Post Topic: Real Estate

Jan 14th

Who Should Be the Trustee of My Real Estate Portfolio?

Make sure your family’s property assets are stewarded from one generation to the next.

The story of family wealth-creation in the West is not complete without a discussion of the role real estate has played in building multi-generational legacies. This is true throughout the region but specifically so in California. Almost every entrepreneur has a balance sheet that includes significant real estate assets in addition to whatever operating business may be the primary driver of the family’s fortune. In our experience at Whittier Trust, many of these entrepreneurs think of real estate as the “simple” part of the balance sheet. Buy the property, maintain the property and collect the rent—easy, right?

Those of us who work with families holding large real estate portfolios know all too well that, while it may seem simple on the outside, the day-to-day of owning real estate is far from easy. The glamor in real estate comes from the acquisition and the disposition and rarely from the details of operating the property. As it is often said, the devil is in those details!

Multi-family housing is a good place to start our discussion since it may be the asset class that requires the most hands-on attention by owners. Units must be rented and common areas maintained, but there are a whole host of other considerations. What tools are employed to monitor market rental rates to ensure rents are sufficient? Is there someone in the family who will perform the day-to-day supervision of property management, or will they oversee an outside management company? Who is vigilantly reviewing insurance markets and the myriad of local governmental regulations concerning housing? Property management of multi-family buildings is fairly labor intensive and while the wealth-creating generation may do this work themselves, it is important to consider whether there is someone with the interest and aptitude in the next generation. If not, seeking a professional fiduciary may be a good option.

Commercial and industrial buildings may be less hands-on, particularly if there are triple net leases in place. However, when vacancies arise, the buildings must be properly marketed to maximize the family’s return on the asset. What if there is damage to a building caused by a fire or a natural disaster? Who will vet potential new tenants for creditworthiness and overall desirability?

When talking with families about succession planning concerning their real estate assets, our team at Whittier Trust often finds that the older generation who has been performing these oversight and management activities will downplay the difficulty involved and the skills required to successfully operate the real estate portfolio. We will hear things like “All they have to do is deposit the rent checks and pay the insurance and property taxes.” In our experience of serving as a successor trustee in innumerable trusts with real estate, there is always more to the story than depositing checks and paying a few bills. 

In the worst-case scenarios, we see surviving spouses who have never been involved in operating the real estate being named as the successor trustee. This is usually done to provide the spouse with control, but there are better ways to accomplish this objective. An unprepared or unskilled spouse can easily make costly mistakes. Frequently, the surviving spouse is an older person who may not be fully able to appreciate and understand the responsibilities they’ve been given. They may experience confusion or even be susceptible to undue influence. This is a particularly difficult situation if the surviving spouse is the stepparent of the ultimate remainder beneficiaries. We often see litigation result in these cases. 

A best practice is to be as thorough and thoughtful about the succession plan for the management of the real estate as one would be in the planning for an operating business. Corporate trustees who have a history of direct real estate investment and management of a variety of assets, make good succession partners. The family can always be given control by holding the power to remove and replace the corporate trustee—a far better solution than having an ill-equipped family member serve in a fiduciary capacity. 

Selecting an experienced and trusted partner who can enter the situation when needed helps preserve and enhance the value of the real estate assets for generations to come.

Written by Thomas J. Frank, Jr., Executive Vice President, Northern California Regional Manager, Whittier Trust.

Featured in Mountain Home Magazine. For more information about trustee services or transitioning a real estate portfolio to the next generation, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

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Oct 15th

Real Estate Wealth Management

The right investment and estate strategy can help create a legacy of real estate holdings that will benefit your family for generations.

In 1891 just before the turn of the century, a young man from Maine named Max Whittier rode a train cross-country to California to seek his fortune. Nearly a decade later, after several failed attempts to find oil, he risked his life savings of $13,000 on land along the Kern River in the southern Sierra Nevada mountains northeast of Bakersfield. By 1903, the area was the top-producing oil field in the nation. Whittier kept the land rather than selling it for a quick profit, and today Kern River remains one of the largest oil fields in the continental U.S. 

Out of the wealth Max Whittier created as a pioneer in real estate, oil, and gas, Whittier Trust was established in 1935 to manage the family’s assets for his four children. In 1989, the company expanded to serve other families, ultimately creating a platform that comprises five core pillars of wealth management:

“These five pillars give us great latitude to tailor investment strategies to individual client goals as part of our multifamily office services,” says Andrew Paulson, who manages a $2B real estate portfolio of diverse asset classes across the U.S. as Vice President of Real Estate at the Whittier Trust Pasadena office. “Many wealth management firms specialize and don’t provide real estate services. But at Whittier, active investment and management of real estate has been part of our platform for over 100 years.”

The Rewards of Real Estate

Real Estate is a unique investment class that performs differently from stocks, bonds, or other investment vehicles. Here are some of the primary reasons why Whittier Trust encourages clients to invest in real estate:

  • Investors have much greater control over property ownership than owning a small sliver of a company through shares of stocks.
  • Although real estate is considered illiquid, real estate values are much less volatile than share prices.
  • Real estate is a good hedge against inflation as rents and values typically increase with inflation.
  • Real estate requires local knowledge. Understanding what is happening on Main Street is as important as what is happening on Wall Street.

