A Leap Day Analysis of “Leap Year”

In honor of the once-every-four-years occurrence that is February 29, I decided to watch the Hulu series “Leap Year.” (Yes, I said Hulu series—believe it or not, there are many original series that air weekly on Hulu.) “Leap Year” is a 10-episode scripted program about five colleagues fired from their jobs who each decide to start their own businesses in a competition where the winner gets $500,000 of capital. What could be more entrepreneurial than that?

Spoiler Alert—much of what follows will ruin the fun if you plan to watch the show!

With one exception, each of the businesses is essentially a personal service company (an accountant, a publicist, a journalist, etc.). The show also touches on several topics of interest to this entrepreneurial attorney. Among them:

·  An employment discrimination lawsuit by a Mormon woman who feels threatened because she doesn’t drink. Never mind that it was “just a joke.”

·  The moral integrity issues that the publicist confronts—he ends up taking the low road when he steals information from a client and makes misrepresentations to benefit another.

·  The corporate attorney, who often ends up wondering why she’s playing the role of therapist and not just being asked to draft contracts. (I often end up contemplating the reverse—tell me what you really want and care about, and I may be able to help you more than I can just writing some agreement.)

·  A cameo appearance in episode 9 by Guy Kawasaki, the founder of Garage.com (and one of my entrepreneurial heroes).

The show gets more interesting (and closer to my universe of real client situations) when the five entrepreneurs decide to pool their talents and resources to form one cool high tech venture to develop 3D holographic videoconferencing capability. Of course, I couldn’t help my attorney self from contemplating the securities compliance issues when a 19-year-old high tech geek writes them a check for seed capital while bouncing up and down incessantly on a hippity hop (since he says he made $19 billion on his last venture, at least they know he’s an “accredited investor”).

Notwithstanding how unrealistic many of the situations are, the characters are pretty entertaining. I’m not saying I’d invest 30 minutes a week and put it as a series recording on my DVR (I reserve that for shows like “Shark Tank” and “Smash”), but the series is probably worth the only 7-10 minutes that each episodes lasts. 

entreVIEW Announces eeVee Award winners

In case you’ve been hiding under a rock, the 2012 Academy Awards ceremony was last night. While some may have survived watching the entire extravaganza, we at entreVIEW quit watching as soon as we ran out of popcorn. That’s okay, because instead we spent our time compiling our own list—the top entrepreneurial movies of all time (or at least since 1980). If we had an award (we’d call it an “eeVee,” obviously), these are the films that would win.

So, without further ado (as they say in show biz circles), and in somewhat chronological order, here are the lucky winners of our imaginary eeVees:

1.     Night Shift (1982). Henry Winkler (the “Fonz” from “Happy Days”) is a Wall Street dropout who teams up with an entrepreneurial idea man (Michael Keaton) to operate a prostitution ring out of a morgue. Keaton’s character has a particularly amusing penchant for dictating blockbuster business ideas to himself. Note to self: Watch for Keaton’s ingenious idea for streamlining the tuna salad business.   

 

2.     Secret of My Success (1987). Michael J. Fox riffs on his “Family Ties” character Alex P. Keaton in this comedy about a Midwestern boy fresh from college who travels to New York City to take a job in finance, is laid off before he even starts, takes a job in the mail room of another company, finds an empty office, assumes a new identity, and ends up running the company (and gets the girl, too).   

3.     Baby Boom (1987). Diane Keaton (do all comedies with an entrepreneurial angle involve someone named Keaton?) as a single investment banker who is saddled with a deceased cousin’s baby, loses her job, moves to Vermont, develops a gourmet baby food, and hits it big. Applesauce, anyone? 

4.     Forrest Gump (1994). The entrepreneurial story here is really just tangential to the larger story arc, which long ago passed into American folk lore, as have a number of choice quotations (think “Life is like a box of chocolates…”), but we especially like how Forrest’s success in business is largely the result of being in the right place at the right time (shades of Malcolm Gladwell). A developmentally delayed young man (Tom Hanks) returns from Vietnam, takes up the shrimping business to fulfill a dead Army buddy’s dream, survives a hurricane to corner the market, invests the profits in Apple stock (“Lieutenant Dan got me invested in some kind of fruit company”), and—well, you know the rest.

