doesn’t mean anything other than that.

You know, and skill and craft and art are some of the greatest and most wondrous achievements that human beings have been able to render. And I hope we get the chance to continue to do it.

Frazer Rice (37:26.566)
Well, as I like to hope, think and hope that that sort of creativity and authenticity, it’s the new beachfront property. In the sense, it’s not being made anymore. It can be under threat, but it’s extremely valuable. And when people see it and know it, they’re nourished by it. And I think, you know, that’s my hope is that as you keep going, keep going. It’s important.

Blake Morgan (37:34.696)
Yeah, I like that.

Blake Morgan (37:54.131)
Yeah, I think that’s a really good point. We’re probably just 1 % of 1 % into our AI journey, if that. But I can already feel that if I do something well on stage, already feels a little bit different. Like, wow, you’re really juggling those chainsaws. Huh. I mean, I’ve seen juggling chainsaws online, but I don’t know if it’s real or not. But I actually saw you do it.

And it’s not just the live experience, it’s making records, which we do here, making records that are made by people. It sounds like it. And it’s a very interesting thing when we get on a major playlist on Spotify or Apple and you listen to the other songs on that playlist, and then our track comes up, it does sound fundamentally different. That’s one of the reasons it does very, very well. Because whether people know it or not, or they dig into the story behind it or not, you know,

Listeners very often are like puppies, and I mean that in a good way. We all love puppies. something happens and they go, this doesn’t sound like all the other things that I, you know, this anodyne cookie cutter mimicked, soylent kind of thing. Right. This sounds this there’s actual food in this. Right. And so that’s part of our business model, too. You know, we’re not we’re not interested in being the embiggened bigness of the big thing.

Frazer Rice (39:08.901)
Exactly.

Blake Morgan (39:17.638)
We’re interested in being good and we’re interested in being the, you know, the Criterion Channel gives me so much hope in the cinema universe with all the Marvel movies out there that I love and all the Star Wars movies and shows that I love. I love that Criterion Channel is such a success. And they stream Truffaut and Hitchcock and Kurosawa and interviews with great directors and actors and cinematographers. It’s a huge success.

And that says something to me. That is a proof of concept for this record label. That’s what we’re trying to do in an indie rock and roll way here in Greenwich Village. That’s a business model.

Frazer Rice (39:57.946)
Really cool stuff. Blake, how do people find you?

Blake Morgan (40:00.968)
You can go to blakemorgan.com or I’m at the Blake Morgan on all social media come say hi

Frazer Rice (40:07.206)
Really good stuff. Blake, thanks for reaching back out. It was a treat to see you live. I mean, if you ever get a chance listeners and watchers to see Blake play, it’s terrific. And go out and buy music and go see the show. You’re supporting an important ecosystem.

Blake Morgan (40:26.63)
That means so much to me, especially coming from you. really appreciate it. It’s been great being here.

Frazer Rice (40:31.1)
Terrific. Thanks, Blake.

MY FIRST DISCUSSION WITH BLAKE ON ARTISTS RIGHTS

ARTICLE ON ARTIST MUSIC THEFT FOR AI TRAINING

Family Office Security with EDWARD MARSHALL, CEO of PRESAGE GLOBAL

In this conversation, Frazer Rice and Edward Marshall delve into the complexities of security within family offices, emphasizing the importance of understanding risk as a multifaceted concept. They discuss the vulnerabilities unique to family offices, the interconnected nature of various risks, and the necessity of a comprehensive approach to security that encompasses governance, internal threats, and physical safety. The dialogue highlights the need for families to engage with security experts who prioritize diagnosis over fear-based marketing, ultimately aiming to enhance the quality of life for families through effective risk management.

Frazer Rice (00:01.173)
Welcome aboard, Eddie.

Edward Marshall (00:03.074)
Hey Fraser, how are you?

Frazer Rice (00:04.375)
Great. Thanks. You are now a member of the two episode club. We’ve got a few of them out there. We one of my favorite ones was with you talking about there is no such thing as the family office, which I thought was a terrific bromide that I bring out every once in a while. It can be controversial depending on who you’re talking to.

Edward Marshall (00:23.15)
So some people like that and some people hate when I say that, but it’s all good. I mean, it speaks to the whole issues around family offices and I think some of the things that we’ll probably talk about today around security is if you’re defining it so many different ways, we’ve to look at it more as a process than some actual thing that we can put our finger up.

Frazer Rice (00:46.421)
Well, so security and whether it’s family office or regular high net worth or people generally is foremost in the headlines these days. We had the United Health Care executive who got shot. We’ve got different scenarios of global conflict out there. The theft around financial assets is everywhere. The urgency in the family office space, though, it seems like it’s really taken on a new thing. What is your experience with it?

Edward Marshall (01:17.612)
Well, mean, I think we could take a look at it from the perspective and start out with this, is risk is really what we deem it and how families and companies…

offices and investors are looking at risk, they can perceive it in a lot of different ways. But I think one of the things that are important for high net-worth individuals or family offices is that some parts of their just organizational DNA create these engineered vulnerabilities. So what they are makes them more susceptible. And if you think of it just from the Willie Sutton effect, right?

Why do you rob banks? Because that’s where the money is. It’s kind of myopic. Because you have to look at the other factors. What does the family office typically have as characteristics? You tend to have a very lean operation. There tend to be sources of time, line, agnostic capital. They have a lot of trusted relationships. Their customer is the family.

And they’re pretty agile. So a lot of those factors come together and make them attractive for bad actors in a lot of different aspects. They could also be politically outspoken, which attracts a different kind of attention to them. And so it is…

It’s really an ability to understand the nature of family offices and what makes them attractive for them because they have enterprise level wealth and oftentimes amateur or retail level security and risk management practices and processes in place.

Frazer Rice (03:08.009)
So how do you get your arms around it? When I hear risk, think, my gosh, you’ve got physical risk, you’ve got technological risk, you’ve got all sorts of other things. One of the frameworks you have is really these 10 domains of risk. And we may not list all 10, but how do you get your arms around it when you’re helping a client think through what their vulnerabilities are?

Edward Marshall (03:30.873)
Yeah, think the 10 domains of risk that we have put together as kind of an organizational philosophy for Presage Global really harkens to the fact that traditional security, traditional risk management is very siloed. I’ve got my cybersecurity thing that I’m focused on, then I’m focusing on physical security. Unfortunately, risks and threats don’t really respect your self-constructed silos.

And that old school mentality tends to lead to lot of whack-a-mole behavior and reactive behavior to these types of risks that come out. So we came up with this framework. The risks range from privacy, technological, reputational, legal, operational, financial, and so forth. And the reason we came up with that is that we were seeing

the interconnected nature of risks in this space, whether it’s for family offices, companies, or investors.

there’s a lot of interconnectivity between these risks and they can cascade. So something that starts out as a privacy risk, exposed information, a bad tweet, an Instagram post that puts out some information around you can lead, cascade into reputational issues or financial…

fraud types of issues or even legal fights depending on kind of the situation that’s there. And if you’re not looking at risk across these different domains, how they interact and really taking a deep dive to assess it, you don’t look at the entire picture. And I think that combined with not just focusing on the shiny object of a technology driven

Edward Marshall (05:31.617)
approach to solving risk in these issues is important as well. Oftentimes you’ll see folks that work in the security space or people that have purchased something to support them on security or risk management. They’ll say, you know what, we’re doing great because we have X, X software, X tool or whatever it may be.

But they haven’t even evaluated if they even need X tool that’s out there or even if X tool is properly configured so you could be spending thousands of dollars hundreds of thousands of dollars or millions of dollars if you’re a company on these tools, but if they’re not properly configured then all that money is for nothing and it’s and And it becomes like security jewelry. We’ve got all this stuff that’s in place.

We have cameras that are of X brand and they’re doing all these things. We have firewall that is of Y brand and it’s doing all these things. But if you haven’t properly configured it or the people that are supporting you internally and externally…

some of the externally creating supply chain risk there, then it’s all for naught. it comes down, and it’s similar in the work that you do. If you’re not looking at somebody’s entire trust and estate picture just beyond the documents that they’re trying to draft, how do you figure things out? It has to be not just a black and white, here’s a legal document for your trust and estate. It’s part…

archaeology, part anthropology, part psychology, multiple other science disciplines and other disciplines that come into it to develop a document, to develop a plan, to have an execution that actually keeps the family safe.

Frazer Rice (07:30.315)
So when, part of this seems like a real governance issue at the family level or at the family office level. When you see it done well, who owns this task, the security task at the family level? Because I could imagine the Generation One, the matriarch or patriarch, they wanna deal with it, but I’m not sure they’re the best ones to be driving it. What is a good practice there?

Edward Marshall (07:58.189)
Well, listen, think risk management and security, oftentimes, whether you’re talking about a Fortune 100 company or a family office, is looked upon as a cost center.

And I think that’s an unfortunate aspect to it, instead of an enablement factor for you to go and do the things that you want, right? Good security, good risk management for a family should enable the quality and improve the quality of life for that family.

If you’re constantly thinking of it, we have to spend X amount of dollars on our cybersecurity or planning for our travel or purchasing this trying to reduce my privacy footprint by buying some security tool that does that and says that I’ll get all of your information off the web news flash. Not possible. You know, there’s thousands of data brokers that are in this country. There’s legislation that is going on in different states and at the national level to try to limit the aspects of the data broker stuff. But you know what?

At the end of the day…

Edward Marshall (09:14.178)
that information is out there to nation states and to bad actors and try telling a hostile foreign country or a hostile hacker whether they’re in Brooklyn or Belarus to remove your private information from their data sources. It’s not going to happen. you have to, putting it in the perspective of governance is shifting the mindset away from

Frazer Rice (09:31.318)
Right.

Edward Marshall (09:41.467)
Just being a cost center and to how does this help? All of the family office operations that are there and the family improve their quality of life by keeping them more secure. And that’s a critical step to it. Then having a robust plan and really looking at the plan and testing it. This may say simple, but if you’re not, if you don’t have a plan and you’re just trying to patch things together and you’re not testing that plan, then you’re spending a lot of time and not of getting a lot of good results.

If you’re not thinking of security governance and risk management governance through a maturity model, understanding what good looks like, where we are today, where we want to go into the future, here’s my gaps, here’s the things that a good family office that’s focused on this issue or a good company that’s focused on this issue looks like, then I think you’re missing out on a lot of things for these families to really keep them

You gotta be able to fix those gaps and somebody has to own that mandate within the family and not be looking at it as, well we didn’t have any incidents this year as a metric. That’s too simple of a metric because you don’t even know.

of how can you predict which incidents occurred or could have occurred during that time frame. that KPI for security and for risk management has to be important too because if you’re just trying to prove a negative, it’s very challenging for anybody within the family. And unfortunately, what this results in is a very reactive approach to security. 80 % of people will come to a secure

Edward Marshall (11:35.201)
or a risk management firm after something has happened. After attack, after a fraud, after insider threats of stealing of proprietary information, after a data leak. And the costs are enormous to do that kind of remediation and those kinds of fixes. Meanwhile, if you look at the front end of this issue and you look at ways on prevention, it’s much cheaper. It’s much less stressful for the family.

