Post Topic: Investments

Jan 17th

Strategic Wealth Planning for UHNWIs for the Second Trump Administration

The new year will present challenges and opportunities for ultra-high-net-worth individuals as they re-evaluate their portfolios and long-term financial plans in light of President-elect Donald Trump’s incoming administration. Strong partnerships between UHNW clients and their advisors will be essential during this transition and the ensuing four years. Proactive planning will be key, especially given potential shifts in tax laws, market dynamics and interest rates.

Tax Law

Before Trump’s election in November, many ultrawealthy families were scrambling to optimize their estate plans ahead of the scheduled sunset of the Tax Cut & Jobs Act to take full advantage of exemptions while they remained in place and to adjust estate plans when and if those exemptions reverted at the end of 2025.

The policy uncertainty in 2024 paved the path for families and their advisors to give more consideration to their legacy and how it will affect their extended family in the future. The impending tax law change forced conversations around important estate planning considerations such as dispositive provisions, age attainments, and wishes for the use of the hard-earned wealth for future generations. The difficult decisions around the mechanics of intergenerational wealth were front and center leading up to the election.

However, with the incoming administration, it’s likely that the TCJA will be extended or even made permanent. UHNWIs and their advisors should continue to review their estate plans and build on those important conversations despite having more time to approach their plans strategically.

This extended horizon also allows for a renewed focus on aligning investments and real estate strategies with enduring goals, emphasizing tax efficiency, diversification and legacy planning. Advisors should take this opportunity to evaluate the use of tax-advantaged structures, optimize trusts and consider philanthropic vehicles that can minimize tax burdens while fulfilling broader family objectives.

Market Dynamics

From deregulation to policy shifts on renewable energy sources to protectionist economic policies, Trump’s election will hold many implications for investors and their portfolios.

The stock market’s reaction to the election results was initially positive. The day after the election, 3 in 4 companies traded higher, with the three major indices reaching record highs. As investors digested the possible policy changes under the new administration, markets in November saw a strong post-election rally, led by small-cap stocks and supported by gains in large-cap indices. However, recent Federal Reserve interest rate cuts and signals of a cautious monetary policy approach for 2025 have sparked turbulence, with major indices like the Dow, S&P 500 and Nasdaq experiencing sharp declines in mid-December.

Projected winners are expected beneficiaries of deregulation including banks; energy-related companies (especially in the liquified natural gas space); cryptocurrencies, particularly bitcoin; technology companies facing increased anti-trust exposure; and Tesla with Elon Musk leading the newly formed Department of Government Efficiency, or DOGE, committee.

Projected losers are companies in the renewable energy space, including EVs not owned by Elon Musk and utilities invested in renewable energy sources. Other losers, given Trump’s protectionist platform, include international companies broadly, and China specifically.

It is still unclear how the markets will treat healthcare companies. Managed care organizations initially saw a bump in anticipation of a hoped-for easing in pricing scrutiny.  Since the election, MCOs have been selling off (CVS Health’s Stock has fallen 24% in December with UnitedHealth Group and Cigna Group also experiencing substantial declines), with the expectation that they may be more heavily scrutinized if Robert F. Kennedy Jr. is confirmed to head the Department of Health and Human Services. The industry-level volatility may create opportunities for investors with the ability to tolerate short-term pricing aberrations if the policies are more moderate than feared.

Seriously, Not Literally

As the markets react and overreact to policy decisions, we are reminded that the new administration should be taken "seriously" but not "literally." Advisors and clients should keep in mind that administrations rarely achieve everything they set out to do. The challenge will be to react to a broader understanding of what the administration intends to focus on rather than fearing the most radical proposal or enacted policy.

Regardless of what policy shifts come to pass, the time-honored values of successful planning remain the same: prioritizing long-term strategies, tax efficiency and high-quality companies. It’s important for the advisor to encourage clients to stay disciplined, avoid being too hasty to react, and emphasize strategic consistency within a portfolio.

Having said that, it’s also important to communicate often with clients about shifts and expected changes within market cycles, as there are opportunities to be seized within any market environment.

Caleb Silsby is the Executive Vice President, Chief Portfolio Officer at Whittier Trust, overseeing a team that collaboratively manages portfolios for high-net-worth clients, foundations, and endowments. He is credentialed as a CFA Charterholder and CFP professional.

Featured in Barron's. For more information about private market investments, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Jan 6th

Getting Started in Private Market Investment

Investor interest in private markets has surged over the past decade. To understand why, it's essential to grasp what these investments entail and the factors driving their growth. Here, we offer insights into the complexities and benefits of private market investments and outline Whittier Trust's distinctive approach.

Demystifying Private Market Alternatives

Private market alternatives might sound exotic, but they're essentially the private counterpart to public markets. Publicly traded stocks represent ownership in public companies. Private equity is simply ownership of a private company. The key distinction between public and private markets is liquidity. Public shares can be easily bought and sold on exchanges, whereas private equity investments may be subject to transfer restrictions and may require specialized brokers to facilitate transactions.

The Appeal of Performance

So why is investor interest in private markets growing so rapidly? The answer lies in performance. A report by Hamilton Lane found that over the past 20 years, returns from private equity buyouts outperformed global equities on a public market equivalent basis. This trend extends to private credit, which has also delivered more income compared to the public leveraged loan market, particularly appealing during low-interest environments.

Expanded Opportunities and Diversification

Beyond performance, the expansion of investment opportunities is a significant driver of interest in private markets. The number of public companies in the U.S. has declined by 50% since 1996, while private equity firms now own more companies than those listed publicly. Globally, the number of private companies with revenues over $100 million is over eight times that of public companies. This shift provides a broader array of investment options and helps mitigate concentration risk in public markets, where the top 10 firms currently account for over 35% of the S&P 500’s value.

The Whittier Trust Approach

It’s important to note that private markets come with additional risks, costs, and complexities, notably illiquidity. At Whittier, we use private markets to complement our core internal strategies, enhancing returns, diversification, and cash yield. This hybrid approach combines top-tier internal investment management with best-in-class private market managers.

Quality and Alignment of Interests

Quality is a cornerstone of Whittier’s investment philosophy. We believe that quality in public markets, and private markets, and the managers we partner with, are key to compounding wealth. This focus on quality extends to the selection of private market opportunities and partners.

Crucially, Whittier's incentives are aligned with client interests. We are not compensated by private equity managers to raise capital, nor do we incentivize employees to direct client assets to private markets. This conflict-free approach ensures that decisions are made solely in the best interests of clients, avoiding the pitfalls of added fees, commissions, and feeder expenses that can erode returns and turn good investments into poor results.

Strategic Integration and Expertise

Whittier Trust integrates private market investments as part of a holistic, diversified portfolio strategy. We view private investments as an extension of public market opportunities. With companies staying private longer, substantial value creation occurs before potential public offerings. Investing in private entities like SpaceX, which remains private and valued at over $200 billion after 20 years, exemplifies the potential for significant returns.