5.     The Hudsucker Proxy (1994). Written and directed by St. Louis Park’s own Joel and Ethan Coen, this somewhat dark comedy, set in 1958 in a perpetually cold and gray New York City, features a storyline reminiscent of 1941’s “Meet John Doe.” A Midwestern boy (Tim Robbins) fresh from college who travels to New York City to find fame and fortune (are you sensing a theme here?) is elevated from the mail room to the executive suite by handlers hoping to torpedo the company’s stock price so they can buy in on the cheap. A hard-bitten female journalist (Jennifer Jason Leigh, channeling Katherine Hepburn) sent to get a scoop by spying on him falls for him, and he makes it big inventing stuff, “you know…for kids!”

6.     Office Space (1999). A bored, frustrated, and unappreciated software engineer, under the influence of hypnotherapy, designs a computer virus to divert fractions of pennies into a special account to which only he and his friends have access. A cult classic, this film includes wonderful depictions of soulless corporate bureaucracy. We especially liked the smarmy manager, so, ummm...yeeaahh...we’re gonna need you to go ahead and watch this for yourself.

7.     The Social Network (2010). You pretty much already know what this film is about. Aaron Sorkin’s screenplay follows Mark Zuckerberg as he creates and builds Facebook. Winner of multiple Golden Globe Awards, British Academy Film Awards, and Academy Awards.

Have we left one of your favorites off the list?  Let us know—we love a good movie.

Put Your Head on my Shoulder

It’s hard to believe that a famous songwriter could cause so much heartache in the entrepreneurial community. Paul Anka is probably the most recognized name in the small company investment community, not because he is a successful entrepreneur (although some would disagree, since he has had a long and successful career as a singer and songwriter), but because of a letter written to him many years ago.

In 1991 Paul offered to open his Rolodex® (a strange term to the under-30 generation) to a company trying to raise money in exchange for a “commission” on sales of securities to people in his network. He asked the Securities and Exchange Commission (SEC) if they would consider him a broker-dealer as a result of this. Being a broker-dealer has significant regulatory effects, including licensing requirements and monitoring by FINRA or other similar organizations. The SEC sent him a “no-action” letter stating that it would not take action against him if he was not a registered broker-dealer. So he opened his Rolodex® and was paid for his contacts. 

Since that time, in my capacity as both a lawyer and an investment banker, I have run into a number of people who have opened their contact databases (for the new generation) in exchange for a percentage of the sales to such people. In the past the SEC has been relatively lax with regard to these “finders,” but recently it has taken a very hard line on them. The SEC has essentially rescinded the views it expressed in the Paul Anka letter. Today, many securities lawyers (including me) would argue that there is no “finder” exception to the broker-dealer registration requirement under the securities laws.

Most executives ask me, “So what if I do this anyway?” Well, here’s the answer: If the SEC investigates and finds that you and your company retained an unlicensed broker-dealer, your company may lose the securities law exemption that it relied on in offering its securities. This essentially gives a put option to all the investors who purchased securities in the offering. It also opens up both your company and its management to civil penalties under the securities laws.

Invariably, their next question is, “Well, how am I supposed to get the offering done then?” It’s not easy, and that is why, in my opinion, there are so few successful companies. Every time someone asks me this I think about a poster I got from one of the big six accounting firms back in 1991. The poster shows a guy sitting in a rowboat in the middle of the ocean; all around him are these huge waves. The caption? “You always wanted to start your own business.”    

A lot of politicians and lawyers are trying to solve the problem. The American Bar Association has suggested that the SEC establish a special “finder” registration procedure that is less onerous than the broker-dealer standard. A number of members of Congress have proposed bills relaxing the exemption standard most companies rely on. However, until one of these solutions is put in place, we all have to deal with the tough reality of the current standard.