Frazer Rice (11:38.423)
Mm-hmm.

Edward Marshall (12:05.104)
And it really comes into that notion of don’t start with technology. Start thinking about people, then thinking about process, then thinking about technology. And that gives you a different mindset.

Frazer Rice (12:16.279)
I was going to say we’ve been alluding to people and processes internally. We’d been talking probably a lot about external threats, but then how do you manage the internal staff, the people that, the threats that are inside the family office and sort of the review process that probably makes a lot of sense in terms of understanding

Who has access to important information, things like NDAs, staff, what happens when someone leaves? Do they take a key fob with them and all of a sudden, all the family secrets are out? How is that distinguished as part of the process compared to the external threats?

Edward Marshall (13:02.072)
Well, I’ll take that as an ability to have a gentle plug for a survey that we’re putting together and is currently launched.

You know, we’ve done a lot of surveys in the space for family offices, but this one in particular is focusing on the estate management and kind of the security areas around estate management. can check it out on our website. It’s presageglobal.com forward slash survey. We’ve been working with the team at Nines very heavily to develop this over the last six months and launched it earlier this earlier this month. And I think that helps.

think of some of the issues around insider threat and insider risks for estate management. So that’s the end of my plug for that survey. But going back to your question, and excellent to work with the group at NINES. If you guys haven’t checked out NINES and their estate management technology, it’s definitely, they’re great partners on this survey and beyond. The insider threat issue is one of those that

is challenging for families because a couple of different factors.

Where is that insider threat risk coming from? Where is the staff risk coming from? Well, you can look at it from a pre-hire perspective. How are you evaluating this person before they come into your family office? Oftentimes, if you’re working with a recruiter, they’ll say, we’ve done a background check on this household staff member, the person that comes into the family’s orbit, whether they’re a housekeeper or they’re a driver or they’re a nanny or they’re

Edward Marshall (14:48.452)
the CEO of the family office. Oftentimes the background checks that we’ve seen for those individuals are the same level of effort and level of quality. And all of these people have different aspects of access to the family. You might spend more money on the family office CEO background check, but the nanny is in your home 40 hours a week.

and has access to your home 40 hours a week. oftentimes, people will fail to do the proper due diligence on that person because it’s been passed on by a recruiting agency that says that, you know, we’ve done the proper background check on this person that comes from there. So I think there’s very, families are not aware of what good looks like on a background check.

Just focusing on the digital checks that are out there is not sufficient. I’m sorry, it just isn’t. And that matters to people that have access to your…

to your family, your home, to personal spaces, as well as your finances, your operations, and your strategy for your family office or your operating business. The amount of diligence that you do there is critical, and what good looks like is challenging for families to see. And then the research tells us that 80 % of family offices don’t have an insider threat program, meaning once that person comes into the family office or to the company or some sort of

for the family, they don’t do an additional check, periodic updates on that person’s background check. So obviously following employment laws for each state, which is critical, but there are ways that families can do and should consider around how you monitor the people that are there. Circumstances change. If you hired somebody and five years later, ten years later they’re working

Edward Marshall (16:53.44)
in your family office and you haven’t done any kind of background check on that person. Lots of things change in people’s circumstances that family should want to know about.

as part of their diligence because of the level of access and the level of private information that that individual may have to the family. And again, you have to do all of this through counsel. You have to do all of this through employment law at the state level. As you’re doing all of these things, you should be working with smart legal representatives to one, make sure you’re following those standards, making sure if you’re doing evaluations of your security in general, hiring them to maintain privilege.

of the information that people are following for you. But again, I think people fail to do those things because they don’t look at risk across the different domains of risk that are out there and just don’t know that those things are best practices because they’re really good at their silo. We are really good at this cyber tool. We’re really good at this privacy tool. We’re really good at this HR solution.

But we’re not thinking things broadly around insider threat and insider threat management. And you can do all of it without making the family office feel like the KGB. You really can. And you should.

Frazer Rice (18:19.192)
The quick step to physical security. We’ve had a lot of violence around lately. We have geopolitical risk all over the place. the technological and the data breaches, et cetera, are one thing. It’s quite another when people are targeting to hurt. How do you think about that?

Edward Marshall (18:24.32)
Yep.

Edward Marshall (18:41.506)
Well, think you have to look at it from the lens that a lot of this and kind of the methodologies haven’t changed that much since John Wilkes Booth and Abraham Lincoln. It’s the same type of scenario.

and how they’re targeting these folks in exposed places. I think that’s an element that people need to be aware is that it’s not just that there’s some technological breakthrough that’s happened in this space that causes physical threat to individuals, whether they’re outspoken or they’ve fallen into an industry that’s controversial for some people or for others.

You know, there was the very sad incident that occurred in New York with the insurance company CEO. But you know, was another incident that a couple weeks later in the Chicago area that was very similar and didn’t get a lot of press and didn’t get a lot of headlines as part of it. So the physical security risk is a real one, but it’s one that you have to have a good understanding about it and you can’t just apply

a blanket solution. A blanket solution is wonderful for the bottom line of a security company saying, well, you you think you have physical security threats, then you need a bodyguard or you need a residential security team. That’s the easy button. And that may not be the right case. And you have a lot of families that say, I don’t want executive protection. I don’t want to have a security driver. I don’t want to have a properly trained three person team that’s providing, doing advance work that’s

doing security driving, that’s got all of the different aspects of proper body guarding and executive protection because I just don’t want that intrusion in my life.

Edward Marshall (20:42.368)
So you have that factor playing into that people do have physical security risks and they don’t want that kind of protection. And, you know, just like in the family, you have the ability to do that because it’s your family and no one can force that upon you. So how do you protect yourself? How do you think about monitoring of,

Sometimes those threats, and this is not always the case, but sometimes those threats come in through social media because somebody might be a publicly very well-known person on social media or a very well-known person and people will…

present those threats from there. How do you keep up with those types of threats? What kinds of technology, what kinds of analysis, what kinds of process should you bring into those types of threats? How do you determine if something is credible, actionable, or just somebody shouting into the wind? Because unfortunately, these devices are some of our best friends for productivity and our worst friends for security. And it also allows these people to sit behind a

keyboard and say some really obnoxious things. But how do you know what is obnoxious versus what’s a credible threat? The specificity of that threat and all these different factors and identifying who that person may be is very challenging. And then, you you see it on stalking of family members or children or cyber stalking. How do you how do you get the attention of law enforcement when they’re focused on a lot of different things?

to look at these things. There’s a finite amount of resources that exist in law enforcement, especially around these types of issues. Yes, there are state-level and federal-level laws and statutes that you can use to protect yourself and your family from it, but if you’re not organizing the information in a proper manner to give to law enforcement so they can take action on it…

Edward Marshall (22:53.182)
it’s going to be a challenge. And these are all wonderful people that work in federal, state, and local level law enforcement, but it’s just a question of resources sometimes. And these families that are facing these terrible types of issues need to have a good understanding of what’s there. But physical security, again, people will harken to

Well, we’ve got great cybersecurity, but we haven’t paid that much attention to our physical security. Well, that means you have no cybersecurity. Because if I can walk into your office and I can get into your server closet and I can be proximate to it, then all of the fancy tools and the money that you’ve spent on cybersecurity and taking your information off the dark web, not possible. Just telling it out there in case somebody… And understanding that,

Frazer Rice (23:40.16)
Reiterating.

Edward Marshall (23:47.445)
then you have no cybersecurity. Or we’ve got cameras, we’ve got this fancy camera system that’s, we even have license plate readers for a car, for a neighborhood, for our office. Wonderful, who’s monitoring it? Who’s monitoring it two o’clock in the morning? So is all of that physical security you’re putting in there reactive?

Or is it layered to make it you have a less attractive target for bad actors that are out there and having somebody looking at it? And unfortunately, again, families don’t know how to put those…

areas into place in a systematic way because a lot of the vendors in this space are very focused on just this. I’m going to get it done, we’re going to sell the camera system and go from there. Or I’m going to sell this widget and go from there. Great for them, terrible for the family because if it’s not properly installed, monitored, you haven’t done a physical security assessment of the home during the day hours, during the night hours, looking for different changes in the environment.

then you’re trying to bail water out of a ship that has got a hole in it. And you don’t know where the actual risks lie in that aspect. And you get into the notion of survivorship biases for families. Well, we haven’t had an incident happen, so we’re fine because nothing bad has happened before. And that’s a challenge.

Frazer Rice (25:18.304)
It reminds me a little bit of zero days since the last workplace incident. It’s awful. That’s great right up until you have one. And then it’s an embarrassing and counterproductive problem that you have to deal with. As we start to wind down here quickly, if we’re advisors, lawyers, accountants, people around families, family offices, et cetera, who are

Edward Marshall (25:37.048)
True.

Frazer Rice (25:44.586)
aware that there’s an issue, how do you interface with experts like yourself to get the conversation started?

Edward Marshall (25:52.899)
Well, I would say whatever group you’re working with on security and risk management for family offices, you should really be looking at a group that is focused on diagnosis first versus prescription and remediation. And avoid the fear-based…

marketing that’s out there because frankly it’s disgusting and people still do it. So I think those are critical factors to it. It’s diagnosis first, understanding what the family is. We talked about it before. It’s not just looking at a checklist. A checklist is a wonderful thing that you have to do if you’re pilot before you fly the plane. But you have to go beyond that and actually have the

experience and the understanding that the anthropology, it’s the cultural awareness of the family, it’s the understanding of what a family office is versus some abstract notion for many folks that are there. Looking across different domains of risk as well and seeing how these things go. know, a prescription before a diagnosis is challenge. Are you looking, starting out from a vulnerability aspect and understanding what things are out

about the family because that’s a critical step and what’s important to the family. Who do they need to protect? Maybe the principal doesn’t need, says that I’m fine, I don’t need security, I’ve got this handled. Okay, that’s great, but you have children and a spouse, so how would you feel if something happened to them?