“A major differentiator for Whittier Trust is that if a client comes to us with an extensive real estate portfolio our team can hold those real estate assets as a fiduciary, or we can serve as an investment advisor over those assets,” explains Paulson. “In addition, for trusts with real estate assets, we have the ability to serve as trustee, which is a rare advantage among asset management firms.” 

“At the same time, our real estate group actively sources new investments that clients can add to their overall real estate allocation,” Paulson continues. “Our firm portfolio consists of Multifamily, Industrial/Commercial, Office, Retail and Flex Space properties, and we have a broad list of qualified sponsors who are sourcing deals across the country. Throughout the history of the firm client demand has remained very strong for these direct real estate investments and all recent opportunities have been oversubscribed. We are currently focused on sourcing more acquisition opportunities for multifamily and industrial assets to continue to broaden our list of experienced partners and sponsors.”

Estate Planning to Preserve Your Real Estate Portfolio

We’re all taxed on our possessions when we die, and there are only two ways to reduce that tax. You can have fewer possessions, or you can decrease the value of those possessions. Real estate owners are uniquely situated to do both, and Whittier advisors have unique expertise in this area, from initial planning to settling the estate. 

Reducing what you own is the first step. Under current law, an individual can give away $11.5 million of assets without incurring gift (or estate) tax. A married couple can give away twice that amount, or $23 million. So if a real estate owner had a property worth $11.5 million, he or she could give the entire property away within the amount of his or her exemption. That exemption amount is scheduled to be cut in half in 2026.

That brings us to the second step: reducing the value of what you own. Whittier Trust helps real estate owners use another advantage related to estate planning—owning assets inside of entities. We help owners make gifts of their interests in entities while taking valuation discounts for lack of control and lack of marketability (which appraisers typically discount in the range of 30 to 40%). For example, a real estate owner holding a building in an LLC, structured with a typical 1% managing member interest and a 99% non-managing member interest, can gift their 99% non-managing member interest with a 30% discount. 

When a real estate investor passes away, even though estate taxes can often be paid over a 14-year period, the cash flow needed to make those tax payments can greatly reduce the cash available to provide for the family. Or worse, for investors with significant portfolios, such assets may need to be sold to pay estate taxes, and the owner's efforts in putting together a real estate portfolio can be lost—often a lifetime accumulation of irreplaceable assets. With proper estate planning, however, those assets can be maintained to provide support for future generations.

The Nevada Advantage for Multigenerational Wealth

If properly planned, real estate assets can pass not only from the real estate owner to his or her children, but also on to his or her grandchildren by taking advantage of the generation-skipping transfer tax exemption. Whittier Trust helps real estate investors use strategies of gifts or sales to trusts for family members to allow the real estate assets of those trusts to be properly administered for beneficiaries in the future.

“In California, most trusts have termination clauses that restrict a family’s sharing of legacy assets,” Paulson says. “Under state law, trusts have a maximum duration of 90 years (or no more than 21 years after the death of an individual alive at the time the trust was created). Whittier Trust Company of Nevada was specifically created to help California families protect their wealth with the Nevada advantage. Residency is not required to transfer those assets to Nevada-domiciled trusts which under Nevada law permits a trust to remain in effect for 365 years.”

In keeping with Max Whittier’s vision for the land he invested in more than a century ago, Whittier Trust believes real estate is an important component in building lasting family wealth. For clients wanting to pass a portfolio of properties down to children and grandchildren, these long-term trust strategies are just a few of the ways that we help you share that wealth with successive generations. 

To learn more about how the right estate planning strategies and real estate portfolio management can help benefit your family for generations, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

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Jan 18th

Star Performers: Whittier Trust’s Real Estate Expertise

How Whittier Trust’s real estate expertise can ensure your real estate investment performs at its peak potential

Three siblings inherited a multi-tenant commercial industrial property that was located in an upscale area a few blocks from the ocean in Northern California. The asset was considered a prime piece of real estate, which produced more than $100,000 in passive income per month. Sounds great, right? 

When the Whittier Trust real estate team began working with the siblings, they discovered that, while the balance sheet looked healthy, rent collections from the fully occupied building were nearly 20% below the market rate for the area. It may seem counterintuitive, but a fully occupied real estate investment with below-market rents can ultimately hurt your bottom line. 

“We knew we had to create a strategy that would usher in market-rate rents, while preserving the consistent income our clients relied on and expected,” explains Jorge Ramos, Real Estate Vice President at Whittier Trust. Here are a few of the smart strategies and factors a savvy real estate portfolio manager will evaluate to ensure clients obtain the best return on their investment. 

Know the Market

“As a real estate fiduciary, we see this often: our clients inherit income-producing assets, but the beneficiaries may not be well-versed with the nuances of overseeing real estate,” Ramos says. “The portfolio may be located in a highly sought-after market, but the beneficiaries may not be familiar with the location, market rents or even local city ordinances that may impact future development.” That can mean that the new owners don’t have an evidence-based sense of what the property is worth, how much rent should be (particularly if tenants have long-term leases) and what improvements need to be made to keep the property competitive. 