As someone who has also started a number of companies and run corporate finance for an investment bank, I sympathize with anyone trying to raise money in today’s tough environment. All I can offer is advice on legal methods and ideas on how to raise capital...and a shoulder to rest your head on.

A Post by Frank Vargas, Guest Blogger

Of Presidents and Patents

I was surprised when I first learned that the initial bill for the establishment of the U.S. patent system was signed by President George Washington in 1790. I don’t know why I was surprised, but for some reason I thought that the national patent system would have been a later development.

This tidbit of knowledge came to mind again on Presidents’ Day, and in looking further, I found that the original Patent and Copyright Clause of the U.S. Constitution was proposed in 1787 by future President James Madison and never-to-be president Charles Pinckney. Madison apparently had a love for inventing, and Washington was supposedly inspired to support a national system by the efforts required of one George Rumsey to obtain patents from the individual states for his mechanical boat.

The first U.S. patent law authorized the secretary of state, secretary of war, and attorney general (at that time Thomas Jefferson, Henry Knox, and Edmund Randolph, respectively), or any two of them, to grant a patent to an inventor if they deemed an invention or discovery “sufficiently useful and important.” By 1793, the process was considered to be too burdensome on the secretary of state, and the law was changed to eliminate examination; patents were thereafter granted simply upon submission of a written description, a model of the invention (if appropriate), and payment of a $30 fee. (Examination was reinstated in 1836.)

It is not surprising to see that Thomas Jefferson was involved in the implementation of the first federal patent laws. As a child visiting Monticello, I was fascinated by the breadth of his interests and creativity. In the entrance hall of the home is this sensational still working clock that has cannon balls hanging on both sides of the doorway that show the day of the week and the time. Although I don’t recall seeing it, I do remember the tour guide mentioning that he had invented a macaroni machine. So, surely Thomas Jefferson must have applied for and obtained patents on some of his inventions. To my surprise, Jefferson was never issued a patent. In fact, with one of his more important inventions, an improvement of the wooden plow, he openly encouraged the public duplication of the invention, claiming that it should be for the public good and not for the advancement of the inventor.

Actually, I found that Abraham Lincoln was the only president to hold a U.S. patent. In 1849, while serving as an Illinois congressman, Lincoln was issued a patent for “A Device for Buoying Vessels Over Shoals.” Based on his own experience working on boats, Lincoln invented a set of bellows attached to the hull of a boat just below the water line. In shallow water, the bellows would be filled with air to float the boat higher in the water, thus escaping the traps of sandbars. Sadly, the invention was never commercialized. Apparently the added weight of the device actually increased the probability of running into sandbars, thus defeating the purpose of the invention. A model of the invention, carved by Lincoln himself, can be seen at the Smithsonian.

As I rambled through the history of our presidents and their connections with patents, I also learned that Millard Fillmore went to the patent office to study the drawings of the new cooking stove installed at the White House so that he could teach the cook how to use it. Vice President Tyler was playing marbles when he was told of President William Harrison’s death—five years before the invention of “marble scissors” that allowed for the economical mass production of marbles. When President Garfield was shot in July of 1881, the doctors were unable to locate and remove the bullet lodged in the president’s chest. Alexander Graham Bell hurriedly tried to invent a metal detector but the gadget he developed was unsuccessful and Garfield died in September from internal hemorrhage and infection. (It was observed that the Bell device may not have worked because the president was on a bed with metal springs, but no one thought to move him.)

Jeremy Lin—the “Linsanity!”

How does a 6’3, 200 pound kid make it to the cover of Sports Illustrated after only five games in the NBA? Simple, his story is FANTASTIC. Here are some quick random facts to know about Jeremy Lin:

·  National Basketball Association (NBA) rookie with the New York Knicks, recently brought up from the development (“D”) league of the NBA after being claimed off waivers in 2011

·  Harvard graduate (no athletic scholarships given at Harvard)

·  Rejected by Stanford, the college of his choice, literally minutes away from his high school, he decides to attend Harvard and plays basketball

·  Parents, both immigrants from Taiwan, are 5’6 and, together, weigh only 20 pounds more than Jeremy

·  After having a respectable college career, Lin was not drafted in the NBA

Lin was one of the most unlikely people destined for success in the NBA. He is undersized and played for a college with a shallow NBA “pedigree” (Lin is only the fourth player from Harvard ever to play in the NBA). By NBA standards, Lin is a living, breathing anomaly (literally a “one in a billion” kind of guy) and his path to success, no matter how temporal it may be, is a story that we should all get to know. 