And because they have, if a bad actor doesn’t care if it’s you or your family, they’re going to look at the principal as somebody who’s a hard target because there’s a lot of resources on there. But the soft target could be the kids or the nanny driving the kids to school and all these different elements. So really thinking beyond just what’s in front of your face around risk is critical as well. And being able to have that conversation with the family to understand what’s there. Going from understanding those vulnerabilities of what’s there

Edward Marshall (28:07.984)
to understanding how those vulnerabilities occur, valuing your technology, evaluating your physical risks and all these other risks that are there, how they’re developed, why they develop for your family, at, you know, not looking at devices, looking at setups of everything, and then putting together a real plan to say, we’re here, we have these aspects in our family office that are, you know, not as good as they could be on our security front.

And how do we actually build a plan and then execute to develop good security around that? One of the areas that families, and again, sorry for the small plug, but one of the areas that we have found that families like is a comprehensive look at security, where we’re acting as their family chief security officer.

and looking at risk in a holistic, strategic way. So they’re not looking at all these different disparate aspects of security and risk management. And it’s not just choosing off of a menu. We’re really providing you that aspect. There are very few families that have a full-time chief security officer in their family office.

know, smart people that do this well are very well compensated. So if a family is looking at resources and how much they’re going to be putting towards this, might not be something that they’re thinking about until they get to a very, you know, very different level of what they’re looking at. But.

But being able to do this on a managed basis is something that families have found to be very effective, rather than just choosing off the gas station sushi menu of security solutions.

Edward Marshall (30:02.146)
that look attractive but might not be the right thing that you need. That might be great for the security company or the risk management company, but not necessarily making your life safer, improving the quality of life for your family, and then going on from there. Again, I go back to what we talked about at the beginning. as a family looks at it, risk perception is what we deem it.

And that plays a big factor into how families look at risk management. Is it, there might not be an awareness of what the risk is, or even if there is an awareness of what the risk is, there’s not a desire to focus that heavily on it, apply resources to it. I don’t like physical security, I don’t like fill in the blank. But you have to at least know what those things are.

so that you can plan around it and plan to protect the things that are the most important to you in your life.

Frazer Rice (31:03.02)
Great stuff. How do people find Presage and reach out to you?

Edward Marshall (31:06.862)
Sure, so we put a ton of stuff online on our website, lots of good white papers, lots of good frameworks that people can look at. Our website is www.presageglobal.com. P-R-E-S-H-E global.com. The surveys on the website as well. LinkedIn, we put a bunch of content on our…

Security matters. We have newsletters.

focused on the 10 domains of risk. have a weekly newsletter that gives you strategic insights around the world across the different domains of risk. if you could sign up for it there, email us, call us. We’d be happy to have a conversation as you’re trying to go through this. know, Fraser, I really appreciate our ability to have this conversation again, because I think it’s an important one. And you’re taking a very

view of how to support these families on a number of different issues and I think this is this is an area and an issue that doesn’t get a get the right a kind of attention towards it so I appreciate your time.

Frazer Rice (32:21.194)
No, thank you for being on. It’s a vital topic and frankly, if you’re looking for risks around a lot of different things around a family situation and you don’t include security as part of it, I don’t think you’re doing the full job. So Ed, thanks for being on.

Edward Marshall (32:36.151)
Yeah, no, I really appreciate it. Have a great one.

Frazer Rice (32:38.966)
Likewise.

Engaging with security experts can enhance family safety.

Security and risk management is suddenly urgent in the family office world. Why now? What’s changed in recent years to elevate these vulnerabilities?

You’ve argued family offices are “risk magnets.” What about their structure, privacy, and scale makes them such attractive targets today?

What do you mean by “security jewelry?”

Where do families get the gap between perceived and actual security wrong?

New survey project? https://www.presageglobal.com/survey

Most people still picture alarms and bodyguards when thinking of security. What is the risk landscape for family offices in 2025? What’s in the equation that wasn’t before?

Your proprietary “Ten Domains of Risk” framework is widely referenced. How does that differ from traditional approaches, and why did you create it? Can you share a real-world or hypothetical example of risk cascading across domains? How a small weakness triggered a much bigger crisis?

What does a comprehensive risk audit/assessment look like at Presage Global? How do you keep it actionable rather than overwhelming?

What is “intelligence-powered” risk management, and how does it go beyond standard security consulting?

Where does the assessment process usually reveal the most hidden or underestimated threats?

How has the threat from AI—like deepfakes, adversarial AI, and data exfiltration—evolved? Are families prepared for these risks?

What AI-accelerated threats keep you up at night when working with families?

If we look ahead three years, what vulnerabilities or attack vectors will be most pressing?

How significant is the insider threat in family offices? Why is this such a blind spot, and how can families detect and manage it proactively?

How should families and family offices approach vendor risk, especially for technology providers and outsourced services?

Executive protection is evolving. What does modern, intelligence-driven protection actually look like, and how should non-celebrity families view this service? How do you integrate physical security across multiple residences and geographies?

Cyber threats and ransomware are in headlines. Why are family offices especially attractive targets, and what’s different about their digital vulnerability?

In terms of governance, who should own security as a responsibility? How should it be mapped in the family office org chart, especially for lean teams?

Advisors (attorneys, CPAs, wealth advisors) are on the front line. What red flags should prompt them to recommend a specialized security review?

How should risk and security management be holistically coordinated? Wwith legal, estate, tax, and investment advisors to prevent things falling through the cracks?

For families hiring new staff, what are the most common mistakes made in vetting, onboarding, and ongoing security training?

What does an initial conversation look like and how should they prepare?

What’s the best way for the audience to stay updated and connected with you and Presage Global?

BIO:
Edward is the Founder and CEO of Presage Global, an intelligence-powered risk and business advisory firm. Presage is a trusted partner to c-suites and boards, family offices, and investors.

Edward is a family office insider and a leading family office researcher, advisor, and author. He is also a risk and threat management specialist. He is working with families to reduce their cyber, physical, financial, operational, and reputational risk profiles.

Edward is a member of the Advisory Board and co-heads the Family Office Initiative at the UHNW Institute. UHNW individuals by promoting best practices, professional development, and positive change in the family office and family wealth field. He also co-authored the book, The Family Office: A Comprehensive Guide for Advisers, Practitioners, and Students.

Prior to founding Presage Global, Edward held leading family office roles at Dentons, Credit Suisse, Citibank, and Boston Private. He joined Credit Suisse from Booz Allen Hamilton and previously was a research assistant at The Kennan Institute. Edward lectured as an Adjunct Professor at the Henley-Putnam School of Strategic Security. He began his career in the public sector, working for the federal government in the United States and abroad.

Edward serves as the Senior Advisor to the President of The Kyiv School of Economics in Ukraine. He founded “After Service,” a Ukrainian NGO focused on reducing veteran suicide and supporting Ukrainian veterans in civilian life. He is a board member at the Defense Intelligence Memorial Foundation (DIMF). It provides full scholarships to the families of Defense Intelligence officers killed in the line of duty. He is an advisory board member for Americas Warrior Partnership (AWP), a nonprofit focused on reducing veteran suicide.

He earned his MBA from New York University’s Leonard N. Stern School of Business and a BS in Human Biology from Michigan State University.

Risk is perceived differently by families and companies.

Family offices often have engineered vulnerabilities.

Traditional risk management is siloed and reactive.

Good security should improve quality of life for families.

Insider threats are often overlooked in family offices.

Physical security risks are increasing in today’s world.

Technology should support, not replace, security processes.

Families need to monitor their internal staff regularly.

Diagnosis of security needs is crucial before remediation.

PRESAGE GLOBAL: https://www.presageglobal.com

https://frazerrice.com/ep-129-ed-marshall/

RICHARD HAASS returns to the podcast to talk about the US FOREIGN POLICY implications of Trump’s Tariffs and other initiatives. We take another tour of the world’s hotspots after the recent UN conference here in New York. Finally, we weave in an analogy of the recent crowd misbehavior at the Ryder Cup as a symptom of America’s current mood.

Frazer Rice (00:01.277)

Welcome aboard, Richard. We are past our technology glitch, I think. The next big thing here is to try to figure out what the US looks like. We’re on the heels of the UN week and also the Ryder Cup. I’m not sure which one was more chaotic, but as you look at the US’s standing after the UN, what do you take from the events that took place last week?

Richard Haass (00:02.744) on US FOREIGN POLICY

Great to be back.

Richard Haass (00:28.172)

It was not a great week for what Joe and I, may he rest in peace, called soft power. What happened at Beth Page, the terrible manners, the coarseness, vulgarity, choose your word, the lack of sportsmanship, we could go on, but you get the point, was really poorly received in Europe, as it should have been. And I thought the PGA here just showed a blind spot would be generous. So it was not good. I felt somewhat between embarrassed and ashamed and also just overshadowed some unbelievable golf on both sides.

Frazer Rice (01:11.069)
Kind of where I came out on it. And it just felt bad watching some really good players doing their thing and then all of a sudden, again, overshadowed by pretty boorish behavior.

Richard Haass (01:22.51)

Particularly golf, because golf’s a game of rules and norms. I think it was Rory Mclroy who used the word etiquette, and what we saw was anything but. I really wondered at times whether some of those people ever played golf. And then the UN. Look, it didn’t happen in isolation. The President’s US Foreign Policy speech was…at times just, it was seen, it was taken badly by Europeans. It was for understandable reasons, seen by them as something of an attack on them. The comments like about Sharia law in London were over the top. The criticism of immigration policy, some of which, for the record, deserve some criticism, I would say. The total denial of climate change was badly received.

So it was not good, even though, and I think the president detracted for some of his legitimate criticisms of the UN. My own sense, though, is the UN’s got bigger problems than Donald Trump’s speech. The UN has basically made itself increasingly irrelevant. It’s no longer a place for serious diplomacy. At most, it’s a venue for side meetings. And since then, you’ve had the announcement of a “peace” plan for Gaza and so forth.

So the world’s moved on. quite honestly, what matters is not what happened during a few days of traffic in New York, but rather what happens more broadly. So we’ll see what, if anything, comes of this Middle East announcement. We’ll see what happens next, if anything, diplomatically with Ukraine. President Trump’s about to meet his Chinese counterpart in less than a month in South Korea. So there’s a lot going on.

And not to mention domestically, there’s a lot going on we can discuss. So the fact that the Ryder Cup or the UN were not great in and of themselves, they’re more data points. And I think what matters is more the larger story for better and for worse.

Frazer Rice (03:32.339)
As we just a couple of quick points to hit back on Ukraine Russia. What’s the state of play in there right now?

Richard Haass (03:41.71)

Well, we’re reaching the end of what you might call the third fighting season of this phase of the war, the one that started just over, mean, just under three years ago, in February of 22, if I have my dates right. My sense is things will dial down militarily somewhat during the winter, and then they’ll dial up again early next year for a fourth fighting season.

