Family Business Audiocast | Episode 40 | Judith Pearson

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About Our Guest:

Judith Pearson is a leading expert in insurance and risk management, specializing in innovative solutions for fiduciaries, trustees, and family offices. She is the founder of Precision Brokers and creator of Nomadx MGA, both dedicated to reducing risk in wealth transfer and navigating complex trust laws. Previously, she led Nomadx Solutions and served as President of ARIS Title Insurance, pioneering coverage for fine art. With leadership roles at Aon, Woodruff Sawyer, AIG, and Chubb, Judith brings deep expertise in management liability and intellectual property insurance. A frequent speaker and published thought leader, she is widely recognized for advancing risk strategies in the wealth management space.

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[Transcript]

R. Adam Smith: [Intro] Welcome to the Family Business Audiocast on LinkedIn. I am R. Adam Smith, creator of this Audiocast series. As an entrepreneur, investor, founder, investment banker, and board leader the last 25 years, I'm fortunate for my many experiences within the family firm industry.

A warm thank you to our live audience on LinkedIn today—and for those listening in the future. A brief comment on why I created this broadcast. Private companies are a passion of mine having grown up in a family of entrepreneurs and having engaged for two decades in deals, strategic transformations, investments, and boards with an array of fascinating family enterprises, family firms, and family offices. I founded this series to offer a useful platform for listeners to hear from veterans, academics, and leaders in the vast family firm [1:00] ecosystem. Whether you're a family business owner, building, running, or advising a family office, or just expanding your me office activities. I hope these conversations are useful and enlightening. Now it's time to turn our attention to our accomplished guests on today's episode.

I'm very pleased to host Judy Pearson. Judy, great to have you today.

Judith Pearson: Oh, thank you so much for including me. I really appreciate it.

R. Adam Smith: Absolutely. We're going to cover some important topics today and learn about you and your organizations as well. So, I will start with a bit on Judith. Judith is a recognized leader in fiduciary risk management, specializing in developing tailored insurance and risk mitigation strategies for trustees, global family offices, and, of course, alternate worth individuals. She is the founder of Precision Brokers and Nomadx, and where she has pioneered innovative strategies on addressing some of these complexities of trust structures and related matters [2:00] around wealth transfer, succession planning, liquidation, governance, all of the important topics we cover on the Family Business Audiocast.

Her work ensures that family enterprises and their fiduciaries are protected from unnecessary litigation, evolving regulatory challenges, and also the hidden liabilities that come with managing generational wealth. With her leadership, she has reshaped many families' thought process about risk and offering specialized solutions that go far beyond traditional insurance models. So, excited to talk about that. Great to have you here today.

Judith Pearson: Oh, thank you.

R. Adam Smith: Yes, why don't we talk a bit about you initially? Tell us about your companies and then we'll come into some Q&A next.

Judith Pearson: Terrific. So I come at this from a different perspective than most risk management and insurance professionals, so I started in the insurance industry way back in 1982 handling directors and officers liability insurance. And the reason why that's important is, at that time, nobody really bought D&O insurance — nobody really understood what it was. And we spent a lot of time from an underwriting perspective, teaching boards of directors what their fiduciary duties were. And it wasn't until the construct of merger mania of the 80s did you get what we have as the D&O management liability structures that you have today. And I believe that trustee liability, family office liability, etc, is exactly where D&O is back in the 80s. So, I did that for about 20 years. I was the fourth employee of what became the Global Financial Services Group for AON. And that's important because I did a lot of very large global programs, you know, the UAL pilot buyout as an example, [4:00] where most of my clients wouldn't say what products are available. It was more, I'm thinking about XYZ, how are we going to solve the problem? So that's how I was brought up in the industry.

I left in year 2000, I co-founded a company that provided title insurance for fine art and other important collectibles. The reason that's important is that gave me really good insight into tax trust and estate issues for personal property. We sold that in 2010. I lived out my employment agreement and thought, well, I'm not really ready to retire. I wonder what else I can do. And so I went to the trust and estate attorneys, family offices, etc., and said, you know, you guys know me as the art girl, but I have this other big background. What is the number one issue your clients are facing today? And bar none, everybody said trustee liability. And I was like, huh, 15 years ago, that would have been really easy. I wonder what's going on. I did a deep dive into the industry, understood how it is [5:00] evolving, how technical it is, and how important it is really to understand what is being structured. And then I went to the underwriting community to find out what they were doing. And it really turned out that most people in the underwriting community from an insurance perspective hadn't been following these trends. So none of the policies were working. And none of the—they weren't and asking the right underwriting questions to really make sure they could structure the policies appropriately.