Lin’s pathway to the “Show” was littered with unconventional and often unheralded lackluster events. Not pursued by major universities after an above-average high school athletic career, Lin’s grades and penchant for basketball got him into Harvard (see Lin on what it takes to get into Harvard here). While a freshman at Harvard, Lin and his teammates were fortunate to have Tommy Amaker hired as coach. Amaker, a college standout, is a “character coach” who, while passionate about winning, understands that his squad of ballers will never be top high school recruits and will likely never go on to play in the NBA.

Lin did well in college while having some notable performances as an unlikely, undersized, skinny, Asian-American point guard for the prestigious Ivy League school. Following a not-so-unexpected quiet NBA draft night, Donnie Nelson offered him a spot on the Dallas Mavericks summer league team. In summer league, Lin played moderate minutes until Roger DuBois injured his ankle, thereby opening available minutes for Lin, who then strung together a couple of strong performances.

Lin hadn’t exactly “arrived” by playing “D” league ball. He went up and down three times from the “D” league to NBA rosters (first to his “hometown” Golden State Warriors) because of injuries to others. He was picked up off waivers in the lock-out shortened season by the New York Knicks, who designated Lin to their “D” league affiliate, the Erie Bayhawks (never heard of them?...neither have I).

Injuries again opened the door for Lin to step up. He was recalled from Erie and, on February 3, in a game against the rival Boston Celtics, given an opportunity to play a few minutes in the fourth quarter. What followed is an unbelievable performance by an NBA rookie. Lin has the longest current streak in the NBA for 20 point/7 assist games with six (coincidentally, the number of games that he has started this season). Meanwhile, Lin was literally sleeping on his brother’s couch, because he had no idea how long he would be with New York, let alone in New York. 

So you’re maybe wondering, “okay, so this is a ‘feel-good’ story of an unlikely underdog who makes it in the NBA”—we all love those stories. Here is why Lin’s story, as unlikely as it may be, matters:

1. Lin is actually that good.  Ed Weiland predicted that, other than #1 overall pick John Wall, Lin was the 2010 point guard prospect most likely to succeed in the NBA.  Even so, no NBA team took him on draft night despite him being a statistical leader amongst collegiate players.

2. Without injuries to other players, Lin would likely still be playing in the “D” league. As with Golden State and Houston previously, it took injuries to numerous starters and back-ups to create available playing time.

3. Lin is a “journeyman,” meaning that he has played for multiple teams in multiple cities without long-term security for his playing future. Being a role player means being ready in an instant, typically to come off the bench and be “ready.” As a journeyman, you never know “whose” bench, where that bench may be, or what the role is.

4. Statistically speaking, Lin continues to get better. Many average NBA players are washed up in their 20s. Although only 23, Lin’s statistics demonstrate that he continues to get better each year that he plays.

5. Effectively, very few people believed in Lin’s abilities and gave him an opportunity to play. Much credit has been given to his high school and college coaches and, in particular, to Donnie Nelson, who gave Lin his big break to play on a “D” league squad.

There are many lessons to be drawn from the experience of Jeremy Lin, all of which are great for the game of basketball, but also applicable in business and the “game of life.” Maybe it’s not a coincidence that offices across the U.S. are littered with motivational references to sports (you know who you are; at the very least you have sports paraphernalia somewhere in your office…). I believe the real take away is that persistence, with faith and help from others, can make the difference. 