I don’t believe diplomacy will gain traction until the United States does probably two things, puts much more economic pressure on Russia and gives Ukraine much more military wherewithal, both to withstand Russia and to take the war to Russia. Ultimately, diplomacy will only happen in a context where Vladimir Putin comes to the conclusion, however reluctantly, that time is not on his side. Right now, he believes time is on his side. He has no reason to compromise or settle. Only if we convince him.

The time is not his friend, I believe. Will he agree to something like a ceasefire? I don’t think we should be pushing for peace for any number of reasons. We can go into it if you want, but I don’t think we need to. So at the moment, diplomacy is dependent on the calculations of the two sides, and I think the Ukrainian leadership is willing to accept a ceasefire in place, but the Russian leadership isn’t. We’ve gotta change that calculation, and that’s more than anything, I think, a function of whether we give Ukraine greater military help, which persuades Putin that more war will not give him more results.

Frazer Rice (05:15.571)
Any inside baseball and any potential weaknesses in Russia that we don’t hear about over here, as opposed to sort of the general posturing we get from Putin?

Richard Haass (05:25.389)

There’s been a lot of talk about it recently. The president mused on true social, about Russia’s economy and so forth. Look, Russia’s paid an enormous price for the war in terms of manpower, in terms of its economy. But China continues to buy oil, India continues to buy oil, Turkey continues to buy oil. So think the Russian economy limps along. Militarily, they’ve got a pretty good wartime economy. Putin still controls the narrative within Russia.

I don’t sense, I’d love to be wrong, but I don’t sense that Russia’s on any brink where it can’t sustain a version of what it is doing. So no, no, could we reach a point, phrase it like that, is no longer true, and Russia, literally and figuratively, begins to run out of gas? Yeah.

But I don’t think we’re there yet, but time, the medium to long term is not in Russia’s favor, only because their productive capabilities are getting diminished and so forth. again, I still think what we want to do is help Ukraine more. don’t know if we will. I don’t know if we’re going to impose sanctions. can’t explain why this reluctance to pressure Russia directly and indirectly.

It gets into places I don’t have any evidence on. But I would simply say…President Trump is right to want to bring peace. I think he’s sabotaging or undermining his own US Foreign Policy efforts by not creating a context in which diplomacy is more likely to succeed. But I don’t see any signs at the moment that either side is ready to essentially shout uncle.

Frazer Rice (07:10.163)
Trump just came out with his 10 or 20 point plan for Israel and Gaza to

Richard Haass (07:15.373)
It was to inflationary times. It was 20.

Frazer Rice (07:18.951)
It’s power of compounding. Hopefully, maybe that’ll help. What do you make of that? We’ve just had all sorts of different iterations of from the invasion to the counter invasion to all the fighting. on one hand, I’m happy to see that there’s an attempt to try to stake out some peace plans here, but I’m not confident that it will come to pass. Do you have any thoughts on that?

Richard Haass (07:44.258)

I pretty much agree with what you said. Look, it’s the shortest 20-point plan in history. And by that, I mean there’s 20 points to it, but none of them is fleshed out. So the immediate question is whether Hamas agrees to it, the Israeli government did. But even if Hamas does any number of implementation questions. Certain preconditions have to be met and so forth.

When I used to teach at Harvard, we used to say that 90 % of life is implementation. Well, this plan is the 10%. It’s a design. It includes all the things a peace plan would need to include, at least it mentions them. But they’re not developed. And so all sorts of things to tall for a technocratic that could run Gaza, a stabilization force, full humanitarian aid, all sorts of things about political and diplomatic processes.

The plan is more, I guess I’d say it’s more aspirational than operational. So the good news is the Israeli government agreed to it. We’ll see what Hamas does. My own guess is at some point,

There’ll be all sorts of hiccups in implementation. And probably early next year, in the spring or so, I expect Bibi Netanyahu will call for new elections. He’s got to do it within the next 12, 13 months. He’ll choose an opportune moment. The fact that he’s gotten this plan put forward, which is quite sensitive, shall we say, to Israeli interests, and he’s agreed to it, puts him in a very good position.

So either Hamas…capitulates or Israel’s given a green light to continue the war from the United States. So I think, my own view is this plan in its current form will not reach fruition to say the least. And at some point sooner rather than later, we’ll probably have Israeli elections, possibly as soon as six, seven, eight months from now.

Frazer Rice (09:48.392)
Got it. So it would be geopolitically crazy not to talk about the two most populous nations in China and India. I know they got together with Russia in the room as well to maybe to broadcast their sort of emergent standing in the world. Is there anything we should be watching on that front besides sort of the obvious in terms of how they deal with themselves and how they deal with US Foreign Policy, especially in a tariff environment?

Richard Haass (10:16.279)

Couple things come to mind, in terms of India.

I think it’s fair to accuse the administration of diplomatic malpractice. The U.S.-Indian relationship has been carefully nurtured over the last few decades by Republican and Democratic presidents alike. It made sense economically. India is the world’s largest country. It’s probably, the fifth largest economy, but it’s going to grow by any measure. Strategically, it’s a real concern for China.

So the idea that we’ve slapped these heavy tariffs on India and pushed them and China’s direction seems to me to make little sense. And don’t get me wrong, I’m not happy with India buying oil from Russia. India’s long bought its arms from Russia, but this hostility towards India just makes no sense. And this embrace of Pakistan, again, what’s Pakistan? A country of 1 6th, 1 7th the population of India. It’s got a long association with terrorism.

The army, shall we say, has disproportionate power. I don’t understand this fondness for Pakistan and this distancing from India. So I think this is one of those head shakers. In terms of the Indians showing up at the powwow in China, yeah, it was a sign that the Indians are alienated. Now they did leave before the military parade. But again, I think it’s India in some ways.

Re-embracing its tradition of a kind of strategic independence, something that it had during the Cold War, even though it tilted towards the Soviet Union. And I think it was the Indians’ of pushing back against US Foreign Policy, saying, we have options. If you Americans are going to treat us badly, we can lower the temperature with China, which is not in our strategic advantage. We want China to have to think about India.

So that’s just at the moment drifting in a kind of bad place in India. We have what, it’s the 50 % tariffs, which again, it’s not that India isn’t protectionist it is, but this is not the way to deal with it. This is not the way to reach a point where India becomes much more open to American exports.

Richard Haass (12:12.398)

In terms of China, again, President Trump and Xi Jinping are gonna meet in less than a month in South Korea on the margins of the APEC meetings.

There’s talk about a summit in China sometime in 2026. And I think the real question is not just what happens economically, what is it the United States and China can agree to, but also what happens geopolitically. And to what extent is it a narrow economics conversation, or to what extent is there a grand bargain in which there’s some trading off, if you will, between geopolitics and economics.

What a lot of people in the strategic world are worried about is that China gives us some of what we want economically, and we give them some of what they want strategically. And that gets into the question of the South China Sea and even more Taiwan. I don’t know. But this is an administration that has consistently put what it sees to be the country’s economic interests before its strategic interests.

And so I can’t rule that out, that that might be the approach. I’m not going to say, I’m not going to rule it in. But I think this meeting in October and then the meeting sometime next year, the summit sometime next year, could go in any number of directions. the meantime, though, I think China has pushed back successfully against American tariffs with their cutting off of exports of rare earth minerals. It’s interesting that we tariffed India, but not China, over purchases of Russian oil. So stay tuned. But I think China has considerable leverage in things like agricultural exports, as your listeners will know.

Essentially the Argentines, the Brazilians and others are benefiting and American soybean farmers are paying an enormous price. The Chinese essentially are saying, you want to play a bit of economic warfare. Well, two can play that game. And by the way, we might be at least as good, if not better than you, at playing it.

Frazer Rice (14:36.148)
Quick flashpoint question about Nepal, which I thought was sort of an under-reported story and how basically the leadership there was in a sense overthrown. And you have that happening right in the middle of India, Pakistan, China right there. there anything, it’s tough for me to tell whether that’s a contagion that’s been closed off or whether that’s something that just bears further monitoring.

Richard Haass (15:01.324)

I mean, I go on at great length, except I don’t know enough to go on at great length. So I haven’t seen a lot, but what I don’t know, to be honest, is whether the fact I haven’t seen anything after the initial few days of reports, whether that shows a lack of media access and interest or that things have seriously or fundamentally calmed. Sorry, I just don’t know. I don’t know how to interpret the lack of news coming from there.

Frazer Rice (15:29.086)
Got it. So let’s move stateside for a second. It’s the economy, stupid. That’s what they all tell us. And it’s actually, in my opinion, probably very true. Trump’s tariffs have now had a set of months to bed in, and it’s had its different issues related to sort of geopolitical relationships.

It’s unclear to me whether we can really sort of take any solace from it other than a high stock market. But even that scares me a little bit. What do you think about in terms of the economy and how the US is set up both for everybody sort of individually who are citizens here, but then geopolitically and otherwise as we look forward to things like the midterm elections and other phenomenon.

Richard Haass (16:15.286)

Sure. You wrapped around six questions into that one, my friend. Look, I think the tariffs, they’ve certainly hurt us geopolitically because a lot of them are against allies. And we’ve essentially said being an ally doesn’t insulate you, whether you’re Europeans or the Indians or Japanese or what have you.

So I think they’ve had a strategic impact of weakening a lot of our relationships. Economically, we’re still in the phase of seeing the effects, but I think the preliminary effects are increasingly apparent. They’re inflationary, they have slowed growth, and they have led to a bit of job loss. So I think that’s the, but this is a work in progress, and my sense is that’ll get worse and it works against what the administration wants, which is for the Fed to dramatically lower rates.

On one hand, the slowing growth does, it reinforces the desire to lower rates, but obviously the inflationary impact works against it. This is an article of faith, not analysis for this president. So I’m on the skeptical side. It will raise some money, maybe a couple of hundred billion a year. in terms of added revenues. But the real question is whether how it nets out. If the economy slows and there’s less growth, then that’s going to hurt us on balance because the IRS, the extent that still in a position to take in revenues, reduce the effectiveness there, will have less to work with. The economy will just be smaller.

Richard Haass (18:04.16)

I think on balance both strategically and economically, the tariffs are unfortunate. They’re ill-advised. But like I said, it’s an article of faith for this president. It’s the centerpiece of a lot of his economic program, even if it works against some of what he wants to see. And I do think politically it hurts him. You see the numbers in the economy.

Look, Joe Biden and Kamala Harris, essentially what led to their defeat, as much as anything, was the cost of living. And, you know, people get reminded of higher prices several times a day. I think it will hurt the Trump presidency as well, both in terms of food prices, which are pretty robust, or in terms of mortgage rates not going down much.