So I opened up Nomadix and ended up with Precision Brokers. We don't really need to go into all those details, but the two companies together represent an insurance broker, through Precision Brokers, which is a full service broker, but we really focus on trustees, trust companies, and family offices from a management liability perspective. And Nomadix is an underwriting facility that I [6:00] created, where I rewrote the policy and rewrote the underwriting structures in order to really provide a solution to the marketplace.

R. Adam Smith: That's great. Yeah, I was reading about that. We'll cover that a bit more about your industry and your company in the conversation. Let's go back high level to the industry of family enterprises, which I cover here more broadly on the Family Business Audiocast covering the ecosystem of the entire family enterprise. So we will talk about family offices, but really the focus is on the broader ecosystem. So, there's this massive wealth transfer that's coming as we know the next couple of decades, 70 trillion or so, next-gen, G2, G3. There's a lot of wealth that's been built up and a lot of my clients, and single family office, and friends in the industry building family offices and family wealth [7:00] and also looking to, you know, frankly, preserve that wealth as efficiently as possible, from a tax perspective or insurance perspective is a massive issue. And I think it's becoming one of the key topics of the private bankers, and lawyers, and experts like you, of course, in this transfer.

And I think part of the reason the transfer that's happening is so significant, it's not just the amount, it's also the change of the generational activities and interests of the next gen. Let's talk about some of the vulnerabilities in trust structures and fiduciary responsibilities. So, talk a bit about that intersection of, let's say, trust laws, litigation risk, and how do you advise family enterprises to think about this intergenerational dynamics from a fiduciary perspective. So there's the risk and there's [8:00] also the legal side and then there's the G2, G3 and sometimes they're not quite as involved in the business.

Judith Pearson: Yeah, and of course that's a whole mouthful. So I'll try and be as succinct as possible, but as I'm looking at understanding the evolving structures and the intersection of each, the trends that I'm watching is what we think about as a family office or the single family office, it's really evolving into the new private equity. Actually, I just saw an article, I think it was Fortune this morning, that was talking about a PWC study that was saying that 22% of all startup capital in 2022 was raised by family offices. So, when you think of a family office or when I think of a family office, I delve very deeply into: what are their investment structures and how are they accomplishing their goals to make sure that we are [9:00] providing the right risk management. From there, a lot of our very large companies are starting to form private trust companies. And I see that that as the next evolution. We're in that structure. The families are really focusing on the intergenerational wealth transfer and family governance structures, which I think is a really cool way of institutionalizing the trust structure.

And then of course, for both of these entities to stay together, trusts and trustees are the link across all the wealth transfer vehicles. So then you start thinking about, well, where are we going to see the litigation? And we are seeing some litigation. A lot of the states that are family offices or our private trust companies and trust are getting structured have a lot of sealed structures for litigation. So it's a little bit harder to find out [10:00] exactly where the litigation is. So I can really talk about more what we're looking at, kind of putting together what I've seen over the last 40 years. But we see, you know, the new trust structures. You know, you have the last dilution, it was 33 states who had taken—who have adopted the uniform trust code and asset protection strategies, which really haven't been tested yet. And I really put a big why, you know, capital, why on yet? Because we're starting to see a couple and we can get into that in a minute.

Also, new roles and responsibilities. You know, every month I see a new role and responsibility and I have to dig in and figure out, well, what does that mean? And what does it do? Is it a fiduciary role? Is it not a fiduciary role? Is it consistent across straight states? You know, for example, you know, trust protectors in many states, depending how it was structured, is a non-fiduciary role, but then you go into certain states, and it is a fiduciary role. And [11:00] all of those impact what the legal liability is for the individuals and what the litigation might look at.

R. Adam Smith: Okay.

Judith Pearson: We're also seeing, oh, do you want me to stop there? because I can go on.

R. Adam Smith: No, I think we have, we have a half hour today, but I am going to have some experts this year on trust structure and generation skipping trusts, and private trusts, and offshore trusts, but we'll keep it tight on today's call, covering a couple of different topics.

Judith Pearson: Very much, but it's important just when you understand all those roles how it integrates with, for example, the Corporate Transparency Act: who has to report the beneficial ownership of LLCs? So it just, it all integrates together in trying to understand risk management strategies and risk transfer strategies. So I just wanted to get into that for a moment, or [12:00] just kind of mention that.

