How Jeffrey Epstein Justified Those Crazy Family Office Fees

$158 million payoff only seems extreme until you see how much estate tax liability Leon Black saved by following the sex offender’s suggestions.

It’s always a tough business decision when people you know are awful find a way to make themselves indispensable.

Leon Black always found Jeffrey Epstein difficult. Bringing him into the Black family office poisoned the atmosphere with endless complaints, criticism and bad ideas.

Epstein also obscured the extent of his crimes, keeping Black largely in the dark about exactly who was being trusted with what might be a $10 billion private equity empire.

And yet, despite the constant irritation, Epstein demanded . . . and got . . . close to $40 million a year.

It’s a staggering amount. Apollo Global leadership was right to express a little concern that the boss had gotten in over his head with someone whose credentials were never clear and whose reputation has gotten a whole lot worse over time.

But Black makes a reasonably convincing case that the $158 million deal with the devil made solid fiscal sense. While not all the details add up perfectly, the numbers have their own gravity.

A Very Private Cloud Of Capital

Black says Epstein found a huge hole in his estate plan that could ultimately have forced his heirs to pay $1 billion in gift tax.

Additional estate advice structured the way cash flowed between Black and the family trusts to theoretically save another $600 million in tax liability.

The problem with evaluating these claims is that very little of Black’s estate plan is in public view. While scattered SEC filings over the years shed some light on a few of the family holdings, the real footprint is hidden in vehicles where either the assets or Black’s relationship to them is not up for disclosure.

That’s worth highlighting as we dig through this. If your best clients want privacy, you probably don’t want massive concentrations of public equity in the trusts.

Structure the holdings to bypass the reporting rules. When all else fails, take a public company private and stop answering to the SEC at all.

The Black trusts ended up crowding out outside investors in one company in particular, Environmental Solutions Worldwide. At that point, management was happy to pull the listing and vanish from the market’s radar.

The company still exists, even though it hasn’t issued a press release in five years. Black’s kids and Apollo insiders dominate the board.

The CEO is active on Linkedin and seems cheerful about the products he has to sell. Maybe he’s doing so well he has no need to trumpet his success anywhere else.

But the stock still trades over the counter occasionally. It’s down a long way over its lifetime.

The Black family’s relationship with the company dates back to well before Epstein was formally in the picture. My guess is that the trusts that ended up with a controlling stake here were something like a “starter” estate plan executed before anyone around the family really knew how rich they were going to get.

Black says as much in the interviews Apollo did to resolve the Epstein relationship. At that stage in his career, estate planning was a sideshow. The trusts and Environmental Solutions Worldwide are at best a distraction now from what’s really going on below the surface.

By 2006, Black knew he needed a real billion-dollar plan. Bizarrely, Epstein recommended the lawyer for that one, but a handful of years later, after his legal downfall began, he felt compelled to point out that that attorney had done it all wrong.

Black had a Grantor Retained Annuity Trust (GRAT) designed to push assets out of his estate to his kids without triggering any kind of inheritance tax. At least that was the plan.

Epstein found a hole in the structure and came up with a fix that impressed Black’s advisors. Reading between the lines, it involved the Apollo partnership interest because that’s really the core of the family wealth.

In a GRAT, the grantor transfers assets into a trust in exchange for regular payments across a fixed length of time. That’s the “annuity.”

When the payments add up to the original value of the assets plus a nominal IRS-mandated interest rate, the grantor’s taxable “gift” has been effectively paid back. As such, any appreciation in the meantime goes to the heirs tax free.

That’s a great thing for outperforming asset classes like private equity and stock in the funds like Apollo that dominate that world. In a zero-rate decade, it’s practically a no-brainer.

However, it’s a tricky balancing act. If the grantor dies early, the structure implodes. And if for some reason the GRAT doesn’t gain value, there’s no benefit.

Epstein’s problem with Black’s GRAT is confidential and he said his solution was proprietary. We can deduce a little about what was going on, but a catastrophic drop in asset value is unlikely.

To create a billion-dollar estate liability, you need to transfer at least a few billion dollars into the trust in the first place. That’s probably the Apollo general partnership itself.

The partnership generates dividends that would normally compensate its owner but in a GRAT would pay the grantor back for the initial gift. The shares remain for the kids.

Epstein might have “discovered” gossip in Washington around raising the minimum payback period, which would in turn increasing the odds that Black would have died before his gift zeroed out. Or he might have had some more esoteric problem.

Likewise, his solution might have revolved around incorporating some kind of promissory note scheme into the structure, perhaps setting up a default that would be forgiven under various circumstances.

What’s important today is that the family office was impressed. Epstein told Black he charged a flat $40 million a year for his consultation, apparently regardless of assets at stake.

No "I" In Team

That number speaks to scale. Obviously that kind of payroll would bankrupt all but a few multi-millionaire families almost immediately.

But relatively few of those families require massive GRAT support in the first place or will ever run up a billion-dollar tax liability. Black needed extremely rarefied expertise and the savings justified the cost.

If Epstein truly saved him that kind of money, the bill would have made sense at ten times its size.

Black thought the bill was too high, however. He’s a sensible and seasoned operator. That’s what ultimately severed the relationship after only four years.

After all, a conventional family office gets by on roughly the same terms as other wealth managers, taking about 1% of the assets every year.

On that basis, you’d need $4 billion simply to justify Epstein, much less the other people and activities in the office.

Black already had a family office that grew out of his professional office. I don’t think he was spending $40 million a year on it. After all, he runs his own money.

But a few people to handle staffing, legal and property management is par for the course when you’re a mere billionaire. As Apollo went stratospheric, operational needs scaled too.

Black got a yacht. He got his own plane. He kept buying art. The family foundation bloomed.

Epstein wanted and probably needed the cash, so he kept looking for ways to ingratiate himself, basically becoming family CEO and alienating everyone else in the process.

He claimed credit for ideas that weren’t ultimately his. Ultimately Black kicked him out and restructured the office.

To be fair, the paper trail contains a lot of weird errors and gaps that you’d find in an organization where morale and expertise don’t add up the way they should.

The kind of office that embraces a Jeffrey Epstein in the first place has problems. He recommended the lawyer who built that initial GRAT and then he came back to poke holes in it when he needed cash.

A strong organization would do it right the first time or at least learn from its mistakes. It would get stronger with time.

Let’s hope the Black family office is in that place now. And if you have clients who need truly massive amounts of support, don’t worry about the fees.

It’s all part of the package.

And Black is rich enough now that he's promised to donate $200 million to women's causes as an apology for working with Epstein in the first place.


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