“We start to understand our clients’ real estate holdings by evaluating the market in order to maximize profitability,” Ramos explains. The Whittier Trust team also spends time with clients to address their concerns and financial needs before recommending any changes to the overall management plan. 

Make Incremental Adjustments

When tenants have long-term leases, it’s impossible to change lease terms mid-stream. It’s also difficult to bring significantly below-market rents up to the market level all at once—in our California example, 20% more in rent per month. Such a large increase will likely induce serious sticker shock on the part of the tenant. Instead, it can be a smart strategy to make smaller incremental increases over time—which are easier for many tenants to swallow but can still induce some to look elsewhere. 

Whittier chose this approach in the example of the Northern California siblings. Approximately one-fifth of tenants chose to vacate the property when the rents were raised by 3 to 5% during the renewal period. While this did cause a dip in the monthly income generated by the property, it also created an opportunity to freshen the vacant spaces and raise rents by a larger percentage to bring them more in line with the market as new tenants signed on. “In a strong market, owners can maximize revenue as units turn and you experience a significant increase in rent collections from new tenants and leases,” Ramos says. Those new tenants with higher rents proved more profitable in the long run. 

Manage Wisely

In some instances, a property may be underperforming as a result of lax oversight on the part of the hired property management group or because of an owner who has too much else on their plate to be vigilant. Perhaps they’re not being as diligent as they should be about day-to-day maintenance, or are less-than-responsive on tenant-related issues. These seemingly small infractions can have an impact on the overall satisfaction of existing tenants and a future impact on the building’s reputation in the community when it’s time to fill a vacancy. “When our team of real estate professionals conduct a due diligence review, we’re looking at every detail to make sure the investments are well-preserved and their value is appreciating,” says Ramos, whose team at Whittier Trust handles the portfolio and advisory side of things, rather than tasks on-site. If the existing management is a risk rather than an asset, it might be time to upgrade or search for a different company to handle the day-to-day administration of the property. 

Know When to Make a Change

While it’s rare that a well performing property turns into a liability—particularly when maintained commercial real estate tends to appreciate and residential occupancy rates in urban areas remain high—sometimes divesting of a property can be a smart strategy. “In those uncommon instances, we look at all options for our clients,” Ramos explains. 

If a client wanted to divest themselves of a poorly performing asset, an advisor might recommend a 1031 exchange—particularly if the client wants to retain regular cash flow from real estate investments. A 1031 is essentially a swap of one real estate investment property for another, deferring costly capital gains taxes. 

Regardless of the nuances of each client’s portfolio, the real estate asset management team at Whittier Trust is ready to explore any and all options to obtain the best outcome. “We look at every possible opportunity to maximize their investment returns, analyze their portfolio, minimize stress and achieve their overall goals,” Ramos says.

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Jun 29th

Top Estate Planning Tips for Those Nearing Tax Exemption Limits

Death and Taxes are two certainties in life, but specific details are lacking leaving them uncertain. The current estate tax exemption is sitting at $11.7 million for singles and $23.4 million for married couples and is set to expire in 2026. While the future of the exemption rate remains uncertain, few advisors are anticipating that tax rates will go down. As the new administration has taken place, along with a pandemic and stimulus payments, it’s likely that tax payments will go up, generating more revenue for government tax revenue.

Derek Hamblet, Vice President and Client Advisor at Whittier Trust says that “It’s all up in the air at this point; we really don’t know what’s going to happen … but at some point, if you don’t use it, you’re going to lose it.”

With uncertainty in tax exemptions, people with more than $5 million in assets will most likely be looking for a way to maximize giving while minimizing taxes. Below are common estate planning techniques for those nearing estate tax exemption limits.

Use The Annual Exclusion

According to Hamblet, one of the simplest methods to lower your taxable estate is to maximize the yearly exclusion limit, which is presently set at $15,000 every year. The donation might be made to a person or a trust. If someone has three children and six grandkids and wishes to give each of them the maximum amount per year, the total would amount to  $135,000 per year without paying gift taxes.

Donate To Charity

Philanthropic individuals can give to charity in their lifetime. Donors overlook donating to appreciated assets like stock by transferring assets from the estate to a charity. Donating in this capacity avoids capital tax gains as the donor is not exclusively selling the assets.

There are other methods of donating to charities including:

– Donate Required Minimum Distributions To Charity (Qualified Charitable Distributions) 

This method includes the IRS requiring those 72 years of age or older to draw annually from their IRAs. Those who do not require this income can make a direct donation to charity with their necessary minimum payout. Taxpayers can contribute up to $100,000 of their dividends to charity under current standards. The contribution also decreases the income tax burden since necessary minimum distributions are normally treated as regular income.

– Use A Donor-Advised Fund

A donor-advised fund consists of qualified charity donations that are exempt from estate taxes, but some contributors prefer more flexibility in their philanthropic contributions. