Post Topic: Investments

Nov 15th

3 Steps for a Generational Transition of the Family Business

As the oldest Multifamily Office headquartered in the West, we bring decades of experience helping families transition their businesses to the next generation. Over the years, we’ve identified several commonalities among families that have successfully navigated a family business transition. The following three concepts we believe are essential:

1. Create a family office to organize your family outside of the business.

Generational transitions in a family business can affect morale, liquidity, and security within the family. A family office can be particularly effective in identifying and addressing these issues, especially when family members share interests in complex assets, such as real estate or business stock.
A family office also plays a critical role in creating privacy, community, shared purpose, and a safe meeting space for all family members. Designed around your family’s unique needs and objectives, your family office can provide education about your family’s financial situation, estate planning objectives, and family history. It can help you articulate values, roles, and responsibilities for the business and the family.

Some families set out to create their own single-family office by hiring attorneys, accountants, administrators, trust officers, real estate professionals, and philanthropic advisors. They will also lease out office space to house these professionals and host family meetings. Our clients find significant value in having efficient access to our many resources, benefiting from economies of scale. With over 550 client families with distinct needs and unique family office structures, we are able to deploy the lessons learned and shared knowledge to help families establish their own platform and make critical adjustments as the business and family evolve.

2. Establish a strong foundation.

For any family to work together and make decisions collectively, it is paramount that a clearly defined vision, mission, and purpose is articulated, integrating their core values and long-term objectives. There should be a mission statement for the family office incorporating each of these elements that is different from the mission statement for the family business. The ability to effectively communicate and resolve conflict is crucial to longevity and work may need to be done to strengthen this foundation.

3. Design a structure that allows the flexibility to adapt, evolve, grow, and protect the family.

Once you have formed a dynamic family office and created a strong foundation, your family is ready to construct an entity structure that allows for ownership and control to transition smoothly ensuring continued success in a tax efficient manner. If there is one constant we can count on, it is that tax laws will always change. The family office will help keep your family at the forefront of planning ahead for these changes. The entity structure should either benefit from being grandfathered into current laws or have the flexibility to adapt to unforeseen future tax law changes. We’ve seen the struggle created when an owner dies, and the family hasn’t planned for the succession or the estate tax liability. There are many options available today that will reduce estate and other tax burdens and prepare the family and the business for the emotional, financial, and related burdens associated with generational transitions.

Having a skilled advisory team that knows your family and understands big picture objectives can make all the difference.

 

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Nov 9th

Art As An Investment

Works of art can have significant value, both personally and as an asset

Fine art may not be one of the first categories that comes to mind when you consider diversifying your portfolio. But paintings, sculpture and other works of art can be a substantial asset in an estate while also bringing beauty and joy into your life.

Make a statement while making an investment

“Quality art is a dual investment,” says Elaine Adams, director of American Legacy Fine Arts who consults with Whittier Trust clients. “It has personal value because it gives you pleasure and because you’ll constantly be discovering something new in it. And if you’ve done your research—and particularly if you have something rare—the piece will also increase in value over time as an investment.”

But how do you shop wisely if you have no formal art education? “Approach it as an adventure,” Adams suggests. “Sometimes you don’t even know what your own interests are; you just see it and it hits you. Gallerists and museum staff love to educate and answer questions, so don’t be intimidated. The first piece you buy may not end up being among the most important, but it starts your collection, and one thing will lead to another. The detective work is the fun part, learning about individual artists while you learn the language. Take your time with it, and soon you’ll become an expert.”

Here are some of the initial steps that Adams and other art consultants recommend as you begin investing in fine art:

  • Read about different art styles, periods and movements. Go to galleries, exhibitions, museums and art auctions to understand the market. Get involved with local fine arts organizations. Learn about factors that can affect the value of art, such as historical significance, cultural and market trends, and the reputations of different artists. 
  • Set a realistic budget and remember to account for potential costs such as shipping, framing, lighting, installation, insurance and climate-controlled storage if needed. Art investment is typically a long-term commitment, so plan to keep your works for many years. 
  • Once you discover an artist whose work interests you, research their background, read about their inspirations and consider factors such as where their work has been exhibited and at what stage in their career each piece was created.
  • If you like what you learn about the artist, take the next step and ensure that their artwork is authentic and not an imitation of other works or simply an attempt to capitalize on a trend. Verify the piece's legitimacy through reputable authorities. 
  • Consider working with a trusted gallerist or hiring a qualified art consultant who can help you navigate the market and also help with aesthetic decisions, such as framing and placement in your home.
  • Diversify your collection, just as you would with stocks and bonds, by investing in different artists, styles and mediums. Consider both established artists and emerging new talent. There’s less risk with artists who have a record of strong auction or gallery sales and whose work has a proven appreciation in value. But you might see a bigger payoff in the long run, and perhaps have more fun, taking your chances on lesser-known works.
  • Prioritize quality and what speaks to your soul while keeping an eye on the development of artists’ careers and their evolving styles. Educate yourself about the art markets in your area of interest by following auctions, joining art investment forums and subscribing to respected art publications.

Make It Personal

You’re likely to find that many of the professional skills and investment acumen you already have will serve you well in navigating the art world. But be sure to balance market considerations with your personal goals: Do you want to become a collector of art from a certain region, specific era or of a particular style? Or would you prefer a more eclectic collection, buying items that catch your eye at different times or that fit into ideal spaces in your home? Are you looking for soothing pieces that invite contemplation or bold pieces that energize you, or both? 