Final Thoughts

Private market investments offer expanded opportunities and the potential for superior returns, but they come with added risks and complexities. Private investment should be considered when after-tax returns, risks, and correlation characteristics more than compensate for higher costs and lower liquidity.

With a focus on quality, a conflict-free approach, and a strategy that integrates private and public market opportunities, Whittier Trust positions itself as a trusted partner for ultra-high-net-worth investors navigating the private market landscape. Whether you are new to private markets or seeking to deepen investments, Whittier’s expertise and alignment with client interests ensure a thoughtful and strategic approach to wealth compounding.

Written by Eric Derrington, Senior Vice President and Senior Portfolio Manager at Whittier Trust. Eric is based out of the Pasadena Office.

Featured in Kiplinger. For more information about private market investments, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Dec 19th

Navigating a Challenging Landscape: Key Considerations for UHNWIs Amid Interest Rate Cuts

In September 2024 we saw a Fed interest rate cut of 0.5 percentage points and another rate cut of 0.25 in November. Now, as we start 2025, The Fed is considering additional rate cuts. For ultra-high-net-worth individuals (UHNWIs), shifts in interest rates carry significant implications for wealth management strategies. Lower interest rates—though more elevated than in prior cycles—can influence everything from investment decisions to long-term planning. To navigate this landscape effectively, Whittier Trust advises affluent families to check in with their advisors to assess risks, seize opportunities, and safeguard their legacies.

Here are five essential questions to guide those conversations:

1. How Should My Investment Strategy Adjust to Reflect Market Conditions?

Interest rate cuts tend to buoy stock valuations, often making equities a more attractive option than bonds in certain scenarios. However, the dynamics of today's market—where interest rates remain higher than historical lows—warrant a nuanced approach. UHNWIs should ask their advisors about the wisdom of rebalancing their portfolios to capitalize on sectors poised to benefit from economic growth spurred by rate cuts.

For example, technology and consumer discretionary sectors often thrive when borrowing becomes more affordable, stimulating corporate growth. Conversely, some traditionally defensive sectors may underperform. The goal is to ensure your portfolio is positioned to benefit from rate-driven shifts while maintaining the long-term diversification necessary to weather economic uncertainty.

2. What Role Should Bonds Play in My Portfolio Now?

While bond yields have been suppressed in recent years, even modest increases in yields can make fixed-income assets more attractive as part of a diversified portfolio. Families relying on predictable income streams should consider whether their bond allocations need adjustments to optimize for yield and risk.

Ask your advisor if now is the right time to reintroduce or increase exposure to investment-grade bonds, municipal bonds, or alternative fixed-income vehicles. The relationship between rising bond yields and overall portfolio performance should be carefully analyzed to avoid unintended risk.

3. Is My Portfolio Adequately Hedged Against Inflation?

Lower interest rates stemming from Fed rate cuts often coincide with muted inflation, which can diminish the urgency of inflation-hedging strategies. However, inflation trends are dynamic and UHNWIs must remain vigilant. Ask your advisor to review whether your current portfolio includes sufficient protection against potential inflationary pressures in the future.

Real assets, such as real estate and commodities, can serve as hedges while offering diversification benefits. Meanwhile, Treasury Inflation-Protected Securities (TIPS) may be less necessary in a low-inflation environment. An advisor's expertise can help you fine-tune the balance between inflation protection and growth-oriented investments.

4. Are There Opportunities for Alternative Investments in This Environment?

Lower interest rates often drive interest in alternative investments, which can offer uncorrelated returns and enhanced growth potential. Private equity, venture capital and real estate are often key areas of focus for UHNWIs seeking to diversify and capitalize on rate-driven opportunities.

A crucial question to ask your advisor is whether the timing aligns with your financial goals and risk tolerance. In a shifting rate environment, access to exclusive investment opportunities through private markets can complement traditional portfolios, particularly for families with multigenerational wealth aspirations, but it’s important to ensure this decision is right for you.

5. How Can We Leverage Lower Interest Rates for Long-Term Wealth Transfer?

An interest rate cut creates potential opportunities for intergenerational wealth planning. Lower rates can reduce the cost of intra-family loans, making it more affordable to transfer wealth in ways that minimize estate and gift tax exposure. Additionally, strategies like grantor-retained annuity trusts (GRATs) become particularly attractive in a lower-rate environment. 

Meet with your wealth management advisor to evaluate how the current rates align with your estate planning objectives. By employing rate-sensitive strategies effectively, families can amplify the impact of their wealth transfers while preserving their legacy.

Partnering for Strategic Decisions

Navigating this period of post-pandemic inflation, one currently defined by periodic Fed interest rate cuts requires strategic decision-making and close collaboration with your advisor. Every family’s financial situation is unique, and a tailored approach is essential.

The interplay between interest rate cuts, market trends, and long-term goals underscores the importance of regularly revisiting your financial and estate plans. These five questions provide a strong starting point for meaningful discussions with your advisor, helping you adapt to evolving market conditions while safeguarding your family’s future.

An experienced advisor not only understands the technical aspects of wealth management but also acknowledges the emotional considerations that come with stewarding significant assets. By focusing on both, UHNWIs can position themselves for success across generations, regardless of economic shifts. At Whittier Trust, we’re committed to helping you navigate these complexities with a customized, thoughtful approach that evolves alongside your goals.

For answers to these questions and more, start a conversation with a Whittier Trust advisor today by visiting our contact page. 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Oct 25th

Identifying the Key Traits of Market Disruptors

Typically, in portfolio asset allocation, the concept of diversification is deemed beneficial to avoid stock-specific risk.  There have been many academic studies supporting this concept.  Although diversification makes sense from a “risk-return” perspective, to have robust performance and beat benchmarks consistently, investors should find stocks that they are willing to hold in a sufficient portfolio weight that will consistently outperform benchmarks.  With the S&P 500 averaging 8-10% annual returns, finding stocks that provide upside over the index is not an easy task.

Nevertheless, the one way we have found to accomplish this objective is to take positions in stocks that are disruptors - disrupting their industries or even creating new ones and fulfilling customer needs better than the competition.  This means companies that are innovating in such a unique way over the longer term that the competition just cannot keep up.  These companies rapidly gain market share from incumbents or even establish new end markets where there is little competition.   

The modern-day example of such disruption is Nvidia. Most know the semiconductor industry was dominated by Intel for the majority of the late 20th century and into the 21st.  Intel focused on central processing units (CPUs) that were the “brains” of personal computers, notebooks and servers.  Intel relied upon Moore’s law, created by former Intel CEO Gordon Moore, which involved the doubling of computing power every two years. This worked well as the personal computer (PC) proliferated in global society and, later, as internet usage grew.  Intel dominated its end markets and had few viable rivals.

