For Entrepreneurs, Confidence in Your Advisers Is Your Most Important Investment

If your estate includes private equity investments, operating businesses or intellectual property interests, I’d wager that you have asked about client confidentiality during every introductory meeting with a potential adviser. I believe that almost every wealth adviser, bank officer, broker, portfolio manager and trust officer has responded to your inquiry with the same assurances:

“Our clients’ confidentiality is one of our primary concerns. We do not disclose your information to any third party unless you request it. Our electronic communications are encrypted whenever they include sensitive, financial or confidential information.”

A leap of faith

Of course, these kinds of statements do not answer your question, do they? Perhaps, because what you seek is not an assurance of confidentiality but of confidence in that adviser. I wish it were easy for you to build confidence in your advisers. You must share so much information so quickly to obtain the financial, fiduciary and legal services you need. And it is almost a leap of faith when you engage a new adviser based on trust that they have not had time to earn.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of Kiplinger’s expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of Kiplinger’s expert advice - straight to your e-mail.

Sign up

Sometimes, my trust company is hired after a single conversation with the prospective family as the directed trustee for a wealth transfer strategy related to a business transaction involving tens of millions of dollars. Almost invariably, it is an introduction by a trusted adviser that laid the necessary foundation for building that kind of confidence.

If you may soon be selling your share of a successful business or other highly appreciated assets, you must engage a team of experts with confidence in their abilities.

Many moving parts

For example, my trust company often serves as an independent trustee, so clients may obtain certain income and estate tax benefits, asset protection and other advantages through a sale involving a trust. But for any trust strategy to succeed, all the advisers serving a client must understand the many moving parts of these transactions to effectuate and preserve the intended tax and financial benefits. And while doing so, they must each employ established practices to safeguard the client’s confidential information.

The process to establish such a trust in conjunction with a properly executed business transaction will necessarily include dealings with a broad variety of parties: sellers and buyers (and their officers, employees and tax and legal advisers); one or more banks and trust companies, law firms and accounting firms (and their staff and associates); one or more brokerage or financial firms (and their staff and associates); and family members (either in the know or unaware of these activities). That is an abundance of essential and tangential people with access to confidential information at a very sensitive time.

Transactions that involve intellectual property, trade secrets and/or the sale of company stock or assets sometimes require complete secrecy. An inadvertent disclosure to customers, suppliers, distributors or competitors could alter those relationships and undermine established goodwill, confidence in supply and sales agreements, and even the negotiated features of the transaction itself, such as the market valuation and sales price. All the nondisclosure agreements in the world won’t provide effective security if some of these parties lack the requisite expertise to execute a multistep transaction or fail to follow standards and practices controlling disclosure.

Personal involvement is crucial

But how do you ensure that your proposed business transaction and trust strategy will be protected? You must personally involve yourself diligently in the selection process and rely on your instincts. There are certain steps that seem to fall into place all on their own, but only if you let them. Foremost is the selection of your advisers.

Your corporate transactional attorney or your trust and estate attorney is hopefully a long-term adviser. Usually, one of these two advisers will first propose establishing a trust to obtain a greater benefit from the sale of your company or other assets. So first, meet with both these attorneys together so they may explain the division of labor and outline the many steps to implement an irrevocable trust strategy as a component part of your transaction.

Often, but not always, this will be a “foreign trust” — so called because it is established under a state law outside your resident state. But, sometimes, the trust will be established in your own state if your state doesn’t impose an income tax, offers strong directed trust laws, and the strategy merely requires an independent trustee (usually a trust company rather than an individual trustee).

Questions to be asking

You may be able to rely on your trust and estate attorney to have the expertise needed to draft a resident or foreign directed trust and advise on its risks and benefits in relation to a business transaction. But this practice requires a working knowledge of corporate, personal and fiduciary tax law, the trust laws of multiple states, and how to structure business transactions that may require company reorganization and strategic tax elections.

So, don’t be shy about asking how many of these trusts they have established, how many have involved a transaction like yours, and to walk through the risks and benefits of the strategy and the chosen jurisdiction.

Second, ask for a recommendation for the trust company you should use. Choosing a store-front trustee or simply using your bank because they operate a trust company means that the adviser with the most direct and continuing connection to your trust assets — your trustee — may not even understand the terms of the trust instrument, much less have the expertise to preserve its tax savings and other benefits. There is a real difference between trust officers trained to administer a large book of personal trusts and a dedicated fiduciary team with a proven track record as a knowledgeable and effective administrator for complicated irrevocable directed trusts and the related business transactions.

Third, ask the senior adviser at the trust company to introduce you to the team. Their team should include a wealth adviser, trust officer, associate support officer and a portfolio manager, with a bench of analysts focusing on securities, bonds and alternate investments. Each of these experts has a role to play in the success of your trust, even several years after the transaction closes. But you must have confidence in more than their expertise. You also need their loyalty; their dedication to your interests over theirs; their ongoing partnership with your own legal, tax and accounting advisers; their ingenuity and proactivity in identifying opportunities through long-term planning; and their objectivity in assessing the risks and benefits of their proposals.

Finally, you need confidence in their commitment to protecting your confidential financial and personal information so it will never be shared without your permission or used to further anyone’s interests before your own. This last item, confidence in your advisory team, begins with a leap of faith and grows with the relationship.