Discussing and shopping for art with a loved one can become a lifelong passion, and each piece will reflect your interests over time. “Collecting as a couple opens a door to learning more about each other and yourselves,” says Adams. “Each year you’ll notice something new in the art because you’ve changed and you’re seeing yourself differently.” 

From a long-term perspective, your collection and the stories of how you discovered and selected each piece can be passed on to family members who will cherish the works that remind them of you and your home. 

So enjoy the journey, the stories you’ll gain along the way, and the lasting satisfaction of discovering and owning pieces that speak to you.

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

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Nov 2nd

The Employee Experience at Whittier Trust

A Journey from Internship to Full-Time Excellence

At Whittier Trust, our clients are the core of all we do. We're dedicated to delivering a tailored wealth management experience that prioritizes our clients' families, estates, and legacies. To achieve this, we assemble exceptional teams around our clients, comprising top-tier professionals and talent cultivated through our robust internship program. Many of our interns become full-time employees, ensuring our team's expertise is deeply rooted in our values. For these individuals, working at Whittier Trust isn't just a job; it's a dynamic journey of learning, mentorship, and growth. We spoke with seven former interns, now full-time team members, to explore the Whittier Trust experience from their perspective.

The Internship Experience

"I think what really stood out to me throughout my first internship with Whittier was just the willingness for each employee to actually take the time and meet with you,” says Taylor Hughes, a former intern and now Officer and Client Advisor at Whittier Trust. “Not only did I get one-on-one time with top-level people, I was included in a lot of conversations and given projects that were actually interesting and not just busy work.”

Matthew Mackel, a former intern, now Investment Analyst with Whittier Trust adds, "I was really amazed by the people and the culture and really the growth mindset of the culture. You can go and talk to anybody, even someone who is at the highest level of the company, and often they'd come and talk to me first.”

These personal connections don’t stop once interns leave Whittier Trust as William Dodds, a former intern and now Client Advisor, notes, "My mentors really cared about me as a person and about my development... it wasn't a transactional relationship. It wasn't, 'Your internship is done, you're back to college, and hopefully you learned something.'”

Katie Muzzin, a former intern turned Officer and Investment Analyst, further highlights the emphasis on mentorship and personal development at Whittier Trust. "Everyone at the firm, especially the investment team, has taken the time to not only teach me and answer my questions, but they've also tailored my projects to areas where I was most interested in and wanted to develop my skills."

However, an internship at Whittier Trust isn't just about technical skills. Derek Galvan discovered the importance of EQ (emotional intelligence) during his internship. He explains that "what really makes a difference in business development and client relationships is being personable and learning that side of the business… as we value relationships with clients at the level we do here, it’s probably the most necessary skill."

Transitioning to Full-Time Employees

Danny Schenker, a Vice President and Client Advisor in the Reno Office, cites these client relationships as a major reason why he returned to Whittier Trust. “No two days are the same. We're a family office and with the family office, we offer our clients a lot of concierge services.”

Katie Muzzin points out that the internship experience at Whittier Trust showcased that the firm doesn't just overdeliver, but genuinely cares about its clients. Matthew Mackel concurs, “We have really close connections with our clients. You know, we're in their life. We're not just sending out a report saying ‘Here's how you're doing it for this year. See you next year.’ We learn how to approach things holistically and that necessitates a strong relationship.”

Muzzin expands on the firm's client-centric philosophy, noting that, "We measure success across generations rather than in years." This long-term, client-focused approach guides employees at Whittier Trust, ensuring that they continue to prioritize their clients over anything else.

Danny Schenker also notes the satisfaction he feels from solving unorthodox problems for his clients. "I feel like at Whittier, I'm challenged to come up with unique solutions to complex situations, and with each challenge that I work on and get to solve, I feel like I get to add another tool to my toolbox."

The journey from intern to full-time employee at Whittier Trust is marked by continuous learning and personal development. The trust that interns receive during their internship carries over as they step into more significant roles. Katie Muzzin highlights that the transition comes with ongoing support: "Whittier and my team have continued to support me in furthering my education and ensuring that I have the time and resources necessary to succeed."

Katie Muzzin also valued the trust she received immediately from her team: "They have always treated me as an equal part of the team since day one and have shown that they value my opinion throughout my time here." After starting as a full-time member at Whittier Trust, Katie was quickly asked to take on key roles in important projects, such as the due diligence of private asset managers and managing alternative asset funds.

Matthew Mackell adds, "It's where the culture of the firm comes from, everyone wanting to promote each other and help each other.”

This culture extends beyond client work. "Whittier is also really supportive of the nonprofit community which is something that I hold close to my heart. I'm on the Young Professionals Committee of Big Brothers, Big Sisters in Northern Nevada and also serve as the President of the Planned Giving Round Table of Northern Nevada,” says Danny Schenker. He notes that not only does his office give employees the full support they need to pursue philanthropic work important to them, but also organizes opportunities for all employees to volunteer.

What advice would you give to interns now?

Whittier Trust interns come from diverse backgrounds, but they all share a common trait: curiosity and passion. As Derek Galvan highlights, "A lot of people have those technical skills. But coming in, you really have to accept that you're not going to know a lot and you're going to have to ask a lot of questions, a lot of the right questions."

Reflecting back to his first few months at Whittier Trust, William Dodds notes, "Coming in with an open mind and accepting that you're not going to know everything and just learning from the people with experience... That's really what helped me grow within this company."

"I think the thing that could be the most helpful is just stay curious,” agrees Taylor Hughes. “Make sure that you continue to ask questions and demonstrate that you care deeply about the work that you're doing.”

William Dodds adds, "Asking ‘why’, is something that I learned over the course of my internship... all of those people that ended up in senior roles have spent their career asking ‘why’."

Matthew Mackel says, "One of the interesting things about the people here is that there's no ego. And, so I'd say take full advantage, and talk with your superiors and learn as much as you can and show a passion. I think one of the things about Whittier Trust employees is that they're passionate, and they care about their work. So I think if you're someone who is looking to go  full time, that's kind of how you want to approach work."

At Whittier Trust, we understand that the well-being of our clients’ estates is only as strong as the team behind it. Whittier Trust's internship program provides an exceptional foundation for young professionals to develop their skills and gain insights into wealth management. As evidenced by the number of interns who are now full-time employees at Whittier Trust, they carry with them a wealth of experience, mentorship, and a profound commitment to client satisfaction. The journey from internship to full-time employment at Whittier Trust is not only a testament to the firm's dedication to personal development but also a demonstration of the potential for individual growth within a thriving company.

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

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Oct 11th

It’s a Great Time to Be a Liquidity Provider

If you have cash on hand to invest, now is the time to capitalize

On the surface, it might look like a less-than-ideal time to invest. Equity markets have been on the rise and no one—especially savvy investors—wants to overpay for an investment. Even though more traditional assets may seem expensive, there is cause for optimism, if you know where to look. “There are still plenty of opportunities in private markets, due to the fact that some investors are liquidity constrained and need a cash infusion,” says Jay F. Karpen, Vice President and Portfolio Manager at Whittier Trust. Here are three ways to capitalize and navigate these types of investments. 

Secondaries: Providing Liquidity in Private Markets

Very simply, secondaries are instances where you purchase someone else’s interest in a private equity or venture fund, often at a discount. The current environment is ripe for these opportunities because, over the past few years, investors over-invested and over-committed into private equity and venture capital, and now they need liquidity. “This is creating a phenomenal opportunity for buying secondary interests and resulting in large discounts in pricing,” says Karpen. He explains that discounts with high quality private equity funds can be 10 to 15% and second-tier funds could be available at 15 to 25% discounts. An even bigger opportunity? Some secondaries in venture capital can be available for discounts as high as 50%. “It’s a very attractive market that exists because in 2021 some people and institutions over-invested in private equity and venture capital with the expectation that they would see distributions in line with historical patterns,” he explains. Instead, fund distributions have fallen precipitously due to the tepid IPO market and a decline in mergers and acquisitions. Such situations create opportunities for investors with cash on hand. 

There’s no widely publicized market for these kinds of investments, so it pays to have a trusted family office or client advisor who has access to high quality managers who specialize in secondary investments. Another advantage? “A high-quality multifamily office is often able to access these managers at lower minimums that otherwise wouldn't be possible if you tried to go direct,” Karpen says. 

Capital Solution: Providing Liquidity to Companies in Need of Capital

“There are a lot of good companies that are finding themselves with bad balance sheets simply because they need to refinance or they have floating rate debt and now, with spiking interest rates, their debt is expensive,” says Karpen. While this situation is less-than-ideal if you’re a business owner, it can be a terrific opportunity if you’re a would-be liquidity provider looking to make an investment. 

Another factor complicating the landscape for businesses is that, following the collapse of Silicon Valley Bank and First Republic and increasingly stringent lending standards, some banks have pulled back from lending, creating a tremendous opportunity for private credit managers. A year ago, a company might have been able to borrow at 7% and now they might be looking at over 12%. There is a huge opportunity for private lenders to fill that void and be compensated with higher yield, lower leverage and better covenants.

Real Estate: Providing Liquidity to Distressed Sellers

In recent years, some investors purchased real estate with floating rate debt and, with the recent interest rate hikes, they are now getting squeezed. This presents opportunities to buy assets from distressed sellers in the real estate market, often at deep discounts and sometimes with guaranteed tenant lease escalators. “We’re already seeing some opportunities in the triple net lease space that are very attractive,” Karpen says. For Whittier Trust clients, there are generally two ways large-scale real estate deals can happen. The firm might do direct real estate deals and then syndicate them to clients. Alternatively, they may choose to partner with a manager who is constructing a diversified portfolio of real estate. The firm looks at each potential opportunity individually, evaluating the advantages, tax implications and more to target the best investment possible. 

Don’t Go It Alone: Find The Right Advisor

Being a liquidity provider in less traditional investments takes insight, research and due diligence, which is why having a partner like Whittier Trust makes sense for high-net-worth individuals and families. “We have clients who are anxious about putting money into equity markets because they see valuations at elevated levels and there’s some market uncertainty,” Karpen says. “By being a liquidity provider, with the right guidance and access, our clients have the opportunity to buy high quality assets at discounted prices.”

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

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Sep 25th

Finding the Right Trustee Is Like Summer Wine Tasting

It Helps If You Know What You’re Looking For

If you love a good wine, then you know the feeling of finding the exact varietal or blend you want—the satisfaction of identifying traits you prefer, then uncorking one that hits just the right notes. Imagine that first pour at your favorite Napa Valley destination or the delivery of a wine flight at your favorite lounge . . . do you have a mental list of how you’ll approach this tasting? Aroma, body, color, clarity, texture—every factor must be weighed before you can decide which wines are worthy.

It's no different for any decision you make with complex criteria—though wine is certainly more fun to think about than, say, the list you might have when buying a new washer and dryer. And the complexity of wine is a perfect analogy for some of life’s tougher decisions because it’s not merely a checklist of elements you’re seeking, but whether those elements come together harmoniously for the desired end result. 

