The oft-quoted (and frequently misquoted) lines by F. Scott Fitzgerald, “Let me tell you about the very rich. They are different from you and me,”1 provide context for an important thought-provoking article by Professor Allison Anna Tait, “The Law of High-Wealth Exceptionalism.” Just as the quotation is often followed by Ernest Hemingway’s purported (but not confirmed) reply, “Yes, they have more money,” this article attempts to draw some simple conclusions about a very complex—and extremely important—topic. Prof. Tait takes on an issue that should be top of everyone’s mind: the rising inequality and concurrent separation of the world’s richest families (the 1% in common parlance, or more accurately the .001 percent) from the rest of society. And, she narrows her focus to issues that should be of particular concern to Trusts & Estates readers—that is, family-created structures and legal frameworks that have enabled and fostered this trend. This increasing separation is—along with (and related to) climate change—a defining issue of our time, and Prof. Tait examines this complex topic with a critical eye. She raises important questions for society and, while not stated directly, for the lawyers and wealth advisors creating and maintaining separation of the wealthiest from the rest of the economy and society.2 Her conclusions are generally sound, even if the analysis could use more rigor.
The article starts with her succinct conclusion: “No family is an island. But some families would like to be—at least when it comes to wealth preservation—and they depend on what this article calls the law of high-wealth exceptionalism to facilitate their success.” It proceeds through three sections—The Inscription of Family Governance, The Measurement of Family Power and The Amendment of Family Privilege—to elaborate on this statement, before culminating in its conclusion. A summary and review of each section follows, with some general observations and recommendations.
The Inscription of Family Governance
Prof. Tait begins by outlining the “law of high wealth exceptionalism” as enshrined in family constitutions and wealth law rules. She takes aim at the promotion and use of family constitutions as a means of creating rules and regulations to “form a perfect family union” and to preserve wealth. She notes that legal scholars and literature have overlooked these structures, which is accurate but likely because lawyers are often not involved in creating them. She quotes extensively from a few sources and relies heavily on statements made in a few books3 and in advertising by wealth management firms. The overview of family constitutions is helpful—noting the inclusion of purpose, values, family history (including “differentness”) and attempts to replicate the three branches of the U.S. government (with special emphasis on the legislative). She highlights the inherent elitism and desire for separation they reflect in their attempts to create self-regulating systems. Prof. Tait doesn’t, however, note that in practice, family constitutions have been more commonly used by family businesses4 than in the high wealth arena. Further, while constitutions aren’t likely to be legally enforceable, they’re implemented through legal documents including shareholder agreements, employment policies, voting trusts, governance documents and more. Focusing on these additional issues would round out and bring the analysis more up to date.
The article states, “it is the constellation of laws governing wealth management and transfer that operationalizes this exceptionalism.” She dives into three entities—private trust companies (PTCs), family offices and family foundations—as examples. Trusts & Estates readers will be quite familiar with these structures and may look for a more detailed analysis of the ways in which they result in the consequences cited. For example, PTCs do indeed provide opportunities for families to retain ultimate control over assets that family members have, legally, given away. But, the article doesn’t delve into the mechanics of a PTC in a way that would make that clear. It also throws all jurisdictions (and time periods) together without highlighting the recent trend of states creating new laws to allow the privacy and flexibility she notes. Most importantly, she extensively cites sources that have obvious self-interest in promoting this trend. This raises some concerns about the article’s analysis. First, it would be helpful to delve more deeply into the laws themselves—for example what disclosure is required by owners of PTCs, family offices and family foundations? What more could be done? Second, motivation must be acknowledged: In general, families want to preserve what they’ve (rightfully or not) “earned,” wealth managers want to attract assets under management (often using fear as a selling technique and legal entities as “products”) and jurisdictions compete with each other for tax and commercial revenue.5 For all these parties, personal motivation drives behavior. In this vein, the article relies primarily on advisors’ claims; additional voices (including family members) would enhance the analysis. It also doesn’t provide enough reliable data, which is of course hard to gather. Finally, it would help to go beyond seeing constitutions, PTCs and the like as “products,” which is how they’re marketed but not how they actually function. And, one must ask, are they symptom or cause?
The article highlights the Securities and Exchange Commission family office exemption, which was heavily influenced by lobbying by and for wealthy families and has guided family office creation, especially in recent years. In this case, the article would do well to cite the purpose of the securities laws as written in 1933, 1934 and 1940, that is, to protect investors from deceitful commercial actors. This would ground the questions: who’s being harmed, and how must they be protected? The family office exemption relies on the assumption that family members can’t—from an investment standpoint—harm each other. Given the evolution of families and the complexity of investments, one must ask, is this true? Family offices are structured and operated in numerous ways. What specific aspects are most problematic? Which laws—state or federal, tax or corporate —should be changed? On the family foundation front, the article acknowledges that the Tax Reform Act of 1969 attempted to stop many of the abuses mentioned, including establishing a minimum annual distribution to prevent excessive accumulation in family foundations. However, it fails to note that, today, the most compelling issue may just be the sheer magnitude of family foundations (the Bill & Melinda Gates Foundation comes to mind) and the heightened challenge of enforcement. It could also note that donor-advised funds may pose a greater threat, as they don’t require minimum distributions at all, further accelerating consolidation of wealth and enhancing profits for investment firms rather than immediately supporting the public good.