R. Adam Smith: That's true. I'll try to cover in in the rest of the call okay so let's talk about insurance um super important for all family offices for their, their operating assets, and also for their lifestyle assets and often, families rely upon insurance as a safeguard and often have policies that that exist for a long time. Sometimes they're out of date, sometimes they don’t take into account the complexities of the operating assets, or it could be a large art collection that’s more complex—I’m not sure. So, just talk about some of the gaps that family offices and their advisors can think about, to mitigate the risk in insurance policies for their primary assets. And also, you know, there are [13:00] misconceptions about what insurance can and cannot protect also in the realm of wealth preservation. So let's cover that for a couple of minutes.

Judith Pearson: Okay, so first of all, most of the property casually insurance brokers that work with family offices and ultra high net worth individuals grew up within the personal lines work and they're excellent at managing the homes, the art collections, etc. But they don't necessarily understand the text trust and estate structures. And that's where I have my expertise. So I don't really necessarily want to talk about the personal lines piece of it, but from a management liability perspective, really understanding these various structures to make sure that you understand what can be covered what needs to be covered and what should be covered like you were saying.

So, just trying to keep it to kind of a half an hour. [14:00] I'm going to kind of pick on from a family office perspective again. Is it private equity, is it your service and what does that mean and how does it get structured. But the next piece of it, and I'm just trying to get to some of the things that we might not have addressed previously, is like the private trust company structure. There are a lot of gaps in that misunderstanding the difference between regulatory requirements and optional requirements and how the laws are changing. And so, for example, in most of the states like Wyoming, Nevada, etc., you could either have a regulated trust company or an unregulated trust company. And if it's unregulated, it's a preference on what types of insurance you purchase. However, I think most of the more sophisticated [15:00] advisors in this realm are saying, “We really better be operating as if we are regulated to make sure that these structures are kept together.

R. Adam Smith: Just pausing there for a second, so for the listeners, so explain a private company trust generally speaking within a family office start within a family office dynamic and then just remind people of the states that are more, most insured, friendly, and most popular beyond Delaware in the market today. And just pick on a couple of states and why they're interesting.

Judith Pearson: Yeah, so private trust companies are a way to institutionalize the trust structure. And what I mean by that is instead of having a trust and some when a trustee no longer wants to operate as a trustee or can't or for a variety of reasons, when [16:00] that trustee resigns in a traditional trust, the lawyer needs to, you know, redo the documents and maybe you have to go to court and maybe you have to get approvals from beneficiaries and it's a pretty complex process.

However, in a private trust company, it's set up as usually an LLC or some other type of corporate structure. And rather than having to redo everything, all you have to do is change out the board of directors, committee members, et cetera. So when I say it's an institutionalization of the trust structure, all a private trust company can do, is provide trustee services to one family, which includes their branches. So it's for the right complex families, it's a really interesting structure. I see most of these being formed in South Dakota, Wyoming, Nevada. [17:00] I'm starting to see Florida raise their hand a little bit and I'm starting to see New Hampshire start getting more aggressive. I've not seen Tennessee, who is pretty active in the asset protection, but I would expect that to be coming along. And by the way, I'm not just, I'm not even sure Delaware recognizes private trust companies. So get, you know, you have to find the right one.

R. Adam Smith: Okay. So I want to dig in a little bit on Florida. You mentioned Florida because there is so much money in Florida and moving to Florida and it is such a quirky state from a political perspective and a law perspective and also labor law perspective. And there's, you know, obviously change in the political landscape. So for everybody who is—either has children, or a second home, or first home, or family office in Florida as well down in southern Florida. I'd love to hear your thoughts [18:00] on where Florida sits right now from a from a trust perspective and where you think that's going the next couple of years.

Judith Pearson: I wish I had a good answer as far as what it looks like right now because like you said it's evolving. What I'm seeing is, a lot of creative individuals are trying to incorporate the things that we've been seeing in South Dakota, Nevada, etc. So I think we're going to see a lot of interesting trust structures evolve in Florida that haven't been available up until now.

R. Adam Smith: I see. So you're talking about the creativity of lawyers. You're not talking about state regulation changes?

Judith Pearson: Well, the state regulation changed recently, which has allowed for the evolution of new trust companies coming in. And yes, the lawyers looking at how to structure the wealth transfer [19:00] vehicles. So for me, it's a little too soon to tell, especially as you were already mentioning. So many of the organizations that have moved down there, Goldman Sachs, etc. I think we're going to see a lot of exciting things come out of Florida, but I don't know how to predict it.