Choosing the right trustee has unexpected similarities to wine tasting 

Like that perfect wine selection, one of the most potentially complex decisions in life is choosing a trustee to represent your interests after you’re gone, or even before. Whether you’re just beginning work on a will or trust or you’re considering updating one, it’s never too late to realize you have a host of options in choosing the most trusted and capable person or firm. Is there a family member or friend who has the temperament, skills, and capacity for trustee duties? 

Let’s call these first two options—a friend or family member—the “house wine.” They’re the simplest answer and they’ll get the job done. They may be lacking an item or two that would make them ideal for trustee duties, but to know what that is, you’re going to need to make that checklist. Top characteristics for managing trustee duties might be someone who is mature, organized, patient, financially and legally astute, and whose values are aligned with the estate's goals. A trustee has legal ownership of the trust assets and a fiduciary responsibility for managing them and fulfilling the intentions of the trust. They must maintain documents and records, pay taxes on behalf of the trust and oversee management of the trust assets and distributions to beneficiaries. It can be a daunting job description and one that some friends and family are unwilling or unable to shoulder.  

A professional trustee might have the ideal “blend” of skills 

But did you know that you have other choices? Just like that rare Bonarda waiting around the corner on your winery tour, perhaps you’ve never even considered a professional trustee. The professional trustee acts impartially to ensure the trust's objectives are met and to provide a level of accountability and continuity that can be especially beneficial for complicated trusts or situations involving significant assets, diverse investments, multiple businesses or intricate family dynamics.

A professional trustee may have an entire team of CPAs, investment advisors and attorneys in addition to their own expertise and experience in trustee duties. If your trust is expected to continue for generations, this institutional trustee team can provide the stability and consistency needed over the long run, whereas a family member working alone as an individual trustee would be burdened with the task of hiring and maintaining all the necessary professionals.

And if you simply don’t want to dismiss the personal connection from your criteria checklist, you can designate a professional trustee to partner with your family member or friend as co-trustees. Your appointed individual trustee will work in concert with the institutional trustee much like a well-chosen wine that perfectly complements a meal.

The decision is not just about expertise but about finding the right fit—a trustee whose values and qualities harmonize with yours and your family’s and with the objectives of the estate. It’s a delicate process for a difficult job. But with a thoughtful approach and your own good intuition, a carefully selected trustee will ensure the prosperity and preservation of your estate. Cheers to that!

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

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Sep 18th

Whittier Trust Presents: Our Investment & Economic Outlook

A considerable amount of market uncertainty has dissipated in recent weeks along the lines of our projected investment theses. Disinflation has unfolded at a faster pace than many had expected. At the same time, economic growth has also exceeded expectations. The odds of a recession have receded for many investors, while others believe that the timing of an inevitable recession has simply been pushed back.

In this Actionable Ideas webinar with Sandip Bhagat, Whittier Trust’s Chief Investment Officer, we examined the economic and market backdrop to pose and answer the following questions.

  • Despite some big early gains, will the last mile of disinflation prove difficult to navigate?
  • Will high interest rates eventually slow down the consumer and cut into corporate profit margins?
  • How significant are the U.S. fiscal problems and are we doomed to higher interest rates for longer as a result?

 

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Whittier Trust Company and The Whittier Trust Company of Nevada, Inc. are state-chartered trust companies, which are wholly owned by Whittier Holdings, Inc., a closely held holding company. All of said companies are referred to herein, individually and collectively, as “Whittier”. The accompanying materials are provided for informational purposes only and are not intended, and should not be construed, as investment, tax or legal advice. Please consult your own investment, legal and/or tax advisors in connection with financial decisions and before engaging in any financial transactions. These materials do not purport to be a complete statement of approaches, which may vary due to individual factors and circumstances. Although the information provided is carefully reviewed, Whittier makes no representations or warranties regarding the information provided and cannot be held responsible for any direct or incidental loss or damage resulting from applying any of the information provided. Past performance is no guarantee of future results and no investment or financial planning strategy can guarantee profit or protection against losses. These materials may not be reproduced or distributed without Whittier’s prior written consent.

Sep 14th

5 Consumer Trends to Keep an Eye on for the Long Term

Teague Sanders, Senior Vice President and Senior Portfolio Manager

It's an interesting time to be an investor. Artificial intelligence is making its mark on the world in continuously more profound ways. The Federal Reserve has increased interest rates from virtually zero to over 5% with a goal of tamping down inflation. As growth in the U.S. looked like it was slowing over the last few months, experts have been debating whether we would be able to achieve a "soft landing" or whether we could potentially see a recession. 

Even though it has seemed like a roller coaster ride through the COVID pandemic and beyond, there are reasons for optimism. Take, for example, consumer debt. Many consumers, bolstered by stimulus checks and reduced spending during the pandemic, paid down debt, bolstered their cash reserves and, generally, got more financially stable. While debt levels have ticked up more recently, the nature of that debt is less impacted by moves in interest rates. Just prior to the mortgage-induced financial crisis of 2008, many borrowers were seduced by the allure of Adjustable Rate Mortgages (ARM), especially in the subprime portion of the market. Today the proportion of home mortgages that are ARM is a fraction what it was in 2007. Since consumer spending accounts for 65 to 70% of GDP growth, it's important to consider what impact all of those things will have on how consumers spend their money.  

Ultimately, as the consumer goes in the United States, so goes GDP growth, which has a tremendous impact on the global economy. To that end, here are five key things and categories to keep in mind as you're thinking about investing and considering the economic landscape in the coming months and years. 