But as Moore’s law reached its peak, Nvidia has taken the crown of the world’s largest semiconductor company by making its graphics unit processors (GPUs) more functional to manage the demands of artificial intelligence (AI).  Nvidia’s semiconductors can work together in an array to create massive computing power and exceed the limits under Moore’s law.  In addition, Nvidia management has indicated a doubling of computing power essentially annually with each generation of AI-based GPUs.  

Such innovation has led to massive revenue growth with FYQ12025 (April) sales growth of over 262% and adjusted earnings per share growth of over 573%.  Nvidia has been a clear disruptor in the semiconductor industry and remains at the forefront of AI innovation likely for many years in the future. 

This is akin to Apple Inc.’s performance under former CEO Steve Jobs.  On June 29th, 2007, Apple introduced the iPhone which clearly took the smartphone concept to a new level.  Apple sales growth and stock price appreciation have been phenomenal from that date forward with an annualized revenue run rate just for iPhones of almost $200 billion (as of June 30, 2024) and the stock up 6000% (60x return) since the introduction.

So, what are some common denominators to successfully invest in disruptive companies?

We focus on the following:

  • A Visionary CEO 
  • High Growth or Nascent Industry That Will Be Very Large
  • Company’s Approach to Industry is Disruptive to Incumbents
  • Advantage(s) Will Last for Long-Term – Creating a Moat
  • Growing Free Cash Flow & Improving ROIC

1. Strong CEO Who is A Visionary

A visionary CEO is one of the most important things to look for when investing in the stock of any company, no matter the sector.  There have been many instances where a visionary CEO was replaced by one who was not so prescient or insightful.  These instances have typically led to the failure of the stock. We can point to many examples, with one of the most recent being Disney.  CEO Bob Iger led Disney from March 2005 and retired at the end of 2021.  Disney’s board chose Bob Chapek as Iger’s successor.  The company went from a well-run entertainment conglomerate to one that had lost its competitive advantages in many end markets.  Disney stock declined about 40% in less than a year under Chapek. Luckily, Iger returned in November 2022 with Chapek’s inauspicious dismissal.

2. High Growth Industry

A strong company in a weak industry is usually a poor investment.  Rather, the “secret sauce” is to own a “strong company in a strong industry”.  This typically indicates a market share gainer with a large total addressable market (TAM).  Nike’s rise to become the premier athletic shoe supplier was based on taking market share in an industry with an exceptionally large TAM. The same has been true for other disruptors like Nvidia, Meta, Eli Lilly and other stock success stories.

3. Disruption of Incumbents

On the introduction of the iPhone in June 2007, cellphone market leaders included Nokia, Motorola, Samsung, and LG.  As discussed above, the iPhone was a giant leap forward in terms of both communication and computing.  Apple’s growth under both CEO Steve Jobs and Tim Cook has been astounding, allowing Apple stock to surpass $3 Trillion in market capitalization.  The first iPhone disrupted the cellphone market and created the world’s largest company by market capitalization.  An investment of $100,000 at the introduction would be worth almost $5,800,000 today!  There are many other examples of such industry disruption from Netflix for consumer entertainment to Chipotle for burritos.

4. Advantage(s) Will Last for Long-Term – A Moat

Any investment that does not offer a long-term advantage is arguably a trade.  Trades are attractive to many investors but will not typically provide outsized gains, especially after short-term capital gains taxes are paid.  Companies that are disrupting need a large “moat” to make sure their competitive advantages remain intact over the long term to generate outsized stock returns.  This can be through patents and licensing (although enforcement internationally has been difficult), a superior customer interface or proprietary software (such as iOS for Apple or Cuda for Nvidia), or other means.  Nvidia’s annual product cycles which entail massive improvements in performance and efficiency for AI systems (as seen with the transition from the Hopper generation of GPUs to Blackwell late in 2024 and with Rubin planned in 2025) are the latest method demonstrated to maintain a long-term technological lead over competitors.

5. Growing free cash flow & Improving ROIC

Ultimately, companies that are disrupting their industries should show extraordinary improvement in their financial metrics i.e. they need to generate outsized returns for investors.  Some metrics to judge success are growth in free cash flows and return on invested capital (ROIC).  These metrics allow an investor to monitor company progress in an impartial fashion.  Improvement in both metrics over time should result from a successful industry disruption. Improvements in net margin also should be tracked.

Conclusion

Companies that are disrupting their industries have the possibility of adding outsized equity performance in a diversified equity portfolio.  There are many historical examples including Apple, Starbucks, Nvidia, Nike, Netflix and others whose CEOs and/or founders out-innovated and tactically outperformed peers to either create massive new markets or garner massive shifts in existing market share.  Undoubtedly, there will be new examples in the future.  Finding such companies early in their growth cycles is a key to future investment success.

To learn more about Whittier Trust's market insights, investment services and portfolio philosophies, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Oct 17th

Market Insights – Fourth Quarter 2024

How Heavy is the U.S. Debt Burden?

The last several months have seen a steady drumbeat of data to validate both declining inflation and a slowing economy. CPI inflation for June posted a significant milestone with its first negative monthly print since the depths of the pandemic in Q2 2020.

The remarkable deceleration of inflation in the last two years has allowed the Fed to shift focus within its dual mandate. With inflation on track towards the Fed’s 2% target, the Fed has now started an easing cycle to address and halt continued economic weakness.

Even as lower inflation and the onset of monetary easing now become tailwinds for the economy, a number of market headwinds still persist. These include: 1) stock valuations that are higher than normal, 2) escalating geopolitical risks, especially in the Middle East, and 3) mounting uncertainty around the outcome and policy implications of the U.S. elections.

One of the biggest concerns surrounding the elections is the potentially negative impact of both candidates’ campaign promises on an already high level of U.S. national debt. Neither candidate has come across as fiscally responsible; their fiscal profligacy is instead projected to increase government spending by an additional $5-7 trillion over the next 10 years.

The national debt is a topic of great interest and worry to many people. We focus exclusively on fiscal policy risks in this article.

We recognize that this is a highly charged and potentially contentious topic. We refrain from any ideological, philosophical, political or moral judgment on the topic; our views are focused only on the likely economic and market impact of the U.S. debt burden.

We interchangeably refer to the national debt as total public debt from hereon and set out to answer the following questions.

  • How has the U.S. total public debt grown and who are its main holders?
  • How vulnerable are U.S. interest rates to demands for a higher risk premium i.e. greater compensation for bearing risk?
  • Has the higher debt level contributed to higher economic growth and national wealth?
  • How onerous is the current debt burden and what milestones would further exacerbate fiscal risks?