R. Adam Smith: Yes. OK, good. Well, let's talk about trustees a little bit more, and their ability to estimate the liability. So, sometimes trustees can underestimate liability when overseeing the trust. And as families grow and institutionalize and they demand more hands on governance and expertise, bringing external expertise, bringing more intellectual capital, raising the bar, what do you see in the shift of trustees and their role, as external governors and bringing that wisdom from the outside? Do you see them operating more like a board of directors [20:00] or more like an outsourced CEO? Where is their role going to go in the market as the bar raises higher?

Judith Pearson: So first of all, I don't think the majority of individual trustees understand the enormity of the job. And I think it's important for our wealth creators or grantors to really think through who they want as a trustee, and what decisions they really want them focused on. So, for example, most of the friends and family members might not have enough experience in true trust administration. So is that really where you want that person to be? Or do you want to set up a structure where that friend and family is doing exactly what you were referring to and being the orchestrator of all the various professionals and weighing in where they should be weighing in, [21:00] which is generally, you know, grantor intent and legacy, et cetera. And I think it's a big issue. And I'm seeing a lot of organizations start looking at how do we train our individual and I would also call professional trustees, which are those individuals who have background usually lawyers, retired CPAs, retired trust officers who in later years are starting to offer these services to our family. So, I think to answer that question succinctly, it's really thinking about who should be in what role and who can be hired to help manage the things that those people shouldn't be doing like the administrative duties.

R. Adam Smith: Also Judy, traditional insurance models often fail to address these intergenerational issues and complexities, like there's a lot of [22:00] transfer going on of the illiquid assets to G2, and I'm seeing a lot of disagreements on the board and the charters of, okay, you know, how do you really structure the trust, either ex-ante or ex-post, when the next generation is maybe less interested in the business. So, if you could talk about how your companies are reshaping how the trustees and family offices address that issue, that would be great.

Judith Pearson: So remember, we're the tail on the dog, so to speak. So, I often am in meetings and might raise my hand on, you might want to think about a few risk management strategies, but at the end, the board and the families get to decide how they're gonna resolve these issues. And then it's my job to figure out how to make sure these things are insured

R. Adam Smith: [23:00] That's true. Good point. Let's just go a little bit on the next-gen though, like what are your thoughts on next-gen and how complex, how diverse is the next gen activity is going to be between staying with the operating companies and like moving on from the core business?

Judith Pearson: I actually find it really fascinating because the next-gen has really been educated more than some of the other generations to be contributing citizens and they're taking that on by their own mark and making lots of different investments that gets back to the private equity question. So I think it's really important for the structures to reflect that and then from the multi -generational businesses perspective, we start seeing a lot of outside management come in, making sure that they're still fueling with earnings [24:00] the trust structures to allow the next generation to continue on with their mission and vision.

R. Adam Smith: Okay, well, what happens when you have a G2 that isn't interested in running the business or staying in the business and they actually want liquidity to go do something else that's interesting for society? Let's just say, like a philanthropic trust, or a for-profit venture philanthropy, or just go out and start a significant charitable endeavor. I see this, I see this interest very, very high in the next-gen to really leap into philanthropy but make it more of a business. So, do you see that happening? Like how do you do that from a tax efficient perspective? Or is there really no way to make it tax efficient and you just have to deal with the after-tax dollars to get the business going?

Judith Pearson: [25:00] Again, I'm not the tax structure person, but what I can say is I have clients who have liquidated businesses because there isn't a next-gen. I have other clients who are creating liquidity either through M &A activity or ESOP activity. So there's a lot of ways to create the liquidity for the next-gen to do what they want to do. What I tend to see more in my circle is ensuring that the next-gen is finding their voice and has the capability to implement the kinds of things we're talking about.

R. Adam Smith: Okay, right. So it gets back to having a really strong bench of advisors across the lawyers and accountants and tax professionals, and then you guys add Precision Brokers [26:00] and Nomadx and firms like yours, you're supplementing those experts around the insurance side. Maybe a bit more on the innovation side of insurance, like what's going on that’s innovative that's exciting for you to offer to your clients?

Judith Pearson: So what's really exciting to me is because we tend to be one of the few insurance brokers who are really looking at this from a scope is I'm getting a lot of opportunities to redesign how we look at risk management and how we implement the insurance policies. So that goes back to my facility, which by the way, is open to all insurance brokers, and what we're really trying to do is train the rest of the market to think about some of the things that we're thinking about. So we started with individual and professional trustees. I'm crossing my fingers that I'm about 90 days out—from [27:00] opening—from announcing a new product for private trust. But it's really taking the old, thank you, it's really taking the old guard policies and underwriting structures and updating them to what we're seeing today.

R. Adam Smith: So there is, so there's a bit of evolution and tweaking what the policies, but there is some innovation going on. That's exciting. Maybe, maybe, you could talk about some of the innovation that has been going on in the insurance industry for either illiquidity or even for art. That would be great if you could talk about art for a bit.

Judith Pearson: Oh yeah, so from an art perspective so much of the art is stored in storage facilities, which is really quite a challenge from an insurance perspective from a more traditional property, casualty insurance perspective. [28:00] But I've also had a lot of people reach out to me asking for advisement on what I might do for authenticity and for title issues again, because when we really created ARIS, which was the art title insurance company, it was a little bit before its time. And today, so much of the art is being used as an asset to leverage. And so, there's a lot more interest in bringing back standardization of transaction from what you see in other asset types like real estate, for example. So I do think there's a ton of innovation, authenticity, and also tokenizing art, and tracking things from a technology perspective, and looking at the contracts to see if there's a way to manage some of that risk. So I think there's a ton of [29:00] evolution going on in all asset classes.

R. Adam Smith: There is more tokenization going on. I think especially I see, I've seen Cartamundi and Fine Art Group and some others taking a stab at it. Do you think it's just at the beginning of that cycle?

Judith Pearson: Absolutely. I just think there's still a few problems that need to be solved like the title and authenticity, but people are really looking at trying to figure out how to do that. What I mean by that is we can put a lot of things on the blockchain, but until we can figure out how to tie that item to that blockchain, we still have some of those gaps. But I think they're absolutely innovating and it's taken a long time. I used to talk about the blockchain technology from our perspective 15 years ago. So I think those organizations are—the technology is involved [30:00] to be able to do some of the things that they want to do.

R. Adam Smith: Yeah, you were early. That's exciting, so maybe we do another episode and bring some people together to talk about art. Right now, the first year we've been covering the bigger picture issues that the elite audiences interested in. I think in terms of wealth creation, and protection, and transfer, governance, culture, legacy, but ultimately, as we often talk about on the podcast, you know, wealth is really what you make of it. And it draws up legacy and then each person's legacy is different. So art is something, as a collector myself, and very passionate about. I think it is increasingly going to be real estate and art, I think, increasingly will be key activities for next-gen to get involved in, because of the combination of financial opportunity and passion. So it will be interesting to see if [31:00] tokenization will accelerate and deepen that activity and make it more sort of tech-savvy, and more global and more fluid like we're seeing on Masterworks. Do you have an you love Masterworks and this tokenization of art?

Judith Pearson: So, I think it's really complicated. I think when you talk about the next-gen and what their collecting passions are, we'll dictate what we think about old masters, right? Because there hasn't been a lot of interest in the old masters for what I can tell for about 10, 15 years. There are a lot of what we would call, I'm going to use the word orphan art, but that's not really the right term in Europe where you have these collections that have been sitting in families for 400 years and they have the opportunity to get authenticated. Back in the art title business, we had one scenario where it had literally been sitting in the [32:00] basement for 400 years and somebody recognized that it was a real, authentic work opposed to the school of. And so, it was a really interesting task to figure out, on that one, what import, export-wise we’re going to apply the title. And so it was very complicated, but for the right collectors who are interested in those types of works, I think there’s lots of opportunity.

R. Adam Smith: Yeah, totally agree with that. I'd love to talk more about that with you offline. We're going to wrap up now, but I want the audience to know how to reach you. If you could tell us a bit about your companies and if people can reach you on LinkedIn or any other way, it would be great.

Judith Pearson: So I'm definitely on LinkedIn. Precision Brokers is www.Precision (P -R -E -C -I -S -O -N -I -N –S.com. [33:00] You can get to me through J. Pearson at precision-I -N –S.com and my telephone number is 303 -917 -7766. I would love to explore some of these issues if anybody's interested.

R. Adam Smith: Fantastic. I hope they do reach out to you. your companies are looking great and it's a very important complex time in the market for family offices, but also non-family offices that are becoming family offices or within a multifamily office context. So I'm excited for them to learn more about these issues. Thank you so much for today. I'd like to thank you for being our guest today, Judith, on the show.

Judith Pearson: Well, thank you so much. I really appreciate your time. And boy, there's lots of things to explore. So, thank you for hosting this podcast in general.

R. Adam Smith: Welcome. Thank you for joining today. This is R. Adam Smith signing off. [34:00] Stay tuned for our next episode of the Family Business Audiocast on LinkedIn.

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