Headquartered in San Diego, Calif., R. J. Kelly, CLU, ChFC, MSFS, is founder and president of the Wealth Legacy family of companies, which specializes in helping closely held business and professional families with the growth, management, protection, distribution, and legacy issues of their wealth — their business succession and exit strategies. Kelly also helps clients create intention and integration between their business and personal lives. Here, he speaks with Charles K. Hirsch about the issues facing today’s high net worth prospects.
Charles K. Hirsch, CLU: Can you talk a little bit about how your practice has developed its focus on the high net worth market? Is this a market you’ve served consistently since entering the business, or did you make a professional transition at some point in time? And if you made a transition, when and how did you accomplish that?
R.J. Kelly, CLU, ChFC, MSFS: For me, some of the things that helped my practice develop in its focus on the high net-worth market were being actively involved in organizations, such as the Million Dollar Round Table; attending the MDRT Annual Meeting year after year and listening to or reading everything pertinent I could put my hands on, especially in the early years; receiving my professional designations, such as CLU, ChFC, MSFS — I’m studying for my CAP now — to help me gain further confidence; investing in advanced training programs, such as Strategic Coach, Jay Link’s Professional Mentoring Program, the Society of Financial Services Professionals webinars, continuing education programs, etc.; actively seeking out mentors to learn from and often doing joint work with those who were working in the high net-worth markets; as well as coming to a place of personal commitment to create $500 million of philanthropy, directly or indirectly, through our personal nonprofits and my efforts in working with clients — if the Lord should wait and I am granted long life, that is!
In the very early months and years of practice, I spoke with anyone who would grant me an appointment. I called on school acquaintances, friends, others I would meet at church, in civic groups, at the gym — you name it! I began my financial practice right after graduation from my university, but in a city where I didn’t knew many people, except friends from attending Washington State University and some family friends. Working in the affluent and wealthy market definitely evolved over time, although, fairly early in my career, I started to focus on the needs of business owners and professionals — specifically, physicians and attorneys. I began to be in front of higher net-worth prospective clients as I became more knowledgeable and asked to be introduced into those circles.
After I made the move from Spokane, Wash., to San Diego in 1985 to facilitate my volunteer work, I found the general needs I helped others solve were the same, but the size of the needs got bigger, as did my compensation for helping to solve them. The zeros just get more, but the work is often the same at this level. A typical client for me now is a privately held, pre-liquidity event, “Stage 2” business owner with a net worth of $8.5 million to $10 million. The largest case I have been involved in thus far is a case in 2011 with a gentleman worth $1.9 billion and, before that, a gentleman in San Diego worth, at the time, $640 million. Neither is a “full-fledged client” for our fee-based work — thus far — but only for specific purposes and needs. Nonetheless, it has given me a confidence to see that I can bring value to clients of that size net worth, and I have several clients with $100-plus million.
I am not intimidated by working in situations with more numbers. I sure didn’t start there, though. If this had happened in my earlier years, I would have brought in one of my mentors to help with the case and learned by watching how they handled the case. Today, I have others behind the scenes whom I can bounce things off of to help me prepare for those meetings. But I don’t usually come in with anyone else except someone that I might be mentoring to expose them to the “fun” of being in front of someone with that size net worth.
Hirsch: At this economically challenging time in our nation’s history, what do you find to be the biggest issues facing your high net-worth clients, and what steps are you taking to address those issues?
Kelly: Everyone’s estate plan needs a review, thanks to the introduction of the portability clause at the end of 2010. I find this leads to much less of the A-B trust needs we are used to seeing, although there is often still the need for a QTIP trust — Qualified Terminable Interest Property — and a discussion of the pros and cons. In addition, with the larger federal death tax credit — this year of $5,120,000 per person — and the likely relatively large credit beginning next year — even if reduced to the $3.5 million that President Obama has said he would accept — there is great opportunity to comment on the lack of creative planning in most client’s trusts. For example, when we can pass along $5,120,000 per person if death occurs this year — or if making a gift this year to take advantage of the higher exemption amount — why would we ever want to make distributions of that money as the children get older? Why not keep the assets in a discretionary trust to keep the money outside the taxable estate of the heirs and away from the threat of divorce and unknown creditors?
I say it this way, “The best way to pass assets to our heirs is in a trust, and in a trust that they did not create for themselves. If we put certain provisions in the trust and have it ‘housed’ in certain states, it will remain free of future federal death taxes — potentially for perpetuity or at least 365 years, which I am told is a very long time! As well, it is outside the reach of divorcing spouses if, God forbid, one of your children gets married and then involved in a costly and difficult divorce. The ex-spouse gets none of the money you left them. And if your son or daughter is driving home late one night from working late, falls asleep, crosses the center lane and kills or severely injures a pregnant woman and her children, none of his or her inheritance will be at risk to the litigation that will likely come from that accident. With all this at stake, why would you use a distribution of assets schedule like you have in your current documents? Why not create a bullet-proof ‘family bank’ that can pass money generationally and is free from divorce or creditor issues?”