Sizing the U.S. Debt Burden

The most eye-catching depiction of rising government debt is the nearly six-fold increase in its dollar value over the last 25 years. Total public debt has risen from just under $6 trillion at the turn of the century to almost $35 trillion by June of 2024.

Most of this debt was issued to stabilize the U.S. economy from two devastating shocks during this time – the Global Financial Crisis (GFC) in 2008-09 and the global pandemic in 2020. Since stability of economic growth is a key goal of fiscal policy, the most commonly used metric for the U.S. debt burden is the ratio of total public debt to Gross Domestic Product (GDP). Figure 1 illustrates how total public debt as a percent of GDP has grown over time.

Figure 1: Total Public Debt as a Percent of GDP 

Source: Federal Reserve Board of St. Louis, June 2024

The debt-to-GDP ratio has doubled from almost 60% prior to the GFC in 2008 to around 120% in 2024.

It is interesting to note the different trajectories of the debt-to-GDP ratio after the last two crises.

a. GDP growth after the GFC was anemic as it got dwarfed by an extensive deleveraging cycle.

Slow GDP growth post-GFC caused the debt-to-GDP ratio to spike up rapidly from 60% to 100%.

b. Unlike the GFC which was triggered by unsustainable fundamental excesses, the Covid recession was caused by a global lockdown stemming from health safety considerations. Growth rebounded quickly when economies reopened and was further bolstered by government spending.

Faster post-pandemic GDP growth has contributed to a slower increase in the debt-to-GDP ratio from 100% to 120%.

Most people are alarmed and worried about this rapid increase in the national debt. At first glance, their concerns appear to be well-founded. High and rising government debt could reduce private investment, lead to higher inflation and interest rates, reduce economic growth, weaken the currency, limit future policy flexibility, and create inter-generational inequities.

We analyze these risks by looking at who owns this debt and why, what might make U.S. government debt attractive even at these levels, and whether this level of debt can produce any economic benefits.

Contrary to most prevailing opinions, we believe the fiscal outlook is not nearly as dire. We see no meaningful risk to growth, inflation, interest rates or the dollar in the foreseeable future of 3 to 5 years.

We begin by understanding the composition of the national debt.

Who Owns the U.S. Debt and Why?

Mix of U.S. Debt Holders

Figure 2 shows the two main categories of the gross national debt: debt held by the public (i.e. debt owed to others) and debt held by federal trust funds and other government accounts (i.e. debt owed to itself).

Figure 2: Composition of Gross National Debt

Source: U.S. Department of Treasury, December 2023

Of the $34 trillion in national debt at the end of 2023, $7 trillion, or 21%, was intragovernmental debt which simply records a transfer from one part of the government to another. Intragovernmental debt has no net effect on the government’s overall finances.

In Figure 3, we take a closer look at the remaining 79%, or almost $27 trillion, of the gross national debt which is held by the public. This portion is generally regarded as the most meaningful measure of debt since it represents Treasury borrowings from outside lenders through financial markets. Debt held by the public was 96% of GDP at the end of 2023.

Figure 3: Composition of Debt Held by the Public

Source: U.S. Department of Treasury, December 2023

Almost 70%, or $19 trillion, of the debt held by the public is in the hands of domestic institutions. The remaining 30%, or $8 trillion, is held by foreign entities, split almost equally between foreign private investors and foreign governments.

We examine the motivations of these entities for holding the national debt now and in the future.

Many Reasons to (Still) Hold U.S. Government Debt

Figure 3 shows that the single largest holder of the U.S. national debt is the Federal Reserve Board. When policy rates reached their zero lower bound in 2020, the Fed lowered long-term interest rates by buying bonds. As a result, the Fed still holds more than $5 trillion of U.S. government bonds. It is safe to assume that the Fed is a reliable lender to the Treasury and is unlikely to trigger a sharp increase in interest rates through its own actions.

Mutual funds own more than $3 trillion of U.S. government bonds to achieve diversification in investment portfolios. U.S. government bonds are among the few investments that can protect portfolios during downturns. The safety and long “duration” of U.S. Treasury bonds typically enable them to appreciate when stocks decline during a selloff.

Corporate and public pension funds typically have long-term liabilities to meet the pension obligations of their retirees. As a safe long-duration asset class, U.S. Treasury bonds are a core building block for pension funds to hedge their long-duration liabilities.

Japan and China are the two largest foreign holders of U.S. government debt. Low domestic interest rates in Japan make U.S. bonds particularly appealing for Japanese investors. China runs a large current account surplus, primarily from its favorable trade imbalance of exporting more than importing. China is a natural buyer of safe-haven assets for its more than $3 trillion of foreign exchange reserves.

Unlike the U.S. consumer, foreign consumers tend to save more. This results in a glut of global savings that is simultaneously seeking safety, quality, income, and liquidity. There is no other bond market in the world that offers the size and safety of the U.S. bond market. Figure 4 illustrates the relative size of the world’s largest bond markets.

Figure 4: The World’s Top Bond Markets

Source: BIS, Visual Capitalist, Q3 2022

The U.S. bond market is valued at more than $50 trillion and represents nearly 40% of the global bond market. China’s bond market carries risks of fundamental weakness, currency depreciation and capital controls. The Japanese bond market offers unattractively low interest rates. The remaining bond markets are so small that they do not offer a viable alternative to U.S. bonds.

Now, we take a quick look at the empirical evidence on risks associated with high debt and deficit levels.

High debt and deficits are intuitively associated with high inflation and interest rates. It seems reasonable that greater government spending could spur demand and trigger inflation; it could also curtail private investments from the “crowding out” effect of higher interest rates. Any subsequent tightening to tame inflation would then further slow growth down.

It turns out that this storyline has indeed played out a number of times in high-inflation developing economies. However, it may surprise many of our readers to learn that this is not the norm in low-inflation advanced economies 1. It certainly hasn’t been the case in the U.S. for several reasons.

The U.S. central bank is highly regarded and enjoys strong global credibility. The Fed successfully kept long-term inflation expectations anchored even as inflation reached 9% in 2022. The big increase in total public debt to GDP from 60% to 100% in the aftermath of the GFC didn’t stoke inflation in the ensuing economic recovery.

The U.S. also has solid governance mechanisms to guard against excessive fiscal dominance; two political parties and two independent chambers of Congress provide institutional checks and balances. The U.S. dollar enjoys significant advantages from its status as the world’s reserve currency. The U.S. is home to many of the most innovative and profitable companies in the world, is blessed with abundant natural resources, and boasts a strong military presence.

We are mindful that high levels of borrowing carry inherent risks and that they cannot keep growing endlessly without consequences. However, at this time, we are hard-pressed to pinpoint a specific threshold at which U.S. government debt would become undesirable or untenable.