In the case of Lin, he will probably be the first to admit that he’s a major ACL injury away from pursuing his post-basketball career. Despite the knowledge that success at the NBA level is fleeting, Lin gives credit where credit is due: others. Hardly any person in business is “self-made.” Without exception, someone else comes along and makes an impact by providing an opportunity, taking some risk, or having faith where it may not be warranted. This can make all the difference in the world (the “X” factor, if you will). 

While we can look at Lin’s life and marvel at the “made for TV movie” experience that he has had, the experience happens every day somewhere in business and personal lives and goes unnoticed, at least by the major news and sporting publications. The result is no less important and we should look for opportunities to be that X factor in someone else’s life. In the meantime, be sure to applaud others when they capitalize on the opportunities given to him (and watch a great burn on John Wall in the process).

Father Knows Best, Maybe

This past Thanksgiving, while enjoying a walk around a Minneapolis lake with my son, Ben, we discussed a wide range of topics, including the demise of the NBA, global warming, chocolate chip cookies, and his love of New York. The topic that created the most excitement was his true dismay that I was not troubled by, or even aware of, SOPA (Stop Online Piracy Act) and the companion bill PIPA (Protect IP Act).This proposed federal legislation would, according to my 27-year-old maven of social media and the web, be the end of the Internet as we know it. And, as an intellectual property attorney, it was my duty and the others in my profession to stop it!

I explained to him that I was not so omnipotent but also suggested that there was nothing to worry about. Spotify was not doomed. I confidently cited the many other failed legislative efforts, supported largely by the movie and recording industries, to halt the activities of rogue web sites and enhance the rights and remedies available to copyright owners. Remember Napster? And, anyway, I told him the Digital Millennium Copyright Act (“DMCA”) already provides remedies to copyright owners concerned about the unauthorized use of their material without creating liability for legitimate web site operators.

“But Dad,” he responded, “this is different. You should know about it. I don’t know all the details of the DMCA or these other legislative initiatives but this may pass and people need to be aware of the implications.” I have to say, he seemed genuinely concerned about issues of free speech and curbing innovation and not just the easy and cheap downloading of music and movies. And he got all this information from social media sites, rather than traditional media outlets.

And, he was right. I should have known about SOPA and PIPA. The proposed legislation would have imposed draconian penalties on allegedly infringing websites with limited due process.

On January 18, 2012, two days before the vote was scheduled in the Senate, a widespread online protest of SOPA and PIPA took place. Twitter, Facebook, and the blogs moved into action. Wikipedia, Reddit, and some 7,000 other websites initiated service blackouts, and the web was saturated with communications to raise awareness. Google posted a black banner on its site to support efforts to fight the proposed law. SOPA and PIPA were front-page news and covered by every media channel. President Obama announced (via Twitter) that he would never sign it into law. The sponsors of SOPA and PIPA withdrew their support.

So, while my son was indeed right about how bad SOPA and PIPA were, I was also correct when I told him not to worry, for it would never pass. His response? “Dad, the only reason they did not pass was because of the ability of concerned parties to organize and mobilize efforts to raise awareness through the Internet and shine a light on this legislation. Without social media and the web community, these laws would have passed and we would never have known about it.”

Is my son right? Was the massive media attention fostered by the organized efforts of the web community and social media the only reason SOPA and PIPA did not pass? Has traditional journalism become obsolete?

We shall soon see. The Online Protection and Enforcement of Digital Trade (OPEN) Act has already been introduced in the United States Congress as an alternative to SOPA/PIPA. This legislation seeks to stop transfers of money to foreign websites whose primary purpose is piracy or counterfeiting. Enforcement responsibility is with the United States International Trade Commission (ITC) and not the Justice Department. Google and Facebook appear to be supportive of this legislation while the Motion Picture Association (MPAA) and the Copyright Alliance representing individual artists and creators have voiced some concerns. OPEN appears to be an improvement over SOPA/PIPA. According to a recent New York Times editorial, “… [OPEN] may not be perfect…but it gives copyright holders powerful new tools to protect themselves, protecting legitimate expression on the Web from overzealous content owners.” No one knows yet whether OPEN will pass? 