So I think this will politically be a… net loss for them plus with specific constituencies I already mentioned certain farmers who live by exports they’re to be they’re they’re they’re furious they are they have been they they have been made you know what they’re paying an enormous price for this policy they didn’t realize they were voting for.

Frazer Rice (19:06.057)
Right. The other part that scares me a little bit is if you subscribe to the notion that AI is going to lead to productivity gains, that could lead to unemployment in pockets that people didn’t expect. In Midtown, if have whole bunch of guys in vests walking around that suddenly don’t have cushy jobs anymore because they’ve been replaced by GPT-5 and all that, that’s not great either.

Richard Haass (19:27.118)
Yeah.

Richard Haass (19:37.999)
That’s happening and it’s gonna happen more. And I think it’s inevitable. It’s gonna affect white collar and not just blue collar. People who have incurred serious debt to go to a fancy four year school. And they’re gonna have a lot of debt and not a lot of jobs. Look, I don’t think we’re ready for that. For the hit it’s gonna take on jobs.

We haven’t really begun this conversation in this country about a safety net for people who, for long-term unemployment, for people who had never had jobs. It’s one thing to get unemployment insurance for a limited period after you’ve been laid off. What if you can’t get that first job? These are, I just don’t think we’re, as a society, as a polity, to get political science here for a moment, we are not positioned to have that conversation yet. And whether we’re talking about universal basic income.

Whether we’re talking about lifelong education and re-skilling and re-tooling opportunities and so forth. So the question is, how do we deal with this? What is the responsibility of the state? To what extent do we condition the various types of economic support on certain willingness of the individual to do certain things? We haven’t begun that conversation, but we’re going to have it.

I don’t know when, whether it’s in a year or two years or three years.

I don’t know if it’ll happen before 2026, but do I think it’ll happen by 2028? Yeah, I do. I actually think that that will be one of the conversations that will, whoever the candidates are in 2028 for the presidency and for Congress, this is gonna figure significantly in the public, if you will, in the political marketplace.

Frazer Rice (21:27.728)
We painted a pretty gloomy picture for Trump in his sort of era here. And in many ways, I feel like he’s trying to run out the clock before 2026 in the midterms, where if the House switches over, I think a lot of what he’s trying to do slows down to a crawl. But the Democrats themselves are not creating or taking advantage of the conditions they inherited.

I spoke, or I didn’t speak, I was at an event where NY1 was talking about the mayor’s race in New York and Mondami and sort of the progressive element in the Democratic Party having a big impact on what’s happening here in New York City. I guess just from a broader question, how do you see the Democrats lining up for 2026 in something that seems to me to be very winnable, but at the same time, they seem to not lose an opportunity to lose an opportunity?

Richard Haass (22:25.006)

I have a couple of reactions. One is you can’t speak of the Democrats when it comes to 2026 because they don’t have a candidate. What they have is 435 candidates for the House and 33, 34 candidates for the Senate. And I don’t know how many governors. It’s decentralized. So the Democrats are going to be all over the place. From center left to center to far left to Democratic socialists like the likely next mayor of New York. So.

They’ll be all over the place. And all politics is local. Some will win and all that. But I don’t know what kind of clarity politically will emerge from it all. I also think there’s some big questions, it’s awkward to talk about, how the administration will try to shape the environment so the Democrats don’t emerge with control of the House.

I don’t think there’s much chance, there’s some, but not much chance they could regain the Senate, but the House is paper thin margin. This administration clearly, strongly does not want the Democrats to take control of the House of Representatives, given the subpoena power, the hearing power, and all that, what would accrue. So the question is, what lengths will the administration go to to see that that doesn’t happen? We’re already seeing what you might call aggressive gerrymandering.

You had the president just recently talk about the deployment of American military in many cities and so forth. I think the jury’s out on what’s gonna happen in this country over the next 13 months. I’m not predicting what will happen.

I’m simply saying I’m not confident that I can sit here and tell you what will be the run-up to the elections in… in 13 months. But I do believe this administration will go to great lengths to see that the Democrats do not gain control of the House of Representatives. I can’t talk about 2028 yet.

There the Democrats will have a representative. Someone will ultimately win the party’s nomination. And I don’t know if it’s somebody of the center, the center left, or the progressive left, the far left.

Richard Haass (24:45.998)

And on the Republican side, I don’t know if you essentially, could have everything from the President running for a third term, if that’s even a possibility, to Vice President Vance essentially representing what he would do is represent a de facto or effective third term of President Trump, whether you might have a Nikki Haley or Glenn Youngkin or somebody like that who might represent a little bit of a correction. I don’t know.

Again, a week’s a long time in politics. We’re now talking, we’re two years away from the beginning of the primary season. So we’ll probably have six more conversations, you and I, before then. So we can revisit that. I think we’ve got to get through this November, which is the mayoral election, a couple of gubernatorial elections in New Jersey, I think Virginia, and so forth. We’ll see what signs they tell us about disaffection over the economy and over other issues.

Frazer Rice (25:21.492)
Ha!

Richard Haass (25:41.643)

Then I think the next big political, well two things, one will be Supreme Court decisions on such things as the power to enact tariffs and post tariffs and how the court decides and how the administration reacts to those decisions. And then I think the other big thing will be the run up to the midterms, among other things again, the use of National Guard, military and so forth and how that all plays out.

I would just say, this is largely a business audience. The range of potential futures over the next, what, 13 months is much larger than we’re used to. Now, investors used to live in a world where the range of possibilities was pretty circumscribed. We were maybe playing between the 50 yard line and the 40 yard line on whatever side of the field the occupant of the Oval Office came from.

Well, now we’re playing on a much wider playing field. Now, we’re not playing within a span of 10 yards. We might be playing within a span of 30 or 40, 50 yards. So, to stretch the metaphor, and I can use football metaphors this week, because the Giants finally won a game the other day, that I think the range of possibilities is much greater.

There’s the two parts of our conversation, to use my two favorite words, home and away, given my substack, I think the range of possible outcomes, both domestically and internationally now, is far greater than we’re used to.

We’re all…trained to operate in a world where you get up in the morning and you can make a large number of pretty big but safe assumptions, I think that world is probably gone for the foreseeable future. And that we’ve now got to operate in a world where both domestically and internationally, we don’t have that luxury of making confident assumptions or predictions.

Frazer Rice (27:33.041)
I recommend your book on the Bill of Rights and Obligations. Emphasis on obligations because people forget the concept of dutt. What do you think about the American electorate and the citizenship? My personal thought on it is that I feel like people are really in it for themselves a lot and that the idea of contributing back to the society and the politics, the confidence in the institutions and the trust is in a weird place right now and something that needs some emphasis. You’ve written a book on it that I love. I’m interested in your opinion on it right now. Many of us are fatigued over the last six months to a year.

Richard Haass (28:16.366)

Well, thank you. Yeah, I wrote the Bill of Obligations because I’m worried. And I feel a sense of urgency. Here we are. We’re less than a year away from the 250th anniversary of this experiment. And coming back to what we just talking about, it’s hard to feel sanguine, shall we say, about our prospects. I’m not defeatist. I’m not negative. But I’m worried, which gives me a sense of urgency. But, we don’t teach civics or foreign policy in a lot of our schools or if we do teach it, we don’t teach it well.

It’s become harder to operate a democracy given how we fund our politics, given social media and cable and radio. you know, go on and on. We began the conversation by talking about the Ryder Cup behavior. There’s things that are amiss, I would simply say, in American society. Things have gotten coarsened. They’ve gotten rougher.

There’s fewer norms that are recognized and respected. So we’re on the brink of yet another shutdown in America, in Congress, what’s gonna happen there. And regardless of what happens this time, there’ll be a next time. We’ve been unable to deal at all with a deficit that’s what, north of 37 trillion.

So, American politics are not working terribly well. I think American citizens are not informed enough or active enough right now. So, yeah, again, we can analyze how we got to where we are, but it’s a worrisome situation. I don’t know if it constitutes a crisis, but probably you could make the argument that it… does, we had about a third of the eligible voters didn’t bother to vote in the last presidential election.

I would think upwards of 40, 45 % of eligible voters at least won’t vote in the midterms. So we’ve got a problem with civic participation. We’ve got a problem with civic knowledge about what people are learning and where they get their information from. TikTok, I know this comes as a great shock to you. No matter who owns it. TIkTok is not a reliable source of information for citizens about their democracy or the issues of the day. So yeah, I mean, I think this is a testing period for American democracy and what we’re seeing in Washington is in some ways a reflection of that

Frazer Rice (31:09.48)
Great stuff. Richard, how do listeners and watchers now find you and find out more about US foreign policy?

Richard Haass (31:14.68)

Well, they can find me on Substack. I publish a weekly newsletter called Home and Away, where I talk about, as the title suggests, things domestic and things international. I try to throw in just a little bit of golf and sports so people don’t get too depressed when they read what I have to say. And I do a lot of media. They can find me there, whether it’s on Morning Joe or some… this shows in you were kind enough to mention my last book, The Bill of Obligations.

I’d for more people to read it, particularly in the run up to, again, July 4th, 2026. This is a time for Americans to reacquaint themselves with the DNA, shall we say, of our political system, of our democracy, which has served us pretty well for two and a half centuries. And if we’re lucky, we’ll continue to.

Frazer Rice (31:48.233)
Me too. Thank you.

Richard Haass (32:10.969)
Thank you, sir. Good to see you.

Frazer Rice (32:13.087)
Likewise!

RICHARD HAASS SUBSTACK “HOME AND AWAY” ON US FOREIGN POLICY

Listen to my first interview with Richard Haass on US Foreign Policy

READ THIS FREE PREVIEW OF RICHARD’s “THE BILL OF OBLIGATIONS“

Council on Foreign Relations on US Foreign Policy

US FOREIGN POLICY

In this conversation on “TAX ALPHA”, Frazer Rice and BRENT SULLIVAN (of TAX ALPHA INSIDER) delve into the complexities of tax awareness in investing, focusing on capital gains, income tax, and various strategies for tax efficiency. They discuss the importance of tax loss harvesting, the challenges of managing concentrated portfolios, and the implications of estate planning. The conversation emphasizes the need for advisors and trustees to understand these strategies to optimize tax outcomes for their clients.

How did you develop this expertise?

How do we find you?

Frazer Rice (00:01.122)
Welcome aboard, Brent.

Brent Sullivan (00:03.035)
Well, happy to be here, Fraser.

Frazer Rice (00:04.558)
It’s fun to chat in person. I’ve been following it to call a blog I don’t think gives it the proper respect because I think you’re uncovering a lot of great information for advisors like me and wealthy people and other people generally speaking in terms of Really getting going on the tax alpha end of it Let’s start a little bit with some basics because I think you know for someone new to the concept of Being particularly tax aware in terms of investing taxes can be, they’re more than just income tax, that’s for sure. How do you think about it? How do you get your framework around what people are trying to avoid when they’re dealing with their investable portfolios?