1. Omnichannel Retailing: Reshaping Consumer Behavior

In the pre-pandemic years, some retailers operated on the assumption that they could conduct business exclusively online. E-commerce businesses such as Amazon were in a steady state of growth. However, when it comes to shopping categories such as grocery and apparel, it's clear that consumers want to have the option for a hybrid shopping experience. Amazon knew this, and in 2017 the retailer acquired Whole Foods Market for $13.7 billion. It was an admission that online shopping wasn't going to be able to take over the entire world: There is still a need for brick and mortar. People like to be able to shop online with fast shipping, but they also like to be able to shop in person and choose their own produce, meats and other perishable goods. The Amazon and Whole Foods model is a shining example of successful omnichannel retail. 

Similarly, Nike has been able to demonstrate this phenomena. It has been shifting from a wholesale model, where their products were sold in partner retailers such as Foot Locker and department stores, to a direct-to-consumer model. This gives consumers a variety of opportunities to interact with the brand. 

From an investment perspective, it's wise to keep an eye on how omnichannel retailing is revolutionizing consumer behavior and fundamentally changing the retail landscape. Companies that are successfully integrating physical stores with digital platforms are likely to have an edge over those with less diverse distribution, demonstrating resilience and growth potential.

2. The Shift Back to the Office: It Impacts More Than the Workplace

Now that the pandemic is officially over, 100% remote work is becoming more the exception than the rule. 

As such, the resurgence of office work presents investment prospects in various sectors. Commercial real estate, transportation, quick service restaurants and travel are all likely to see a resurgence because consumers will be spending more disposable income on commuting and services related to being in-office. Office workers will likely need a wardrobe refresh after years of comfortable, ultra-casual work-from-home attire, presenting a possible surge in profits for apparel retailers and personal care products. Employees will also be spending more time on the road, communing back and forth between their homes and offices, so fuel prices are likely to remain high. And they'll be interacting with other businesses along the way, such as restaurants with drive-thru offerings and gas stations. 

3. AI and Shopping: Enhanced Response and Prediction

The role of artificial intelligence in shopping is an area of near-unlimited opportunity, but it is still evolving. We are in the early stages. AI-powered bots can act as "assistants" to do tasks such as making a shopping list based on the meal you're planning to cook, a stylist to virtually try on clothing or an erstwhile travel agent to plan a vacation. While these services are still in their infancy, they are primed to leave their mark on how consumers shop.

Anyone who has purchased something online knows that user reviews can be valuable when making a decision about a product you can't see in person. However, as AI chatbots are deployed to "stack" reviews to sell products, it can be difficult to tell the truth from marketing speak. One significant AI opportunity for online retailers that want their reviews to be truthful as a service to shoppers, will be to use sophisticated programs to "scrub" untruthful reviews from their sites. They can also use AI to help further refine their searches to serve up products customers want, based on their past shopping history and search criteria. Online retailers that differentiate themselves with a seamless shopping experience and the quality of the information they provide about the products they're selling are primed to succeed.

4. Experiences Are Expensive, But Many Consumers Are Still Spending

When travel and in-person gatherings were rare, many consumers spent money on durable goods such as home appliances, vehicles and home improvements. Now that those things are bought and paid for—and don't yet need to be replaced—consumers have turned their attention to experiences, chief among them being travel.

Another contributing factor: During the pandemic the upper half of the U.S. population mostly kept their jobs and saw salary increases that increased their spending power. Plus, if those people had a home mortgage at 2.75% and still saw a 5 or 6% salary increase, their housing costs have diminished over time. Now, they have more disposable income than ever and an intense interest to get out and see the world. 

It's intuitive that there's a finite amount of inventory when it comes to travel—there are only so many resort rooms, seats on an airplane and rental cars in any given destination. The hotel group Hilton recently announced that RevPAR—that's the revenue per available room—is up 12% year on year. Hotels are seeing a strong return already, and bookings are going to continue to increase. Beyond traditional hotels, less traditional models—such as Airbnb and villa rentals—are continuing their climb in popularity as hotels are overbooked. Similarly, there are new ways of renting a car. Beyond the typical rental companies such as Alamo and Hertz, startups like Turo and Sixt are making an impact on the marketplace, potentially offering new opportunities for investors. To combat increased demand and unavailability, expect to see more and more alternative travel service providers entering the market.

5. Mobile Payment Adoption: How to Use It and How to Protect Yourself

More of a long-term trend, as mobile payment adoption grows, companies are increasingly providing secure payment platforms and digital identity verification solutions while the world continues to move away from fungible paper currency. Cryptocurrency was an offshoot of this—combining the convenience factor and a means with which to be able to track your transactions. The digital age means we're increasingly not exchanging goods face to face and, as a result, there is a level of trust that's been broken. Companies are stepping in to alleviate these concerns with services like Apple Pay. Now, we can simply tap our iPhone or Apple Watch and never need to pull out a credit card or cash.

Visa and MasterCard have done a phenomenal job of continuing to prove out the security measures. Most people have had some sort of fraud, even if it's minor, on their accounts and most will attest that it's been resolved in their favor with minimal hassle. As such, consumer protections around this adoption of mobile technology mobile payments will continue to chip away at the legacy credit card transaction and cash.

Understanding and capitalizing on emerging trends is imperative for building successful investment strategies. These consumer spending trends—and others—can help position us to maximize returns and navigate the evolving financial landscape with confidence in an ever-changing world.

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

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Apr 20th

Rolling GRATs: Asset Selection Trumps Current Interest Rates

By: Tom Suchodolski, Assistant Vice President, Client Advisor, Whittier Trust

Financial planning during periods of relatively higher interest rates is certainly not elementary. In a low interest rate environment, the opportunities for wealth transfer seem boundless; one can seemingly draw from a myriad of strategies and have a high likelihood of success. A high interest rate environment, however, all but eliminates the effectiveness of such. In particular, strategies that involve intra-family loans or installment sales are negatively impacted by high interest rates. A Grantor Retained Annuity Trust (GRAT) is one of the few exceptions.

A GRAT does not seek to transfer the trust assets to the beneficiaries, but only the appreciation on those assets. Transferring only the appreciation, unlike other gifting techniques, can[1] allow for a transfer that is entirely gift and estate tax-free. For this reason, GRATs are particularly attractive for those who have already transferred assets equal to (or more than) their lifetime gift tax exemption of $12.92 million per person. GRATs may also be a good fit for those who are undecided on how they would like to use their lifetime gift tax exemption.

A GRAT is an irrevocable trust, yet it contains characteristics that are contrary to the very essence of an irrevocable trust. For example, by definition, in an irrevocable trust, the grantor relinquishes his or her ability to change it. However, for a trust to be considered a grantor trust for income tax purposes (i.e. the grantor pays the taxes incurred by the trust), certain features must exist. This includes, but is not limited to, grantor powers such as adding and changing the trust beneficiaries, or the power to substitute the trust assets with other assets of equal value. The ability to substitute trust assets in a GRAT should not be overlooked.

Functionally, the interest rate at GRAT inception is meaningful. You may be familiar with the Applicable Federal Rate (AFR), which is the minimum interest rate that the Internal Revenue Service allows for private loans and is published monthly based on current interest rates. GRATs utilize another monthly interest rate known as the Section 7520 rate. By definition, this is the AFR rate for determining the present value of an annuity. It is also known as the hurdle rate and can be perceived as the IRS projection for appreciation on the assets contributed to the GRAT.

For a GRAT to be successful, the trust assets must appreciate more than the annuity stream. This is why GRATs are particularly successful in a low interest rate environment when the Section 7520 rate is low. However, GRATs can still be fruitful in a high interest rate environment. The current market conditions could be viewed as favorable for GRAT creation due to the repressed prices of assets—most publicly-traded securities are trading at significant discounts due to lower valuations. As of this writing, the Section 7520 rate is 4.40%. A GRAT created today can successfully transfer wealth to the beneficiaries if the assets contributed appreciate more than 4.40% over the GRAT term.

So how do you go about actually creating a GRAT? First, identify the assets you wish to fund the GRAT with—generally either marketable securities, private company shares or real estate. Then you must engage an estate planning attorney to draft the GRAT agreement. This document will contain key provisions such as the funding amount, the annuity term, the annuity payments back to the grantor and the trust beneficiaries. It would be prudent to consider utilizing a “zeroed-out” [1] GRAT strategy, for which the annuity payments bake in the hurdle rate. These annuity payments will be considered in good standing with the IRS as long as they do not increase by more than 120% of the prior year’s payment. There’s an alternative Section 7520 interest rate applicable for these purposes (this rate is 4.45% as of this writing versus the 4.40% standard Section 7520 interest rate).

It’s important to note that success can be contingent on selecting the best assets to fund the GRAT, but an unsuccessful GRAT shouldn’t necessarily be considered a loss. If the contributed assets do not appreciate more than the hurdle rate, those assets are simply transferred back to the grantor. Keep in mind, however, that you will incur administrative expenses to implement the strategy, including, but not limited to, fees paid to the attorney who drafted the trust agreement and valuation expenses should you choose to contribute private company shares to your GRAT. While it may be tempting to fund a GRAT with family business stock, some experts opine that GRATs funded with marketable securities are more likely to succeed than their counterparts, as valuation expenses can be quite costly. A pre-initial public offering stock would be a notable exception.

Even in a high interest rate environment, there is one GRAT strategy that is highly likely to succeed. This strategy is known as “rolling GRATs”, which can be defined as a series of short-term (read: 2-year) GRATs, for which each subsequent GRAT is funded by the annuity payments from the preceding GRAT. This strategy reduces mortality risk versus implementing one longer-term GRAT, which is one of the key considerations for any GRAT. The grantor of a GRAT must survive the annuity term. Otherwise, the contributed assets and their appreciation are clawed back into the grantor’s estate. Rolling GRATs also spread out interest rate risk, as each subsequent GRAT would have a new hurdle rate.

Functionally, a rolling GRAT strategy would operate as follows:

  • Execute the trust agreement with a 2-year annuity term and a zeroed-out[1] annuity payment schedule. Assume an agreement date of March 15, 2023, a contribution of assets with a fair market value (FMV) of $2,000,000 and the current 120% Section 7520 hurdle rate of 4.45%. For your GRAT to be successful, the GRAT assets therefore must appreciate to $2,089,000 by March 15, 2025.

 

  • The first-year annuity payment, made on March 15, 2024, should be 47.47729% of the initial FMV of the contributed assets. This allows for a second-year annuity payment percentage to be 120% of the first-year annuity payment percentage and for both annuity payments to total the FMV which beats the hurdle rate ($2,089,000). Therefore, the March 15, 2024 payment is calculated to be $949,546.

 

  • If you funded your GRAT with marketable securities, you would calculate the FMV of the GRAT on March 15, 2024, and transfer shares with an FMV of $949,546 to a new GRAT with an agreement date of March 15, 2024, which also has a 2-year annuity term. The hurdle rate would be the Section 7520 interest rate on March 15, 2024. Should you have chosen to fund your GRAT with, for example, real estate family business stock, you would engage an expert to perform a valuation as of March 15, 2024, and transfer an interest with an FMV of $949,546 from the initial GRAT to the new GRAT.