From a strictly economic perspective, we believe the current level of U.S. national debt is not particularly problematic.

i. Excluding intragovernmental debt and debt held by the Fed, the U.S. debt-to-GDP ratio falls from 120% to 77%.

ii. The remaining domestic and foreign investors have strong incentives to hold U.S. bonds for safety, liquidity, diversification and hedging needs; in any case, there is no viable alternative to the U.S. bond market.

We conclude with a quick look at how the recent increase in total public debt has coincided with economic or market gains.

National Debt and National Wealth

In the four years from 2019 to 2023, total public debt rose from $23.2 trillion to $34 trillion, while nominal GDP grew from $21.9 trillion to $28.3 trillion. The post-Covid annual growth rate of 6.5% in nominal GDP was a lot higher than the meager 4% annual growth from 2009 to 2019.

A number of factors were different in these two periods. A long cycle of deleveraging restrained growth in the post-GFC recovery. An equally powerful theme in this recovery is the significant, but still nascent, impact of technology and AI on the economy and markets. Over the last few years, pandemic-related health safety needs have spurred numerous technological innovations and inventions.

There is a school of thought that our current GDP measurement may not fully capture all the benefits of technological advancements. We will explore this theme in a different setting at a different time. But for now, this notion prompts us to examine the association of debt levels with other measures of well-being or monetary gains.

In this setting, we identify the U.S. national wealth as a useful measure of prosperity. National wealth aggregates the total nominal value of assets and liabilities across all sectors of the U.S. economy. These assets include real estate, corporate businesses and durable goods; liabilities include foreign claims on U.S. assets.

Figure 5 shows the rapid rise in both national wealth and national debt.

Figure 5: Growth of National Wealth and National Debt

Source: Federal Reserve Board of St. Louis, June 2024

The two biggest components of national wealth, by far, are real estate and domestic businesses. We have long argued that one of the key factors behind the resilience of the U.S. consumer is the wealth effect. Home prices and stock prices are at all-time highs and, as a result, so is household net worth. The top quintile of households by income, who account for more than half of all consumer spending, have particularly benefited from the wealth effect.

Several factors have contributed to the rise in national wealth. It is difficult to ascertain exactly what role the fiscal stimulus may have played in its recent rapid growth. However, we do believe that fiscal policy has contributed in some positive manner to the growth in national wealth.

We look at national debt as a percent of national wealth in Figure 6.

Figure 6: Steady Debt to Wealth Ratio in Last 15 Years

Source: Federal Reserve Board of St. Louis, June 2024

The dollar value of both the national debt and national wealth has nearly tripled from 2009 onwards. As a result of the synchronized growth rate in both metrics, total national debt has held steady between 22-25% of national wealth from 2009.

To the extent that the pandemic simultaneously unleashed both significant fiscal stimulus and highly profitable technological innovation, national debt and wealth have moved in tandem. By this yardstick, the U.S. national debt burden looks less onerous.

Summary

We recognize how intensely people feel about the national debt burden. We also understand that there are several intuitive reasons to worry about it. We pass no judgment to either condone or condemn it in this article; we simply examine its likely economic and market impact in the coming years.

We summarize the many reasons why investors hold U.S. government debt and will likely continue to do so on similar terms.

  • High credibility of monetary policies
  • Unparalleled size, safety, quality and depth of the U.S. bond market
  • U.S. dollar as the world’s reserve currency
  • Lack of viable alternatives for domestic and foreign investors
  • Diversification and hedging needs of long duration asset owners
  • Solid governance against fiscal dominance
  • Global glut of savings
  • Disinflation from technology
  • Vibrant economy and formidable military 

We do not expect the national debt burden to create meaningfully higher inflation, higher interest rates or a weaker dollar in the foreseeable future of 3 to 5 years.

We remain vigilant and alert, but we maintain our conviction that the U.S. economy continues to head steadily towards a new equilibrium. We do not anticipate any imminent major shocks in this new economic cycle and bull market.

1Footnote: “Fiscal Deficits and Inflation”, Luis Catao and Marco Terrones, International Monetary Fund

To learn more about our views on the market or to speak with an advisor about our services, visit our Contact Page.

Download PDF

Excluding intragovernmental debt and debt held by the Fed, the U.S. debt-to-GDP ratio falls from 120% to 77%.

 

The remaining investors have strong incentives to hold U.S. debt for safety, liquidity, diversification and hedging needs.

 

We do not expect the national debt burden to create meaningfully higher inflation, higher interest rates or a weaker dollar in the foreseeable future of 3 to 5 years.

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Sep 26th

Robert Levy Named Director of Investments at Whittier Trust

Whittier Trust, the oldest multi-family office headquartered on the West Coast, is proud to announce that Robert L. Levy has been elevated to the role of Director of Investments for Whittier Trust Company of Nevada, Inc., as a reflection of his continued dedication and contributions to the firm. In this new role, Robert helps oversee the company’s investment strategy, leads a highly skilled investment team and spearheads the identification and execution of key investment opportunities while guiding client investment policy objectives.

David Dahl, President & CEO of Whittier Trust, commented on Robert’s remarkable career, stating, “Robert has been with Whittier Trust for more than two decades and has consistently demonstrated exceptional investment, acumen and leadership. His track record in identifying profitable opportunities has been instrumental in driving the growth of our investment strategies. We are confident that under Robert’s leadership, our clients will continue to benefit from our firm’s robust investment approaches.”

Robert’s tenure at Whittier Trust began in December 2000, and his contributions have been critical in helping the firm and its clients navigate many complex and unprecedented market cycles. He has played a key role in growing both client portfolios and the firm itself.

As Director of Investments, Robert has a pivotal role in shaping Whittier Trust’s investment philosophy, creating customized strategies for clients, and overseeing the firm’s flagship large-cap equity strategy, known as Corporate America. He will also continue to serve on Whittier Trust’s committee that analyzes, selects, monitors, and advises on external investment managers, ensuring that clients have access to top-tier advisors and exceptional investment guidance.

Robert is an active member of the Nevada community, where he serves on the boards of Whittier Trust Company of Nevada, Big Brothers Big Sisters of Northern Nevada and the Renown Health Foundation. His commitment to giving back is also reflected in his role as Trustee of the Joshua L. Anderson Memorial Foundation and College Scholarship Fund.

For more information about Whittier Trust's investment strategies and portfolio management services, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Sep 4th

Nasdaq Weekly Guest Spotlight: Sandip Bhagat

Whittier Trust Chief Investment Officer, Sandip Bhagat, was recently featured in the Nasdaq Trade Talks Weekly Guest Spotlight. His professional insights and analysis of the current state of the U.S. Market were provided in an Interview format: 

Coming into this year, there was speculation of a potential recession. Why do you think the economy has been so resilient this year?

Fears of an imminent U.S. recession have lingered for several months now; at times, the recession was all but a foregone conclusion for many investors. These worries have valid historical precedent. In the past, a Fed funds rate of 5.4% after 11 rapid rate hikes would have been significantly restrictive in slowing the economy down.