The Measurement of Family Power
Prof. Tait rightfully makes a statement that’s rarely mentioned in trusts and estates or wealth management circles: “The lives and fortunes of high-wealth families are deeply connected to those of other families in the larger state.” She describes three key “financial harms of exceptionalism:” (1) shadow banking and systemic risk,
(2) financial secrecy and tax burdens, and (3) the creation of wealth inequality. This section includes important facts and commentary. Some ways that these arguments could be bolstered include: discussion of the “black market” that still dominates many of the world’s economies; comparison of the privacy granted in the United States with other jurisdictions that are fast creating a more transparent reporting environment. And, just as there’s no single “law” of high wealth exceptionalism, the question of causation is exceedingly complex. Without acknowledging some of the sources of the extraordinary wealth inequality—which, like the Gilded Age, has been accelerated by the massive accumulation of wealth from new industries (including tech, the Internet and hedge funds) in an economy that was transforming at a pace faster than the ability (or interest) of government to regulate and tax new forms of income. The carried interest loophole helped create hedge fund billionaires, tech consolidation of the distribution of goods free of state taxation accelerated the fortune of businesses like Amazon and consumer-driven family enterprises such as Wal-Mart have created wealth that was unimaginable not long ago.
Prof. Tait points out the tendency toward patrimonial plutarchy as a concurrent consequence of these structures, behaviors and laws. As she states, “privilege flows to privilege in a family economy.” One need look no further than the White House (past and present) for evidence, and yet, the trend is a global one. In this section, she draws on a wider range of sources, and her arguments are more far-reaching. She notes the use of political power by families as a matter of fact, which it is. And, she questions the notion of “gilded giving.” Here, as in the rest of the article, she goes against the grain of the simplistic “American Dream” and gets to the more profound questions of whether and how democracy may be at risk. The myth of the trajectory from poor entrepreneur to successful business person passing wealth across generations must be put under the microscope, and she begins to do so in these pages. Acknowledging the power of this story and how it’s enshrined in law and practice would help the analysis.
The Amendment of Family Privilege
It’s ironic that Western-educated (and primarily U.S. located) lawyers and advisors have been the drivers behind many of the non-democratic trends highlighted in this article. This irony isn’t lost on the author, and she cites several ways to identify and solve this contradiction. These include: increased regulation and taxation—specifically focused on the estate tax, which is at historic lows (high exemptions and low rates) and easily reduced with planning. Prof. Tait reviews a few additional options, including a potential wealth tax, restructuring the estate tax as an inheritance tax and reframing citizenship rights. It would be interesting to see these ideas explored further, but they’re only a start. One must also look at income tax, securities laws, corporate governance and more to tackle such an enormous issue. Again, one must distinguish between symptom and cause. Finally, any future analysis must consider how to adapt any remedies to the times we’re living in—with the current political climate and expectations and notion of the social contract that’s—at bottom—the source of our nation’s democracy.
Observations and Recommendations
Prof. Tait begins her article with an adaptation of John Donne’s famous line: “No family is an island.” This is indeed the proper starting point for this inquiry. And, the source of one of the most important questions of our time: What world do we want to have, and what are we creating today that will have profound impacts on the world of tomorrow? The issues covered in this article deserve serious attention, not just by Trusts & Estates readers, but also by politicians, legislators, civic leaders and the very same high wealth families that are the subject of her study. It presents many further avenues for additional research and analysis.
Endnotes
1. F. Scott Fitzgerald and Matthew J. Bruccoli, ed., “The Rich Boy,” The Short Stories of F. Scott Fitzgerald (New York: Scribner’s 1989), at p. 335.
2. See Allison Anna Tait, “The Law of High-Wealth Exceptionalism,” 71 Ala. L. Rev. __ (forthcoming 2020), endnote 2: “In the wealth management field, high net-worth (HNW) families have a minimum of $5 million investable assets and ultra-high-net-worth (UHNW) families are defined as those with at least $30 million in investable assets.”
3. James E. Hughes, Jr., Family Wealth: Keeping it in the Family (Bloomberg 2004). Note that an article co-authored by this author is published in Hughes’ 2004 edition.
4. See, e.g., Daniela Montemerlo and John L. Ward, The Family Constitution: Agreements to Secure and Perpetuate your Family and your Business (Palgrave 2014).
5. See Robert H. Sitkoff and Max Schanzenbach, “Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes,” Yale L.J., Vol. 115, at p. 356 (2005).