Brent Sullivan (00:45.723)
Yeah, I mean, there are really just a couple of different ways to break it down, but I probably start with the concept of a capital gain as a distinct thing from income tax. so capital gains come in really like four different flavors.

There’s short-term capital gains, short-term capital losses, and then long-term capital gains, long-term capital losses. And then these things are different if you have collectibles or other types of instruments too. But the point is here that you’ve got those four quadrants that you’re always sort of operating in.

And I think that’s where the management and the prowess around portfolio design, execution, that’s where all of that really comes into play. And the final point I’d make about capital gains versus income is that capital gains is really a planning opportunity. Income is gonna come at you and there’s really not much you can do about it. Strong caveat to that. But capital gains are really about timing. You can accelerate losses, you can defer gains.

Frazer Rice (01:37.929)
Right.

Brent Sullivan (01:45.079)
And that’s really the beginning of the conversation when I’m talking with advisors about this usually. I operate in B2B space, I’m not retail facing. And usually that’s where the planning conversation starts.

Frazer Rice (01:57.655)
So as you sort of step back and help people think about the tax planning aspect of it, for advisors generally speaking, they’re very interested not only in the investment perspective, but the structuring of wealth such that they’re taking advantage of what they can and mitigating that which is destructive, but otherwise not really something they can avoid.

If we settle in a little bit on the investment piece a little bit, what is the universe that we’re looking in in terms of how people allocate their portfolios?

Brent Sullivan (02:33.22)
Well, mean, so probably I’d say the hot topic in tax management nowadays is really getting the portfolio to be more equity like. And so the reason or part of the motivation for more equity like exposure is to utilize to the extent possible the planning opportunity of capital gains, realization and acceleration and things like that. So that’s that’s probably the core concept. The biggest chunk of the investable portfolio. The idea is to make it more equity like.

And then the planning opportunities sort of expand beyond the core portfolio. That’s in, you know, how can we align total diversified exposure across the right types of investment accounts? In your space, it starts to get really interesting.

You know, I say your space, like in a state planning world, it starts to get, you know, the idea of asset location, putting the stocks, you know, in the high growth portfolios or tax exempt portfolios, depending on the profile.

Frazer Rice (03:17.228)
Sure.

Brent Sullivan (03:26.458)
Putting the bonds in tax advantaged accounts or tax exempt accounts, again, depending on the profile. All of that is like, these are like really crisp, interesting planning questions that do not have crisp answers. And I think that’s where the planning opportunity really emerges.

Frazer Rice (03:42.668)
We talk a little bit about asset location. The investment vehicles we’ll talk about shortly and some of the things that can happen to turn the dials on that front. But in terms of location in whether ERISA accounts or life insurance or trusts or things like that, as people are trying to get their arms around the matrix, as you called it, and certainly with the capital gains and short and long, there’s almost a matrix of different things you can think about in terms of the tools in your toolkit. How do you get your arms around that if you’re new to the space or otherwise trying to really provide subtle advice as opposed to maybe speculative advice?

Brent Sullivan (04:23.214)
Yeah, I mean, I think that the first step is really trying to understand how each investment decision impacts not just the current investment returns, but also future investment returns, after-tax returns, pre-liquidation, post-liquidation, but then also estate considerations, like are you choosing the right vehicle if you’re trying to isolate or exclude assets from the estate? Do you want to keep a strategy on for multi-generations? Is it private? Public? Is it liquid? Iliquid?

Inflation protected? All this kind of stuff. You have to realize that every single investment decision involves or impacts this really complex ecosystem. It’s super interesting, but I think like first order decision is like how much of a thing should I own? That is just like the tip of the iceberg. And I would say that’s where 99 % of like the financial media focuses. You how should I invest a million dollars now? It’s like, no, boy. Like there’s so much more ground to cover that could make portfolios resilient today, but also with multi-generation in mind.

Frazer Rice (05:29.835)
As I like to say, trying to get past the two dimensions that most people are normally thinking about in terms of the X and Y of income and capital gains and then sort of layering on asset allocation to be responsible on that front, but then add the Z axis of the estate planning, really kind of years 10, 15, 20, and then going beyond your use of the assets to different constituencies that are going to benefit from it later.

Brent Sullivan (05:55.365)
I mean, I get so excited when I think about the opportunities in this space because they’re so messy and bespoke. And I say messy in a good way. These are real problems that planners have an opportunity to step in and address for high net worth folks. really, down market, I don’t say down market in a pejorative sense, but mean, in down market too, there are really opportunities for planners to step in and add meaningful value and like again, I am an observer of this industry.

I’m an independent tax analyst, which means that I don’t have a stake in the game. I don’t, I’m not trying to sell anyone’s product. So I just get to see the opportunities that planners have when they’re engaging with, with clients at all wealth levels. And again, like to your point, yeah, multi-generation is super exciting. It’s so messy and interesting.

Frazer Rice (06:43.755)
As we look at it here, the one unifying theme is most people don’t want to pay taxes if they don’t have to. success really does come down to what do you get to keep at the end of the day from the fruits of your labor or your investment. Without that unifying principle, then we’re sort of grasping at straws I guess.

Let’s start with the simplest sort of tools that we have in the toolbox. And this is gonna combine a little bit of investment vehicle and tax awareness in the long only space? What are the things that you’re thinking about in terms of the tools that a lot of people have access to, but maybe not have the tax awareness that we think is a good idea to think about?

Brent Sullivan (07:27.332)
Well, mean, the easiest thing or probably the highest level thing is just asset allocation specifically. And so that’s just like at the very, very simplest level that would be, you know, how much of your portfolio is allocated to growth assets like stocks versus how much of your portfolio is allocated to fixed income assets or something fixed income like like bonds.

That’s the first decision you need to make. It already has tax implications attached to it. And the first tax implication is are we dealing with the character of capital gains in the equity sleeve and we’re dealing with income in the fixed income sleeve. Okay, you already have like made tax decisions at that point.

So should you be augmenting portfolio allocation to make sure that your after-tax results are more favorable? Now again, to my earlier point, this is where more equity-like exposure starts to come into the fold. We haven’t even layered in any complex products or anything yet.

We’re still just talking about stocks and bonds. But then if we’re expanding beyond those core allocation decisions away from stocks and bonds and we’re adding different types of accounts. Again, like you said earlier, ERISA, other qualified accounts, IRAs, whatever it might be. Now we have an extra lever to pull.

Okay, great, maybe we should be putting all those bonds in the advantaged accounts such that we’re not realizing income or such that we’re not paying income tax and experiencing tax drag like on an annual basis. So that we can expand even beyond that and we can start thinking about planning around accelerating losses and deferring capital gains.

If we start matching those income or we start matching those assets, tax assets, probably through something like tax loss harvesting as a trick, and we’re matching that with capital gains liabilities that we’re expecting either through routine portfolio management or through an exit, we can start matching these things and really pushing out tax into further and further years.

And that’s really the planning opportunity there. And again, there’s plenty more we can do beyond that. But I think the basic tools, again, allocation and then location. And then if you want to get into the portfolio itself, there are specific products that might be able to dial in those concepts even a level further. I’m talking about things like no dividend ETFs to the extent that’s relevant and attractive to the investor.

Brent Sullivan (09:47.567)
And then there are other things now, interesting happening in fixed income. Okay, are there ways to defer the income such that, and to have it have a capital gains treatment instead of ordinary income? That’s probably, you know, those three tiers again, allocation, location, and then investment selection in the portfolios themselves, very powerful right off the bat. And again, we haven’t even done anything complex yet.

Frazer Rice (10:08.115)
So let’s dive into the complex. Tax loss harvesting, is really kind of the bell of the ball right now in the investment community and getting talked about on many fronts. Talk a little bit about the concept there of what it is to generate losses while maintaining the character of an investment profile that you think is appropriate for a client.

Brent Sullivan (10:28.91)
Well, OK, so let’s say that we’ve got a portfolio that’s 80-20 stocks and bonds. Let’s set aside the bonds for now. Let’s just focus on the stocks. So the stocks have capital gains treatment as an investment asset class.

And what that means is that as the portfolio is oscillating around its cost basis, right? So you buy the portfolio, you buy an asset for $100, and it appreciates above the $100 to $110. You’re in capital gains territory, unrealized capital gains.

If it trends below the cost basis, you’re in capital loss territory. And so the portfolio is bouncing around that critical number, the cost basis. If it’s below the cost basis, you have the opportunity to liquidate that asset, capture that tax loss, and then reinvest in something that is not exactly the same, but is similar in risk profile. Similar is the key word, not substantially identical.

And the idea is that you’ve captured this tax asset sits on your household balance sheet and it can be unlocked and utilized when you realize capital gains somewhere else, again, in the entire household portfolio, as long as it’s still within the estate.

That’s really the strategy there is to capture those tax losses and then to use them to offset gains that might be occurring elsewhere in the portfolio just through routine portfolio management, but it also might be through tax inefficient vehicles like managed futures.

It could be from some income program, again, capital in nature, not income. And those are really the opportunities that are immediately present through tax loss harvesting.

Frazer Rice (12:06.92)
One of the things I think is important is that typically most people say, oh, if you’re taking losses, is my portfolio going down? The reason why this is appealing is that, you know, instead of having one index that represents a particular, say the SP 500, you’re investing generally in a basket of stocks that is Sam is a sampling of the S and P 500, which allows you to take advantage of the oscillation while maintaining the investment characteristics of the larger S and P 500 index.

Did I square that correctly?

Brent Sullivan (12:38.224)
Yeah, 100%. Yeah, that’s it. I mean, so you’ve got S &P 500 exposure or Russell 1000, Russell 3000 exposure. And then what you’re referring to is really the granularity of individual holdings. And so you can imagine, if I hold one ETF and it’s oscillating around the cost basis, well, that these oscillations occur with much more violence and interest if the portfolio holds individual positions. The idea is that as those individual positions dip below cost basis, you sell them.

You reinvest in something not substantially identical but economically similar such that you maintain the same exposure. So you’re still getting the benefit of appreciation in the portfolio and the same risk reward characteristics. But now you’ve got these tax assets sitting on your household balance sheet.

Frazer Rice (13:26.123)
Now, one thing that’s sort of popped up as a product enhancement in this type of scenario is the idea of embedding short and long term overlays on top of this tax loss harvesting so that you can get the notional value beyond what’s being invested and generate more losses in addition to having your exposure to the underlying investment. Maybe talk about that a little bit for the listeners.