And yet, the U.S. economy has proven to be surprisingly resilient so far. We believe several unusual factors are at play in this post-pandemic recovery. We have long held the view that the U.S. economy is now less rate-sensitive than ever before. After a long period of ultra-easy monetary policy, consumers and corporations alike have locked in low fixed rates well into the future. They are, therefore, more immune to rising rates than they were in the past.

The U.S. consumer has also been supported by a fairly solid jobs market. Despite the recent significant downward revisions in jobs data, monthly jobs growth has still averaged more than 220,000 in the last one year. The rise in the unemployment rate is still below the dreaded 1% threshold and the absolute level of unemployment is still low by historical standards. We note that employers have hoarded labor in the post-pandemic economy to prevent disruptions; we expect this trend to continue.

And finally, we trace the resilience of the U.S. consumer to two unexpected sources of support. Even though incomes and spending have started to deteriorate, the high-end consumer has been buoyed by a significant wealth effect and low debt burdens. The strength in the housing and stock markets has catapulted consumer wealth into its highest historical decile. The prolonged deleveraging that took place after the Global Financial Crisis has also left U.S. households with relatively low debt.

We may yet avoid a recession in the coming months from the following shifts in trends. The pandemic brought about a significant loss of income, which was effectively countered by fiscal policy support. The resulting tailwind of excess savings helped fight off the headwinds of high inflation and interest rates in the last two years. And now, as we deplete those excess savings, low inflation and interest rates are poised to inflect and become tailwinds on the path to a soft landing.

 

Over the course of this year, the markets have been trying to price in rate cuts — oscillating between a single cut and multiple cuts this year. As the Federal Reserve continues to assess economic data, can you speak to the importance of correctly timing the first rate cut? Has the Fed already missed its moment?

The Fed has often committed to a higher-for-longer stance in the last several months. As long as growth was resilient, the Fed had the option to remain patient and keep rates high. Indeed, their policy was largely focused on avoiding the mistakes of the late 1970s. If they were to ease too soon, a potential surge in economic activity might rekindle inflation and send it higher.

Recent economic data, however, is now beginning to reverse. The last couple of months have seen renewed evidence of cooling inflation, a weaker job market and a softer economy. As growth deteriorates and inflation heads lower, the risks of waiting too long now clearly outweigh the benefits of being patient. Several sectors of the economy remain vulnerable to the prolonged impact of higher interest rates. These include the highly leveraged private equity and commercial real estate businesses and the less regulated private credit markets. The balance of risks has now tilted towards growth and away from inflation; the time has come for the start of a new easing cycle.

Our view on future monetary policy has remained largely unchanged through the year even as the market expectations for rate cuts gyrated all over the place. We have felt all along that falling inflation and a slowing economy would allow the Fed to cut rates sooner and more frequently than it believed or the market expected. Along the way, we also formed a view that the new neutral rate for the new post-pandemic economy was 3.1%, which would allow the Fed to make eight to nine rate cuts.

As we did before, we expect three to four rate cuts in 2024, five to six in aggregate by March-April 2025 and all eight to nine by the beginning of 2026. We have believed that the Fed could have started in July; however, a September start doesn’t leave the Fed hopelessly behind with no chance to correct course. It is inconceivable to us that the Fed would hold off any longer. If they do so for any reason, it would be a major policy misstep.

 

What are the market trends you are watching?

Growth is clearly slowing and has yet to bottom out. We expect that it will subside to below-trend levels, but still remain positive. We recognize that it is always hard to achieve a soft landing in the economy. We are intensely focused on any sign of unusual weakness in the jobs market, for instance, unexpected layoffs, early increases in weekly unemployment claims or a sharp drop-off in monthly jobs growth.

Given fairly high valuations, we also recognize that the stock market has a low margin for error. We are confident that high earnings growth expectations will be achieved; however, we are vigilant for any canaries in the coal mine that spell trouble for corporate profits.

Geopolitics and the U.S. elections carry their own set of risks. We are on the lookout for any escalation of geopolitical tensions that threaten global growth or any signs of an election outcome that results in fiscal profligacy without a corresponding growth impetus.

 

Featured in the Nasdaq Trade Talks Weekly Newsletter. Insights and analysis provided by Sandip Bhagat, Chief Investment Officer of Whittier Trust.

The information contained within this feature reflects the data and trends at the time they were written and is not intended to be used as investment advice. For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Aug 28th

Don’t Wait For The Sunset

The November election will impact whether the 2017 Tax Cuts and Jobs Act expires as scheduled, but the time to act is now.

Ultra-high-net-worth individuals (UHNWIs) are anticipating the sunset of the 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire at the end of next year. The TCJA was enacted to address both individual and corporate taxes. The corporate tax cuts and changes were made “permanent,” while the individual tax changes were approved through a congressional process known as reconciliation, requiring an eight-year sunset.

The scheduled expiration of the TCJA's tax provisions would significantly influence tax and estate planning decisions for UHNWIs. The planned increase in the highest individual income tax rate, for example, would impact cash flow, tax strategies and many other aspects of a UHNWI's finances, while changes in exemptions would significantly affect estate planning.

We work with several families that view the upcoming tax uncertainty as a catalyst to create and implement important multigenerational plans. The unpredictability of future changes makes it essential to plan ahead and consider the legacy and values of the family that transcend one single generation. This is a critical time to make important decisions that will last for decades and compound over time.

Overview of the 2017 TCJA

The 2017 TCJA brought significant changes to the tax landscape, reducing income tax rates for individuals and corporations. The top income tax rate was lowered from 39.6% to 37%. The lifetime unified estate and gift tax exemption increased to $13.61 million (as of 2024), meaning a married couple could have an exemption of up to $27.22 million.

The TCJA significantly reshaped the U.S. tax landscape for pass-through entities as well. It accelerated depreciation for business equipment, modified the Alternative Minimum Tax and introduced a deduction for pass-through entities.

A cornerstone of the TCJA was the Qualified Business Income (QBI) deduction, offering a 20% deduction on business income from pass-through entities. This provision aimed to level the playing field between C corporations and pass-through entities. Prior to the TCJA, C corporations faced a higher combined tax rate due to corporate and dividend taxes, making pass-through entities like LLCs more attractive for small business owners.

The TCJA’s corporate tax rate reduction made C corporations more competitive. However, the QBI deduction often tipped the scales in favor of pass-through entities, resulting in lower effective tax rates. While the TCJA narrowed the tax gap between C corporations and pass-through entities, it did not entirely eliminate it. Factors such as business size, industry, and individual circumstances continue to influence the optimal entity choice. Potential individual tax rate changes may cause small business owners to reconsider their corporate structure once again.

What's Next?

