Elizabeth Harris
08/01/06
As Richard Bakal sees it, just having money is no reason to spend it. The second-generation wealth-holder has been the steward of his family’s fortune for nearly 40 years. This responsibility, in his view, obligates him to ensure that its nine beneficiaries, himself included, use the money very carefully. He approves of his relatives tapping into the trusts for what he calls “enhancements,” such as college tuition or medical bills. But he is adamant that no one be able to draw a regular income from the wealth his parents earned through entrepreneurship, scrupulous saving and opportune investing.
Bakal describes this thrift as his family tradition. “I look at wealth as being liquid energy, and you don’t waste that,” he says. “The needs that we face, as a community and a world, are enormous. A key element in dealing with those needs is resources. So to take that and use it foolishly or extravagantly seems to me to be immoral.”
He wants to be sure no Bakals grow
up with a sense of entitlement that can blot out motivation and ambition. “A
trust baby is a prime example of entitlement,” Bakal maintains. “You don’t know
whether people value you because of your money or because of you—you have not
demonstrated your own competence.”Bakal never experienced that sort of insecurity himself, growing up with parents who lived the classic immigrants-make-good tale. His father, Max, arrived from Poland in the early 1900s and went to work in a New York sweatshop. He eventually earned enough to launch his own business and became the successful owner of a large shirt-making company. His business provided sufficient income that Bakal remembers living comfortably in their Brooklyn home even during the Great Depression. The family’s assets were greatly increased by his mother, Bessie, who discovered the stock market in the late 1940s and had the foresight to buy and hold Polaroid and several other legendary winners.
Bakal’s own company, the Wine Trust, based in Ridgefield, Conn., sells vintage Bordeaux to restaurants. The wines range from $100 to $2,500 each, yet he works out of an understated office in a strip mall. A sign on his door urges, “Please turn off lights.”
The fiscal conservation that he expects of himself and his staff has not always been easy to impose on his family. Nor has he always been able to rely on his fellow trustees to be as strict as he would like. In 1999, he realized that having only two fiduciaries overseeing the trusts—he and one other—did not provide sufficient safeguards. A retired family member asked for a disbursement for living expenses that was $5,000 more than Bakal considered appropriate. His fellow trustee approved the payout without even asking how that $5,000 would be used. “The answer I kept getting was, ‘Don’t fuss about it, for goodness sake, just hand out the money and forget about it; it’s not worth arguing about,’” Bakal recalls. “That violates a principle of mine—these principles apply whether it’s $10 or $100,000.”
He soon began researching alternative structures for his family trusts. He considered simply replacing the existing trustee, but he was unable to find anyone who would take on the kind of liability the job might entail. “Trustees are used to having wide discretion,” says Rashad Wareh, a partner with New York-based Kozusko Harris Vetter Wareh and one of the attorneys who helped Bakal create his new structure. “If you go to any significant trustee institution, they prefer, for their own liability purposes, for their own ease of management purposes, not to be given guidelines that are open to easily conflicting interpretations that can result in them being sued.”
Bakal sought to acquire insurance to indemnify trustees against this liability, but found it was too costly and limited in scope. He considered establishing a private trust company, but discovered that because of the onerous expenses and regulatory reporting requirements these are appropriate only for estates of $500 million or more, several times larger than his family’s.
Command and Control
Instead, he decided to set up an unregulated personal
trust company and transferred fiduciary responsibilities to an oversight
company. Directors of that business take on trustee responsibilities, but the
corporate structure reduces the threat of a lawsuit. He established the
company in 2005, but he remains its sole director as he looks for others. He
envisions three nonfamily directors serving on a board with four voting members,
along with two nonvoting members—one a family member serving on a rotating
basis, the other an independent trustee of the family’s Max and Bessie Bakal
Foundation.
The overhaul also entailed moving the trusts from Wisconsin to
South Dakota, a state that allows division of trustee duties and liabilities.
Practically speaking, the institutional trustee, South Dakota Trust, handles
administration of the trust, while the nonstock corporation manages distribution
and investments and has authority to hire and fire the administrative trustee.
This structure allows trustees to follow Bakal’s unusually specific requests.
To make certain the trustees and the family understand why no one is
entitled to payouts on request, Bakal wrote an 11-page document outlining what
he views as the family’s values. In one case, Bakal’s niece asked him if he
would consider it in the spirit of the trusts to pay for flying lessons for her
husband, who had wanted to be a pilot since childhood. Bakal looked into whether
his niece supported her husband’s wish, given its potential danger. He also
advised that they increase their life insurance coverage. Then he granted the
request.
Some advisors have told Bakal that it is unfair to withhold money
from family members. He was considering hiring one such advisor as a trustee
when she revealed this view. “She was furious,” Bakal says, recalling that she
was adamant that the funds should go to family members so they could live
interesting and enjoyable lives.
His own relatives, he fully admits, would
probably make more liberal spending choices, and they feel “neutral, at best,”
about his approach to trust planning. He maintains that they do recognize that
he is neither arbitrary nor mean-spirited, and that the rules apply to him as
well. Looking out his office window, he points to a stranger walking by. “Why is
it that we have it and he doesn’t?” he asks. “It isn’t because of our virtues or
anything that we did. I would like ongoing generations to appreciate—maybe not
to the extent that I do—but to appreciate it enough and not take it for
granted.”
Portrait by Thomas Hart Shelby/Illustration by Allan Burch.
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