Rise to the Occasion: The “Shark Tank Trust”

As mentioned in last week’s post, my regular Valentine’s Day speech in Midland was postponed. Much to Laurie’s pleasure, I rose to the occasion and took her to Rise, her favorite dining experience. Rise urges all to follow their souffle motto and “Rise to the Occasion,” a theme I’ll borrow for this week’s post. Whereas last week’s focus was business transition at the end of the founder’s tenure, we flip this week to the other end of the business life cycle. How can parents, especially in more affluent homes, encourage the next generation to “rise to the occasion” and pursue entrepreneurial endeavors?

It’s the American Dream. A kid with grit and talent grows up to build a mega-successful business. Interestingly, children who grow up with modest means learn how to prioritize limited resources, using their wits to make the most out of whatever they have. Moreover, sharing close living quarters with others teaches them to relate to others, building leadership and interpersonal skills. Family consultant Tom Rogerson of GenLeg Co. describes the conditions of a modest upbringing as creating an “entrepreneurial incubator.” Kids from that world learn how to build and lead a team.

However, as a family’s wealth increases and kids become more independent, they lose much of that drive and interpersonal connection. Rogerson labels such a privileged environment as an “entrepreneurial kill-zone.” Kids from that world are much less likely to become risk-taking entrepreneurs.

How can business creators improve the odds that future generations, though affluent, avoid the “kill-zone” and grow an entrepreneurial spirit? The answer lies in designing an inheritance structure that creates empowered, rather than entitled, heirs. Enter the “Shark Tank Trust.”

Pamela Cucina and Eric Czepyha, both with Northern Trust, explore this concept in “The Entrepreneur’s Trust” (Trusts & Estates, May 2023). Traditionally, trusts that automatically dole out regular distributions are like giving a kid an allowance. Beneficiaries are shielded from trust investment management and decision making, leaving the heavy lifting to family offices and trustees. Per Cucina and Czepyha, this traditional structure “has the potential to infantilize rather than empower and inspire beneficiaries, creating a generation of ‘perpetual children’ who are ill equipped to become responsible and engaged stewards of the family’s wealth and business holdings.” Furthermore, such trust babies are unlikely to possess the grit and ingenuity to become an entrepreneur.

It’s time for a new kind of trust that will “ignite a fire” and “cultivate a spirit of entrepreneurship.” Cucina and Czepyha call it the “Entrepreneur’s Trust.” I’m borrowing the concept from a hit TV show and labeling it the “Shark Tank Trust,” but it’s the same thing. Here are some key features:

  • Authorize the trustee to invest in a business where the beneficiary will be actively involved, even if new or speculative.
  • For each such investment, require the beneficiary to present a “Shark Tank” business plan with projected budgets and information on advisors and co-investors.
  • Hold the business to certain standards of accountability, such as conservative leverage, hiring practices, and reporting requirements.
  • Encourage beneficiaries to get the needed financial education.
  • Develop parameters for requirements to be met before funding additional capital needs beyond the initial investment.
  • Allow the trustee to hire outside advisors, at the expense of the trust, to evaluate the proposed business.
  • Use a Directed Trust approach where the Shark Tank process is delegated to an investment committee.
  • Waive the trustee’s duty to diversify and duty of impartiality for such private investments.
  • Indemnify the trustee from liability related to such investment decisions.
  • Consider imposing a percentage limitation on the portion of trust assets to be invested in the beneficiaries’ private businesses.

In addition to these provisions, probe the trust creator’s intent on the “why” behind the entrepreneurial emphasis. Include such statements of intent (the “why”) in the material purposes section of the trust. For example, perhaps the trustor believes that private businesses are better investments for creating and preserving wealth, provide practical training, and give beneficiaries the fulfillment that comes from achieving something out of their own hard work and skill. Knowing that “why” can guide trustees, and moreover, inspire beneficiaries to endure challenges in their quest for the stars, achieving the rewards of self-esteem and self-growth along the way.

In the words of the Latin motto adopted by Fort Worth’s Trinity Valley School’s beloved founding Headmaster Stephen Seleny, give your kids the chance to grow per aspera ad astra, through difficulty to the stars.

Marvin and Laurie Blum enjoying a Valentine dinner at Rise, encouraging the next generation to “Rise to the Occasion” and pursue entrepreneurial endeavors.