While the corporate tax rate of 21% will continue beyond the expiration date for the personal tax policy, the highest individual income tax rate will revert back to 39.6% after 2025 — the “Great Tax Sunset.

The TCJA's roughly doubled unified estate and gift tax exemption amount will return to the pre-TCJA level as of Jan. 1, 2026, which, indexed for inflation, is expected to be approximately $7 million. Post-TCJA, a married couple's lifetime exemption will drop to around $14 million, with the estate amount over the exemption subject to a 40% federal estate tax. Starting in 2026, the $10,000 itemized deduction cap for state and local taxes (SALT) will also expire.

The Reality of the Situation

If you're an UHNWI, you may be asking what the likelihood is of the government actually sunsetting the TCJA, and whether the November election will have any effect on that decision. We don't and won't know those answers for certain for a number of months. What we do know is that The University of Pennsylvania Budget Model projects the budgetary impact of extending the TCJA policy to be $4 trillion over the next decade — presenting a challenge for any divided government. That said, both political parties want to extend some of the policies, including the higher standard deduction and tax breaks for those making less than $400,000 per year.

While the election outcome will materially impact the probability of the tax law extension, those who would act in the event of a tax law change should prepare well ahead of time. Don't wait for the election outcome to start thinking seriously about important family and legacy decisions.

How UHNW Families Should Prepare

UHNW families will require more proactive and forward-thinking advice from their tax advisors. Keeping abreast of legislative changes and planning ahead will be critical to minimize tax implications and build flexibility into financial and business plans. Developing long-term plans that account for the possibility of further changes in tax laws beyond 2025 and emphasizing sustainability and resilience in tax strategies will also help weather future legislative shifts.

Considering a transition between different business structures, restructuring ownership and management of family businesses, and exploring options like trusts, charitable donations and lifetime gifting to reduce taxable estates are all tools on the table. Every family requires a uniquely tailored strategy.

 

Written by Caleb Silsby, Executive Vice President of Whittier Trust and the Chief Portfolio Manager at Whittier Trust since 2006. Caleb is based out of the Newport Beach office and oversees the investment team for multiple Whittier Trust offices.

Featured in the Family Business Magazine. For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Aug 26th

Transparency in Family Financial Matters

Choose the right time and tone for topics such as money and succession issues in family-run companies.

The last thing you need in your family business is a disruption caused by miscommunication over crucial decisions such as promotions, the succession plan, or division of ownership. But in the absence of deliberate, scheduled discussions, people tend to make assumptions, and resentments can build. One of the best ways to avoid surprise issues is by planning regular family meetings so that everyone will know there is a time and place when important matters are disclosed, discussed, and settled.

How Family Retreats Simplify Communication

At Whittier Trust, we’ve helped orchestrate and facilitate hundreds of such family business meetings. Many of our clients hold annual or biannual family retreats that involve several generations, and we encourage this methodical, structured approach to keeping everyone informed. 

One client recently planned a particularly tough retreat after the family patriarch and company founder had passed away. In addition to having their Whittier Trust advisors there to moderate, they brought in an attorney and a counselor to help everyone understand the changes in both business and personal matters after the loss of the head of their family. 

Although there were multiple generations and more than 30 family members present, discussion at the retreat was wholly transparent. In the most loving way, family leaders conveyed how the business would go forward and shared their vision for the family’s legacy. They emphasized how they were reinvesting profits and building reserves for inevitable downturns, like the challenges the company had faced during the pandemic. They made it clear that the goal was to preserve the family’s legacy and assets for future generations.  

They also made sure that the third and fourth generations understood they had access to education to better their lives through a protected education fund. An education fund was a gift from the patriarch and matriarch, structured so that funds would be replenished in perpetuity, promising all family members the tools to better themselves through unlimited access to education and training.

The retreat concluded with a discussion of their personal philanthropic legacy. Each family member would have input on charitable causes to support, and they reviewed the process for collaborative decision-making. The final takeaway was the reassurance that family leaders were working hard to ensure a continual transfer of wealth for future generations. As the retreat drew to a close, moderators circled back to be sure everyone understood the key points and that all issues were resolved.

Anticipating Communication Challenges

Sometimes the hardest work of a retreat is done on the front end before even setting a date. If significant tension exists between any family members, you run the risk that your time together will be consumed by grievances; or worse, that someone will refuse to attend or be a last-minute no-show. This type of family discord is not uncommon and can be managed with the help of a neutral, third-party facilitator who will ensure that every concern is brought to the table. 

Working with the facilitator, the Whittier Trust team of advisors can organize individual interviews for each family member before specific retreat planning has even begun. This is everyone’s chance to make sure their voice is heard and that every complaint or worry, no matter how small, is taken seriously. The facilitator then works with the Whittier team to set a strategy for family discussion at the retreat with the goals of transparency, inclusiveness, and empathy. 

Although heads of families are sometimes hesitant to bring in an outside party, they inevitably realize that relationships are unlikely to improve without specialized help. After all, if the family hasn’t achieved effective communication while the matriarch and patriarch are alive, how much worse might it become when that leadership is gone? To safeguard their own legacy, they must allow for a new approach, knowing it's their best chance at more trusting communications in the future.

The Five Rs of Family Retreats

If you’re looking to organize your own family business meeting, you can use this “Five R” structure as a starting point:

RETREAT

Schedule at least two days away from home and work, rather than simply holding a meeting at the office, or trying to combine a meeting with a family vacation. A retreat allows members to arrive mentally and emotionally prepared to engage in productive conversations, knowing they’re coming to a focused environment in a space with few distractions.

RESOURCES

Communicate the goals of the retreat from the outset and bring all the reinforcements you need, including documentation and professional assistance. Our Whittier Trust team not only helps facilitate family meetings, but also coordinates with lawyers, accountants, moderators, or anyone else needed. The retreat is another chance to reinforce family values, work ethic, and healthy attitudes about wealth, so it’s essential to factor in individual personalities and each member’s familiarity with the status of the business and your wealth. 

RESPECT

Although you don’t want a casual conversation, you also don’t want to be too formal. Discuss the importance of listening and learning from other family members’ perspectives at your initial gathering and approach all conversations with trust and empathy. Be inclusive and bring in spouses and younger generations at appropriate times, giving them specific ways to be involved, such as philanthropy or education discussions. 

RESOLVE

Be prepared to pronounce final decisions for the present, while staying committed to further discussion in the future. If a family member is suggesting an alternate direction for some aspect of the business or their own life choices, hear them out, give a specific and respectful response, and if necessary, propose a later date to continue talking after everyone has had time to consider all options.

REPETITION 

Plan on getting together every year or at least every two years. Circumstances change and the company may have ups and downs, but communication should be a constant. Having a date on the schedule lets everyone know that you are invested in consistent, transparent discourse and that even if day-to-day operations are too busy for meetings, they will always have that chance to ask questions and present ideas at the annual retreat.