Brent Sullivan (13:55.995)
Yeah, I would say probably the white hot topic in core portfolio management nowadays is exactly what you said, Frazier. It’s adding additional margin or it’s adding a margin to the portfolio and then complementing that margin with short positions. Just to give it like a simple example, suppose that we have simplest possible example is probably imagine you have an S &P 500 ETF. Okay. Start with that as your core allocation and then you borrow against that

ETF, you use that ETF as margin and you add more long exposure. And so the long exposure, let’s assume that it adds another 100 % to the portfolio. So you started with $100, now your portfolio is $200 gross. And then you complement that extra margin long with shorts, and you do them the same as the margin.

You have $100 core portfolio, $100 margin extension, $100 short exposure and the idea is that the long Margin and the shorts are market neutral such that the manager who’s handling this is really interested in relative value between the two So your gross exposure in that case would be 100 margin 100 core 100 short for 300 gross exposure But your net exposure is just that 100 and the again those those extensions are market neutral ideally such that we’re capturing relative value.

That’s the pre-tax alpha argument. And then there’s a post-tax alpha argument where it’s like, there’s a lot of interesting opportunities to accelerate capital loss realization in the longs the shorts, depending on how violent the market is that you’re.

Frazer Rice (15:41.069)
That it’s one of the things that for the mad scientists among us, you can turn the dials and if you want something different than market neutral, i.e. you’re willing to take a little bit more risk on that front in the theory that you’re able to maybe generate some more alpha by in a sense just being a little bit more aggressive on the risk side of the investment.

Then you’re able to dial in a little bit more return while going for it on the tax loss generation end of things as well. We’re seeing that with different clients here. where the market neutral is very interesting and as part of a core allocation, a good idea.

Then they’re willing to listen to the manager underneath and say, might be an area where your prowess might be rewarded in a way that helps us on a pre-tax and a post-tax scenario.

Brent Sullivan (16:33.628)
Yeah, 100%. Yeah, I mean, so that’s probably the first order concern is always like, hey, does this investment make sense? Does it add, you know, maybe additional diversification principles, maybe, you know, whatever it might be, maybe pre-tax alpha generation. Like, that’s the first order concern.

Does this make sense? And then once you’ve broken through or confirm that barrier, because you’re going to expose the portfolio to additional tracking error, that is to say difference between the portfolio performance and the underlying benchmark, these extensions have risk attached to them.

If you’ve confirmed that it’s worth taking that additional risk and paying financing costs and whatnot, and all that is not free, then if all that makes sense, then finally you can say, actually there’s a lot of really great post-tax opportunities here too. And this really comes, let me just give you a quick flavor of it because it’s interesting.

On the long side, this is just as if you had injected a bunch of cash into the portfolio. And so from my earlier example

That’s just like you had reset the cost basis high again. So what that means is that the portfolio is pretty close to cost basis. Again, it’s oscillating around that really critical number. If the long extension dips below the cost basis, you can harvest those losses. That’s interesting, maybe even intuitive to some folks out there who are used to sort of direct indexing, typical tax loss harvesting. But on the short side, it’s really much more interesting.

Essentially, your shorts are a bet against the market. Okay, so if the market keeps going up, there’s almost always, nearly always, I don’t wanna say it’s not unlimited, it’s not in perpetuity, but almost always, there’s an opportunity to capture losses on the short side.

So this one’s quite simple to understand, it’s technically complex, but the idea is if the market’s going up, you have losses. Now that’s totally different than a long only mandate where if the market’s going up long enough, you sort of run out of losses, you run out of basis to mine.

If you think about it as like a little gold pile that you’re working into to try to extract tax assets, that disappears over time. Long short extensions reinvigorate that possibility, I don’t know, say almost in perpetuity, almost, heavy asterisk there.

Frazer Rice (18:44.068)
That’s right. No guarantees or anything like that. The asterisk is in bold and underlined. So we’ve been talking a little bit about really in a sense diversified portfolios and allocating in that world. If we get into the concentrated portfolios, many people build wealth.

They work at Google. People sell a business. They do something like that and they have or they have a business that haven’t sold it yet, but their wealth is concentrated in one thing or the other.

What is the universe around that to help sort of a tax-efficient component of either disposition or otherwise planning so that capital gains tax is as low as possible and it can get to the next generation or elsewhere in a more efficient way.

Brent Sullivan (19:28.634)
Well, let’s start with the long short as a solution in that specific case, because this is a very popular topic. It’s also, advisors are very interested in it because I think, because they’re getting inbound from clients who are just like, hey, I’ve got this really gnarly situation.

I’m holding, like you said, too much Google or I’m about to exit. So what can we do here? And I think this is really where the planning opportunity steps in. So if we assume.

Frazer Rice (19:35.299)
Mm-hmm.

Brent Sullivan (19:55.397)
Let’s assume that the investor is holding a publicly traded large cap stock just for simplicity. Let’s assume that we’re going to consider long short extensions around that concentrated position as a means to diversify, to de-risk over time.

The way that that works is the investor would contribute, let’s say their Google shares into a portfolio margin account. And the portfolio margin account just essentially uses risk-based criteria to be able to dial up the leverage pretty aggressively on the margin and short sides.

So the investor contributes the Google to a portfolio margin account and then uses, the manager uses the Google as collateral to again add that margin position on top and then shorts a complimentary portfolio to maintain that market neutral exposure.

Okay, so you’re getting that pre-tax alpha that is helpful for, know, always pre-tax alpha never hurts. But what’s actually happening is that, or what’s really happening in compliment to the pre-tax alpha is that you’ve got a lot of loss realization.

As you’re realizing capital losses, you are using those capital losses to offset capital gains as you wind down the concentrated position. Depending on the amount of leverage that you’re using in this portfolio, you can really exit the position tax neutral. That would be the objective. This is again, deferral, not avoidance. It’s deferral. You’re eventually pay the tax. Another strong asterisk!

The idea is that you want to try to execute this position tax neutral and you can do so if you’ve not already realized the gains that the typical timeline with a heavily leveraged portfolio, something like two years to exit tax neutral from that concentrated position. And if you’re uncomfortable with really, really high amounts of leverage, then you can do it something like in five years.

Frazer Rice (21:45.115)
I mean for people who are thinking long term, two to five years is much more palatable than say the standard where you have this big bulky position and you’ve got, let’s say you came in at 200,000 and it’s worth a million, and you’re saying, gosh, how do I get from here to there? That’s a meaningful sort of absorption of time to get you into a diversified place.

Brent Sullivan (22:09.562)
So that is really the critical point that you’re making. Like what is a graceful way to get from A to B? So it’s like, do you know what you want? Do you know what B is? What’s your ideal state that you want to gracefully transition into?

So if your initial state is concentrated stock and you’re like, wow, my ideal state is Russell 1000 diversification. I still want to upside exposure, but I just want to not be so idiosyncratically concentrated. Okay, cool.

Frazer Rice (22:23.81)
Mm-hmm.

Brent Sullivan (22:38.128)
What’s the most graceful way to get from A to B? And there are a bunch of different methods. Long, short, just a direct extension over a concentrated position will allow you to gracefully transition from A to B.

Now, there are other tools too in the concentrated toolkit. Probably the simplest is, of course, just to sell it. You could just exit the position instantly. Now, is obvious ramifications, tax ramifications.

Frazer Rice (23:03.788)
Simple, graceful.

Brent Sullivan (23:05.264)
Not graceful, know, yeah, yeah, it’s like yeah, it gets yeah, it gets gnarly now that makes sense for some folks though You know just be done with it, you know, let’s transition. Let’s diversify instantly.

You know, there are other tools there to like an exchange fund depends on the capacity the fun depends on the underlying characteristics of the name but probably for your audience I think it’s worth having the variable prepaid forward on their radar and so variable prepaid forward achieves a couple different objectives.

First, the way that it works is you’ve got a concentrated position and then you can imagine a cap and a floor placed on that concentrated position and then a loan granted against that collared position.

Then the loan is usually something like 75 to 90 % of the notional value of the position. So again, you contribute $100 worth of Google put on the variable prepaid forward. This requires an ISDA, it’s a very complex arrangement, but you put on the variable prepaid forward and then the loan that you’re granted against those $100 would be something like, again, $75 to $90.

What you do with those proceeds is you put them into a diversification program. And nowadays, ideally, that diversification program includes loss harvesting potential such that when the variable prepaid forward matures, you’re able to match losses from the diversification program with gains from winding down the isolated position.

You also retain the optionality to extend the variable prepaid forward. So again, like Frazer, just to your exact point, it’s just like, how do you get from A to B in the most graceful ways? There is just like the whole toolkit to get this done thoughtfully.

Frazer Rice (24:46.506)
Well, one of the things that, you know, if you start talking about the estate tax perspective, one of the tools is the step up in basis when you die. And so for some people who are willing to absorb that concentration risk, sometimes it’s worth holding onto those shares. if the idea is that you’re thinking long-term enough to pass them on to somebody else, you end up getting a step up in basis. Your estate does when those shares, when you pass away and then that capital gains part goes away. Now you have to net that against the estate tax. Fortunately, we have large exemptions in place, but that’s another tool in the toolkit that we think about.

Brent Sullivan (25:23.984)
It’s insanely valuable from a planning perspective. I think you could educate me a little bit here, from the on community property states, you’re going to get spousal step up. tell me about that, because that does come up with some regularity.

Frazer Rice (25:31.84)
Sure. Well, a lot of times you have to be careful in terms of how these are owned so that you don’t get half of it split and half of it not. Essentially there are some States that allow community property to be co-mingled into a trust so that you get the step up immediately.

That deserves its own episode on its own probably. we’ll dive in. We’re going to, dramatic foreshadowing for our listeners, we’ll probably have a separate estate planning one, but

Yeah, no, that’s a big deal where you have to really understand the characterization of the features there of ownership so that you’re not splitting one and not the other if it’s owned jointly.

Brent Sullivan (26:20.794)
Yeah, that’s a fascinating topic. That’s a real planning opportunity in community properties states. There are other solutions too we could get into another time. But just suffice it to say that like the planning opportunities here, this is really the work of an advisor, I feel. It’s not investment selection.

I mean, to a certain extent, it’s investment selection, but it’s design, it’s thoughtful planning, it’s accelerating losses, deferring gains, optimizing gains, using tax as a risk mitigation device. That’s probably a little complex, but this is the work of a thoughtful advisor.