 

  • Given that the first-year annuity payment percentage is 47.47729%, the second-year annuity payment should be 56.97271% of the initial FMV, which is 120% of the first-year annuity payment percentage and calculated to be $1,139,454. When you add both annuity payments together, they total $2,089,000, meeting the hurdle rate.

 

  • Should the FMV of your initial GRAT be greater than $1,139,454 on March 15, 2025, this would make it a successful GRAT. You would then apply the same exercise that was performed at the end of year 1, calculating the FMV of the initial GRAT on March 15, 2025 and transferring shares with a FMV of $1,139,454 to another new GRAT with an agreement date of March 15, 2025. The shares remaining in the initial GRAT after the second-year annuity payment can now be transferred to the GRAT beneficiaries free of gift and estate tax. Again, do keep in mind, should you have chosen to fund your GRAT with harder-to-value assets, you would need to obtain yet another appraisal as of the end of the initial GRAT term.  Avoiding the expense of obtaining three valuations for your initial GRAT (and then annually thereafter for each of the new GRATS) makes for a compelling argument to consider funding your GRAT with marketable securities rather than illiquid assets.

 

[1]: Only a “zeroed-out” GRAT eliminates all possibility of a taxable gift. A Zeroed-out GRAT is one where the present value of the annuity of the grantor’s retained interest is equal to the full value of the property initially transferred to the GRAT. Essentially, the hurdle rate is baked into the annuity payments.

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Apr 13th

A Dependable Way to Increase Returns

In investing, when something sounds too good to be true, it generally is. Plenty of examples over the last three years show that speculating on supposed “risk-free returns” can instead result in “return-free risk.”

By Mat Neben, Vice President and Portfolio Manager, Whittier Trust

Despite these cautionary tales, investors still have a dependable option for increasing returns without adding material portfolio risk: tax planning.

The following examples show how an effective tax plan can improve investment results. Keep in mind that tax laws are complex and constantly changing. We recommend talking with a trusted tax professional before adopting any tax strategy.

Profiting from Your Losses

Stock markets are volatile. No one enjoys buying an asset that declines in price, but tax-conscious investors can turn that pain into an opportunity.

When you sell a stock that has appreciated, you realize gains and create a tax liability. The inverse is also true. Selling a stock that has declined can realize a tax loss and reduce your future taxes. This is commonly called “tax loss harvesting.”

If you actively harvest losses and stay fully invested through market downturns, price volatility can actually add to your overall wealth.

The higher your tax bracket, the more you gain from loss harvesting. On the other end of the spectrum, if a gap year or early retirement shifts you into a lower tax bracket, realizing capital gains might be beneficial. Accelerating the realization of gains into low-income years can reduce your future tax liability.

Location, Location, Location

Investment decisions should focus not only on what asset to buy but also on where to put it. 

Equity mutual funds regularly distribute capital gains to their shareholders. These distributions are taxable to the investor, even if they did not sell any shares (and even if the fund had a negative return).

For employer-sponsored retirement accounts, where the tax inefficiency is irrelevant, equity mutual funds may be perfectly fine investments. But in taxable accounts, the distributed capital gains can turn a great fund into a poor investment.

Taxes and Hedge Funds

Absolute return hedge funds are designed to deliver positive returns regardless of market conditions. They are frequently held by some of the largest institutional investors. For example, at the end of the 2020 fiscal year, the $31 billion Yale Endowment had an allocation of 22% to absolute return strategies.

But what works for a tax-exempt endowment might not work for a taxable investor. Hedge fund returns are often fully taxable at your ordinary income rate. For investors in high tax states, this means that more than half the fund return may go to the government. If you are only keeping half of what Yale does for investing in the same fund, is the investment worth the added cost, complexity and potential illiquidity?

Hedge funds can still make sense for taxable investors. The strong risk-adjusted returns or diversification profile may more than compensate for the tax headwind. But it is important to focus on after-tax results and properly calibrate your expectations.

Don’t Pay the Penalty

If you sell a stock you owned for less than a year, the gain is taxed at your ordinary income rate. As discussed above, that rate can exceed 50% for high income investors in high tax states.

If you hold the stock for longer than a year, the gain is taxed at the long-term capital gains rate, which can be significantly lower.

The difference between your ordinary income rate and the preferential rate for long-term capital gains is the penalty you pay to place short-term trades. At top tax rates, short-term traders need to outperform long-term investors by more than 2% each year just to make up for the tax headwind.

By purchasing quality companies that you will own for at least a year, you align your investing with the tax code and avoid the punitive tax penalties facing short-term traders. Alternatively, high-turnover strategies can be located in a tax-exempt account, so gains compound tax-free.

Gifts and Inheritances

Stocks can be an incredible tool for long-term, tax-efficient wealth compounding. Dividend income is taxed at a preferential rate, and price gains are not taxed until the securities are sold.

One method to avoid realizing capital gains is to donate appreciated securities to a nonprofit. The nonprofit can sell the investment with little-to-no tax liability, and you can get a deduction for the full value of the security. If you are currently giving cash to charity, it is worthwhile to explore gifting appreciated assets instead.

Another method for managing deferred capital gains is to pass the asset on to your heirs. When you inherit an asset, its cost basis may be “stepped up” to match the market value as of the original owner’s death. The basis step up resets any deferred capital gains. While this rule might not be immediately actionable for most investors, it has significant portfolio management implications and can result in multi-generational tax savings.