How Whittier Trust Can Help

As a multi-family office for more than 35 years, Whittier Trust is an expert in guiding families through multiple generations—protecting and enriching the family legacy while encouraging stewardship among newer members. We bring your investments, real estate, philanthropy, administrative services, trust services, and more under one roof, letting you maintain control, while your personalized, trusted team of advisors helps ensure the strength and success of your portfolio and your family. For more information about Whittier Trust’s services, visit www.whittiertrust.com.

 

Featured in the Los Vegas Review-Journal. For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.

Aug 19th

Maximizing Your Legacy: A Look At Minimizing Estate Tax Liabilities

The specter of estate taxes can loom large for ultra-high-net-worth individuals. For those with an estate in excess of $13.61 million (or couples with a combined estate in excess of $27.22 million) in 2024, this tax can significantly reduce the amount of wealth passed on to heirs, making it crucial for families to take proactive steps in their estate planning. Understanding the complexities of the estate tax, including the current exemption limits and the 2025 sunsetting of those estate tax exemptions, is essential for anyone looking to preserve their wealth.

To navigate these challenges, individuals and families facing this situation often turn to sophisticated estate planning tactics. These can include gifting vehicles, the use of trusts, charitable donations, and other techniques designed to minimize the taxable value of an estate. Here at Whittier Trust, we tailor teams made up of internal and external professionals to employ the right strategies that fit your specific needs. It's never too early to start looking ahead to the inevitable transition of your estate. Here are insights into some of the tools and tactics our clients use to preserve their legacies.

Harnessing the Power of Trusts

Trusts are the bread and butter of effective estate planning, offering a versatile tool for safeguarding assets and ensuring a smooth wealth transfer across generations. While our trust services advisors consider all possible trust options for a client, here are a few examples of the structures that our clients often consider: 

Grantor Retained Annuity Trusts (GRATs)

A GRAT is an irrevocable trust that allows the transfer of asset appreciation to beneficiaries free of gift and estate taxes. The grantor retains the right to receive annuity payments during the trust term, and only the appreciation of the trust assets is transferred to the beneficiaries. This makes GRATs particularly useful for those who have exceeded their lifetime gift tax exemption, as it can help reduce estate tax liabilities by removing the appreciation of assets from the estate. GRATs are most effective when there is an asset (or assets) that are likely to grow in value.

Irrevocable Life Insurance Trusts (ILITs)

ILITs are trusts that own a life insurance policy, either purchased by the trust or gifted to it by the grantor. Ordinarily, the proceeds of life insurance, if directly owned by the insured, are included in the insured’s estate for estate tax purposes. By having the ILIT own the insurance policy, the proceeds are moved out of the insured’s estate. The life insurance proceeds may replace assets inside the estate that will be used for estate tax payments. The trust can be structured to last for generations, particularly if the trust is sited in a state, like Nevada, where trusts can last for hundreds of years.

Qualified Personal Residence Trust (QPRT)

A QPRT is a so-called “split-interest” trust in which the parents contribute their home into the trust and are the initial beneficiaries for a set period of years. After this period, the heirs become the beneficiaries. This type of trust allows parents to significantly reduce the transfer value of their residence, as only the “remainder” interest is considered a gift for transfer purposes. The parents may continue to live in the home, paying rent to the trust which can then be distributed to the heirs as distributions of trust income. 

By establishing a trust, our clients can provide for the management and protection of their assets during their lifetime, dictating specific terms for distributions and working towards reducing eventual estate taxes.

Maximizing Gift and Estate Tax Exemptions

Perhaps even more critical to estate planning is fully utilizing available gift and estate tax exemptions to reduce your taxable estate and preserve wealth for beneficiaries. This proactive approach minimizes tax burdens and allows for effective asset distribution according to personal wishes. Staying informed on estate tax exemption amounts is also essential. By leveraging lifetime and annual exemptions, ultra-high-net-worth individuals can transfer significant assets out of their taxable estates. The annual gift tax exclusion has increased to $18,000 per recipient ($36,000 if coming from married couples). The current lifetime estate tax exemption is at $13.6 million for individuals and $27 million for married couples. 

For more detailed information on the current estate tax provisions, check out Whittier Trust's Federal Tax Updates.

Leveraging Charitable Giving

Another cornerstone of Whittier Trust's approach is maximizing the benefits of charitable giving. Charitable contributions can serve a dual purpose: fulfilling philanthropic goals while also providing significant tax advantages.

Qualified Charitable Distributions (QCDs)

Those 72 or older must annually withdraw from their IRAs. If this income isn't needed,  individuals required to take these Required Minimum Distributions (RMDs) from their retirement accounts can donate it directly to charity through QCDs. Taxpayers can contribute up to $100,000, reducing their income tax burden as these distributions are typically treated as regular income.

Donor-Advised Funds (DAFs)

DAFs are charitable accounts within a pre-existing public charity and provide a flexible vehicle for charitable giving. Contributions to a DAF receive an immediate tax deduction, while the donor may advise over how and when the funds are distributed to charities. This can offer estate tax benefits by removing assets from the taxable estate. DAFs also allow for strategic philanthropic planning and the potential growth of donated assets before distribution.

Charitable Trusts

There are two different types of charitable trusts that are used as strategies for those wanting to benefit a charity or charities while still having the family enjoy the benefits of the assets. 

Charitable Lead Trusts (CLTs) are irrevocable trusts that provide for an amount to go to charity (or charities) during an initial term of years. After the charitable term is over, whatever is left in the trust goes to family members, either outright or in further trust for multiple generations. Because there is a charitable beneficiary upfront, the amount of the taxable gift made to the family is reduced, leveraging the donor’s available gift and estate tax exemption.

Charitable Remainder Trusts (CRTs) are the opposite. The donor (or donors) receive a stream of income, often for life, and anything left in the trust at the end goes to charity. CRTs work a little like an IRA or an annuity in that the income paid to the donor is generally taxable but the income (capital gains) inside the trust remains tax-deferred. There is an additional benefit to a CRT in that the donor receives a charitable income tax deduction for the actuarial amount passing to charity.   

The Importance of Personalized Guidance

While these strategies offer a glimpse into Whittier Trust's approach to estate tax mitigation, it's crucial to recognize that each estate is unique. What works for one individual may not be optimal for another. Whittier Trust offers a holistic approach, considering multiple factors like financial goals, desired legacy, family dynamics, tax sensitivity, and more to develop tailored strategies that meet clients' specific needs. Our professionals work directly with clients and their attorneys and accountants to help each individual and family achieve their goals.

 

To learn more about how working with experienced professionals at Whittier Trust can help you gain confidence in your estate plans and take steps to protect your wealth for future generations, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
An image of a silver and gold ring intertwined together.
empty image