Frazer Rice (26:52.288)
No question about it the it just to get back into the estate planning world even though it just said we’re going to hit the pause button on that one of one of the main things that that in terms of getting things out of one’s estate the the basis carries over and so when you’re doing planning to get away from the estate tax oftentimes you’re not necessarily going to avoid the capital gains tax if you go sort of the simple route

There’s the concept of a grantor tax status where sort of dialing up good estate planning is having the grantor or the donor of the assets into the irrevocable trust pay the taxes on that and that’s done by keeping a set of powers that makes it an incomplete gift.

One of the things that we talked about I think in a different vein was the idea of in a sense having your cake and eating it too where if a grantor is able to put low basis assets into an irrevocable trust for and or maybe low basis and then they grow later so that the growth happens out of the estate maintain the power to substitute those assets which is that’s the real juice here uh… and then be able to substitute those assets that correct fair market and provable valuations through uh… through a firm uh… you know valuation firm.

To substitute it with something like cash that has a high basis so that when you substitute, you’ve gotten the value out of your estate, but then you get the low basis back into your estate so that you can take advantage of the step up later when you pass away.

Is that something that’s come across your desk? I’m sure when people are looking at everything from low basis of stock to companies to so on. We’re seeing it as well where people are saying, okay, you know, what are the best assets to put into these vehicles short and long term so that we try to avoid as much of the different types of taxes that are out there.

Brent Sullivan (28:58.084)
Well, I’m pleased to say that this is definitely a fringe topic. So yes, it comes up for sure, specifically swap power. as deep as we want to go on this, Frazer, we’re more or less bringing what some folks, I think, in estate planning would consider routine practice, where we would be shedding light on it.

Because I think these opportunities are interesting, but I think are rarely discussed out in public. So I mean, that’s really the opportunity for us to create some really interesting knowledge sharing just for the community of listeners or both for my readers. I think this area is, it’s in its nascency if we’re talking about concentrated positions from a public exposure standpoint.

Frazer Rice (29:41.886)
One other thing to put a pin on so we can maybe discuss it and we’re now we’ve now created a whole new podcast not just different episodes but we’re seeing a lot of interest in private placement life insurance and private placement variable annuities really more as a location device in terms of allowing tax-free growth because these is this is life insurance

But then when it’s stitched together with the estate planning component, because oftentimes life insurance is bought in order to match up with the liability of an estate tax. so when someone dies, it’s there. and PPLI is something that we’re seeing a lot more interest in because as a vehicle for owning alternative assets, which are usually high, high, highly taxable, either from an income or otherwise component, why not own it in a vehicle that kills two birds with one stone?

You avoid the taxes on the sort of income and capital gains basis, but then you also get good estate tax treatment if you’re able to own it that way.

Brent Sullivan (30:42.67)
Yeah, totally. I mean, yeah, you’re going to educate me on all that stuff. I mean, that’s that’s one step beyond what I normally encounter, even though I’ve got the PPLI books sitting on my desk over there.

Frazer Rice (30:52.564)
It changes hourly because it’s becoming more more popular as we get going. the, you know, as we sort of, I don’t know if we want to wind down here quite yet, but the one thing that’s interesting here is we get to a, for people who are operating in that estate world with where executors and trustees and people who have what I call fiduciary with a “Capital F” types of roles.

Do you get people asking you, know, what do I have to think about? If I’m an individual owning it, that’s one thing because those people are responsible for their own investments. I maybe they’re getting help from an advisor and there’s some back and forth on that, but the concepts are sort of limited to that person or that generation.

So you start going to the world where you have to probate in a state or then manage a trust with these types of concepts. To me, the functions are important because you’re not only managing assets, like when things go wrong, you’re personally responsible.

And that to me is, think, some of an area where we’re to have to discuss even further what we’re doing here because not having a really steady hand on the wheel and understanding what’s happening underneath all of this.

If you don’t take advantage of these things, not only from an investment perspective, but a tax perspective, that people can come back at you later and that can get ugly. As an example, if you’re in a long short situation and someone passes away, in my mind, you want to wind that down as fast as possible because you don’t want liability to … all of a sudden balloon on you and then all of a sudden the beneficiaries of these states say well why didn’t you wind this down?

Brent Sullivan (32:45.034)
I think that’s one of the most interesting planning opportunities that I’m getting into the weeds in now. And so that’s like, know, just stepping all the way back. If we’ve got a portfolio again, that’s got margin extension and shorts, those are liabilities like on the household balance sheet or on the estate.

Then the typical default behavior is that the estate has to settle all liabilities. Now, of course, if you don’t want to settle the liabilities, you want to exclude these assets from the estate using some vehicle. There’s multiple options. Could be a trust, could be an LLC, family limited partnership, a bunch of different solutions to ensuring continuity if that is the family’s priority. But then to your point, and it’s such a good one, it’s just like, if you do want to use a vehicle that requires a trustee, does the trustee know what’s going on here?

Do they understand that there’s an alpha model and that the alpha model introduces tracking error into the family circumstances and that the portfolio has leverage attached to it?

Now here’s an analogous case here, which might be real estate, The entire balance sheet of the asset passes. I think this is a very common situation in estate planning. Is that a suitable analogy for what’s happening with long short mandates? That investors want to keep on for decades?

There are reasons for doing that, by the way. I mean, part of the reason is that they just want to keep the alpha exposure. Like, hey, this thing is great. I love this relative value. It’s market neutral.

Cool, like let’s keep this going. Another thing is that if the assets are in the estate and someone passes. We’re going to settle and if we have unused capital losses, they essentially evaporate. They don’t pass on. Okay. But if these assets are excluded from the estate, those losses are part of the balance sheet. They just like keep on, they can be continually used by future generations. There are a lot of just different interesting concerns here. To your earlier point, are trustees familiar with what’s going on? Maybe this is actually all routine and I’m just not privy to that, but I think, yeah, I mean.

Frazer Rice (34:51.417)
I’ll tell you right now it’s not. The whole body of law has evolved that way so that there’s a concept called directed trusts. The functions are bifurcated. the mailbox admin component can be one person or one institution. The distribution decisions can be more family oriented, et cetera.

That can be a group of people or an institution. And then the investment part, that can be a different group of people or an institution. a lot of people got frustrated with the idea of having a bank sort of taking control of all that.

Their gut instinct is going to be to diversify because they don’t want to take any investment risk because if something goes wrong, it’s going to be the, you know, the beneficiary on one hand 25 years from now who sues and says, well, you know, why did you do that? In a more familial situation.

The trust law has really, in a sense, stepped ahead of some of these concepts, probably really to deal with the real estate wealth that you were describing before. These new tax alpha strategies are becoming much, much more of an asset and much more of a short and long-term asset that A, have to be taken seriously, and then B, I think have to be managed much more adroitly than I think the typical trustee can deal with.

Brent Sullivan (36:08.388)
Yeah, especially when talking about nuanced expressions of planning. When we’re talking about utilizing these losses very deliberately for a specific purpose. Whether it’s for the trust itself. Because the trust is a taxpayer, it’s got compressed brackets, all of that is a planning opportunity. How is a trustee gonna handle all that? That seems nuanced to me, but it also seems like there’s incentive, I guess, at that point for the… The assets to pass to the heirs like almost as soon as possible for the trustee to mitigate liability. Is is my understanding right there? mean, like.

Frazer Rice (36:46.373)
So the short answer is yes. I mean, if you’re a trustee, you’re set up to be investing as prudently as possible. The real leap forward in the last five years, is these tax tools have become so powerful so quickly. Prudence now has to be looked at on a pre-tax investment perspective and a post-tax perspective.

Then the other sort of component of that is if you’re the trustee of a limited vehicle, just a trust. Whereas you’re advising a whole family and sort of going in between individual ownership and trustee ownership. Pre estate and post estate and things like that. It’s not fair to take somebody to task for that. Especially if they’re the trustee of a specific trust from a pure legal perspective.

I see a big thing coming down the pike. Someday where someone said, the trustee did not take advantage of the tools that were available to us. And we had a tax bill that we shouldn’t have paid. whether shouldn’t, shouldn’t’s doing a lot of work there. And there’s probably going to be a 95 page brief describing the underpinnings of shouldn’t.

But that’s something that I think modern trustees, especially in the directed world. Modern investment directors of these trusts are going to have to really understand well. I think they understand that well in the real estate sense. All the 1031 exchange things have become sort of fait accompli knowledge for people who own that.

These new tax rules on the investment side are going to be important to digest and understand. Both from a strict trustee in the trustee role, but the advisors that are advising.

Brent Sullivan (38:40.496)
I mean, you made this incredible point. The power of these strategies is that it gives additional planning flexibility to advisors. And now you’re saying, OK, trustees also have this additional flexibility. Are they going to be taken to task for not prudently administering the “tax assets” that are sitting on the trust balance sheet now?

That’s a really interesting concept. It’s sort of like if we zoom out we’re saying like these products are actually quite powerful. It’s funny to think about somebody being held accountable for not exercising or using them to their full potential. And that’s an interesting wrinkle, but it’s suffice it to say investors are, I think, well served by these products.

I don’t want to go too far there, but I want to say that these are planning capabilities. These are important arrows in the quiver.

Frazer Rice (39:13.945)
No question.

Brent Sullivan (39:39.894)
They have a suitable profile for an investment household. And I think in certain circumstances, they are just incredibly useful planning devices, especially multi-generation.

Frazer Rice (39:53.518)
Question. Let’s stop there because I think we could go on for four hours. Frankly I need to get my research hat on to know what I’m talking about for four hours. What a treat and Brent how do we how do people get a hold of your blog? How do they find you and stay in touch with your work?

Brent Sullivan (40:14.004)
I’m sorry, I’m very obnoxiously on LinkedIn all the time. This makes some folks shame on us. We’re on the cringe platform, but just having a ball there, it’s fun. But yeah, LinkedIn, you can just search for me, just Brent Sullivan. And then my blog is taxalfainsider.com.

And I’m in market three times a week. So new stuff, and this is usually expert interviews. It’s oftentimes really, I think, some novel research on

Frazer Rice (40:17.527)
Me too.

Frazer Rice (40:23.158)
Exactly.

Brent Sullivan (40:43.95)
These issues specifically. I’m really talking about core portfolio management and nowadays spending a lot more time in estate investigations. So this is highly relevant for me anyway. You can find me at TaxAlphaInsider.com.

Frazer Rice (40:55.563)
Well, and for listeners and watchers on the show, I highly endorse it. learn a lot every time it pops up.I’s got a nice little dose of humor attached to it too, so it’s a lot of fun to read.

Brent Sullivan (41:08.304)
Yeah, mean, you know, we’ve got to keep it light, serious. I mean, this work is deadly serious. We need a refresher every once in a while, just because it’s, yeah, because it’s hard work.

Frazer Rice (41:20.153)
No question. Brent, thanks for being on.

Further Reading on the Wealth Tax