Moving Forward

The above topics are one small subset of potential tax planning strategies, and tax planning itself is just one aspect of a larger wealth plan. At Whittier Trust, we believe in a holistic approach to wealth management. We work with your existing advisors to develop comprehensive solutions for all aspects of wealth: investments, tax, estate plans, philanthropy and more.

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Feb 22nd

How 529 Plans Can Benefit Your Estate Plan

The Gift That Keeps on Giving

A 529 Plan is a savings account for college and, in some cases, K-12 education, depending upon the state plan that is selected. With the cost of college and private schools soaring, creating a 529 Plan for kids to ease that financial burden is a wonderful way to assist family members and friends. 

“For our clients, gifting to 529 Plans serves as a great estate planning tool and offers some unique benefits,” says Alec Gard, client advisor at Whittier Trust. He outlines how below.

The Major Benefits of 529 Plans to Investors

The funds in these savings plans grow tax deferred, similarly to that of IRA’s and 401(k) plans. Yet unlike IRAs and 401Ks, 529 plans have unique funding options, the most advantageous of which is the ‘5-year election’ (often called “superfunding”), which allows you to contribute five years’ worth of the current annual exclusion by prorating the amount contributed over 5 years. The annual exclusion is the amount of money one person may transfer to another as a gift without such gift counting against the lifetime exemption from federal gift and estate tax. The annual exclusion amount for 2023 is $17,000 per individual. 

“For example, in 2023, you could fund a new 529 Plan with $85,000, which is $17,000 times five years of annual exclusion. If you and your spouse both elect to give, then you each can contribute up to $85,000 to that same 529 Plan, thus potentially superfunding it with $170,000 in the first year of being opened,” Gard says.

The funds contributed to the 529 Plan, along with any future growth, will now be out of your estate. If you’re able to superfund vs. gifting one year of annual exclusion, you can put more tax-deferred money to work faster. “You can quickly see the benefits, especially if you have a large family and are inclined to help,” says Gard.

Another option available for individuals is contributing the maximum funding amount allowable for the selected 529 Plan. For example, some state plans allow for a maximum funding amount of $550,000. This means that a husband and wife could elect to give $275,000 each in the first year of funding. This strategy is also very effective; however, it will utilize a portion of each spouse’s lifetime exemption. This is the amount of money each person in the U.S. can exclude from estate and gift taxes. In 2023, the lifetime exemption amount per person is $12.92 million. Each spouse receives the same amount of exemption for a total of $25.84 million. It is important to note that the lifetime exemption amount per individual is scheduled to sunset at the end of 2025. When this happens, the lifetime exemption amount per individual would drop to $5,000,000 (indexed for inflation). There have been no current legislation proposals to keep the current lifetime exemption amounts past 2025, so it appears the plan laid out in the 2017 Tax Cuts and Jobs Act may take effect.

He adds, “Using lifetime exemption is not necessarily a bad thing, especially at these high levels, but if you intend to preserve your exemption for larger future gifts, the ‘5-year election’ may be the better option.” 

How Beneficiaries Benefit from 529 Plans

The first major benefit is that it’s the most flexible savings plan for college, unlike other savings plans that have more restrictions around funding and use. When money is taken out of a 529 Plan to be used for qualified education expenses, such as college tuition, fees, books, equipment and room and board (if enrolled in college at least half-time), the funds are not subject to federal or state taxes. If a 529 Plan allows for K-12 education (not all do), the beneficiary can also withdraw up to $10,000 annually for qualifying expenses.

Each 529 Plan can only have one beneficiary. However, multiple 529 Plans can be opened by different individuals for the same person. For instance, a grandparent and a parent could have opened separate 529 Plans for their grandchild/child over time. It is worth noting that the plans are viewed as combined for funding and use purposes.

“If an individual does not utilize the funds in their 529 Plan, the funds may remain invested and can be used in several other ways,” Gard says. 

As the plan owner, you could elect to change the beneficiary to yourself and use the plan for your own education expenses. Alternatively, the plan owner could name a different beneficiary within his or her family (once the plan is established, it cannot be gifted to anyone outside of the family). 

For instance, if a 529 Plan was opened by a mother to benefit her son, but the son decides not to attend college or goes to college but does not use the full balance of the 529 plan, the mother, as the owner, could name her grandchild as the new beneficiary. There may be generation-skipping tax implications with this change, so it is always best to consult your tax professional for advice.

Common Misconceptions About the Savings Plans

A common misconception is that 529 Plans can only be set up for family members. However, you can contribute funds to a 529 Plan for the benefit of anyone with a valid Social Security Number. 

“This can be another great opportunity if you are feeling generous toward non-family members. You do not have to open the 529 Plan yourself but can coordinate with the person or parents of the person that you would like to benefit and either contribute to the newly established 529 Plan or one that has already been opened,” says Gard.

The Potential Downside to This Financial Investment Strategy

There is a chance that a 529 Plan is created for someone who neither uses it for education (perhaps they don’t go to college) nor has a child who can use it. If funds are withdrawn by the owner and are classified as “non-qualified withdrawals,” the earnings will be assessed state and federal taxes, as well as an additional 10% penalty. 

Disclaimer

It is important to note that rules, maximum contribution limits, investment options as well as fees vary per 529 Plan offered by the state. Most states offer a 529 plan, but to determine the best plan for you and your family, please consult with your financial advisor and tax professional.

Download PDF

1. Major Benefits to Investors

 

2. How Beneficiaries Benefit

 

3. Common Misconceptions
About the Savings Plans

 

4. The Potential Downside to This Financial Investment
Strategy

 

 

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