So here I am, doing my part to shine a light on this legislation. Let’s see if my son is right and the web community will rally again to either support or stop this effort to curb copyright infringement without threatening innovation and legitimate expression.

*P.S. One thing Ben and I did agree on during our conversation—the absolute best dark chocolate chocolate chip cookies in the entire world can be had at Levain Bakery in New York’s Upper West Side.

Friends, Family & Futbol

It may sound like a dream come true for many entrepreneurs: an entourage of wealthy friends happy to invest millions in your idea, no matter whether it’s legitimate or plausible. But an ex-professional soccer player’s story serves as a sobering reminder. These types of initial investors might be “fools,” but you could still be on the hook for a deal gone bad.

In a story reported last month, former professional English soccer player Michael McIndoe was linked to an investment scheme in which multiple other professional players participated. Apparently, the business idea involved offering exclusive access to nightclubs and private jets to these individual investors. The plan was sold as a guaranteed-return investment with interest of 20% per month, collected by the investors on the first day of each month at a hotel in London. (Yes, one related comment did mention how many times soccer players hit the ball with their heads.)

Despite the claim by a financial consultant for professional athletes that the scheme was well known and he kept his clients away from it, most investing players did not ask questions; they knew other player-investors were collecting their interest on a regular basis. Beginning last April through this fall, upwards of £1.9 million was invested in the business (one player supposedly invested £1.0 million individually, which, according to my sources, equals about $1.58 million in U.S. dollars). But starting in November, the monthly hotel visitors began returning empty-handed, and many now believe the scheme was a Ponzi-style play, meaning most recent investors will lose all of their money.   

While there are a myriad of lessons one could draw from this fateful story, from the perspective of an entrepreneur it can’t hurt to receive an occasional reminder regarding the risks of the game (pun intended). McIndoe enjoyed a successful soccer career, and was reported as being a “charismatic and popular figure” among other players. He spoke openly about his successful battle to overcome a tough upbringing, and is married to glamour model Emma Frain. He ultimately left professional soccer last year to concentrate on his business career, which includes directorships for a number of businesses in the concierge services, property, and restaurant industries. Although he became a director for the business discussed in this post and helped promote the venture, several articles have mentioned that there has been no suggestion of wrongdoing on his part.

Despite all of this, it is now being reported that gangsters are travelling to Scotland to find McIndoe’s family, that McIndoe has vanished from his flat, and that he has had to hire personal protection. The players do not want to report their losses to the police for fear of getting into trouble with their soccer clubs (and just generally looking stupid), so the only other avenue for blame is their former friend who was involved in the business and encouraged their investment.

While I’m not suggesting that any of our faithful entrepreneur followers would ever suffer such ill fortune, it’s worth noting that even without thugs after you, the U.S. securities laws can also punish promoters of schemes-gone-wrong in a pretty harsh way. Ultimately, the message is that you should always perform your own due diligence and have confidence in any investment you endorse, since no matter how foolish a business’s initial investors may be, when the money dries up, all eyes will be on you.

For those eager to dig into the details of McIndoe’s story, you can read more here, here, here, and here.


A Post by Karen Wenzel, Guest Blogger

Writing the Check is the Easy Part

 

Last week I had the privilege of attending the Minnesota premiere (sponsored by among others, Gray Plant Mooty) of the documentary film, “Something Ventured: Risk, Reward, and the Original Venture Capitalists.” It was a great night of movie-watching and meeting with those interested in the role of entrepreneurship and venture capital.

Something Ventured tells the story of the creation of an industry that went on to become the single greatest engine of innovation and economic growth in the 20th century. It is told by the visionary risk-takers who dared to make it happen--leading venture capitalists Tom Perkins, Don Valentine, Arthur Rock, Dick Kramlich, and others.  The film also includes some of America's finest entrepreneurs sharing how they worked with these venture capitalists to grow world-class companies like Intel, Apple, Cisco, Atari, Genentech, Tandem, and others.

While the film mostly features talking heads, their stories add color to the incredible statistics that demonstrate the profitability and success of these early investments. Here are some of my favorite anecdotes from the film:

·    Steve Jobs and Steve Wozniak were considered smelly, ill-mannered geeks who dressed funny and could not get a bank to even listen to them.

·    Nolan Bushnell, who created Atari, held board meetings in his hot tub. Bushnell introduced Steve Jobs (then 18 years old and working as a technician at Atari) to Don Valentine.

·    Bushnell was offered a one-third stake in Apple for $50,000. He turned it down. Bushnell’s comment? “That was a big f------ mistake!”

·    Arthur Rock displays a one-page business plan filled with typos and few specifics requesting $2.5 million for the creation of Intel. Rock says, “Not a polished document, but kinda cute.”

·    Mike Markkula ($142,000), Arthur Rock ($57,000), and Don Valentine ($150,000) provided the seed money for Apple. Collectively, their investments in Apple are now worth over $300 billion.

·    Markkula recalls the early days with Jobs and Wozniak. “While the two of them did not make a good impression, Woz had designed a really wonderful computer. I came to the conclusion we could build a Fortune 500 company in less than four years.” Markkula adds: “Steve Jobs had never seen the inside of a board room. I remember one meeting when he took off his shoes and put his bare feet on the table. I said, ‘You’re excused until you act like a board member.’ He put his shoes back on and was fine.”

·    Half of the original founders of start-ups were replaced within 18 months after receiving start-up funding. Cisco System co-founder Sandy Lerner was the sole woman who appeared in the film. She tearily describes how Don Valentine abruptly fired her from the company she started.

·    Don Valentine tours the Atari factory and finds the people working there smoking something that’s not his brand. Valentine believes in the Atari concept of moving the coin operated game console featuring Pong into homes. The film includes a clip of a nostalgic commercial showing a family sitting in their living room playing Pong, which demonstrates how quickly this world has changed.

What if Your Heirs Become Hoarders?

Estate Planning Considerations for Heirs That May Have Addictive Behaviors or Mental Illnesses

Last week I was watching the intellectually stimulating program Hoarders, and it featured a gentleman named Kevin McCrary (Season 4, episode 53). Kevin is the son of famous parents and the beneficiary of a sizeable family trust. Kevin is also homeless because his Upper East Side apartment is completely full of trash.

Kevin McCrary is the perfect example of how trust beneficiaries can end up in a very different situation than the creators of the trusts intended, because of addictions or mental illness. Especially when trusts are created to benefit generations far removed from the creators of the trust, it is difficult to predict what provisions may be required. I’m pretty sure “hoarder” wasn’t even a term people used when his parents created their trust.

Two years ago, Casey Johnson, an heir to the Johnson & Johnson family fortune, died at the age of 30. Casey had a serious drug problem that was partially funded by access to her family’s wealth. Many of her trusts were able to turn off distributions and prevent her from paying for a lavish lifestyle of drug use, but not all of them could. She spent years estranged from her family, but living off the income of trusts to support her dangerous drug habit.

This is a problem that is appearing more and more in my practice. Parents or grandparents have executed complex estate plans that now benefit children or grandchildren, or they have even moved wealth during their lives through a variety of tax advantageous techniques that resulted in trusts for children or grandchildren. After those documents are in place, and are most likely irrevocable, the beneficiary develops a drug problem or a mental illness becomes more apparent. The trust terms often don’t anticipate these problems and may require a trustee to pay for any health or welfare related expense—including the twentieth time to rehab—or even to make mandatory income distributions to that beneficiary of significant amounts. Further, some trusts may lack the flexibility to assist a beneficiary in the appropriate treatment of a mental illness or to pay for psychotropic medications. 

It is very difficult to reform a trust after it is in place, especially if the reformation changes the interests of the beneficiaries. It is much simpler to add language from the beginning that provides flexibility if a drug addiction or mental illness should arise. I am finding that I recommend this language more and more to clients, especially if we are doing long-term legacy planning or funding irrevocable trusts with significant assets.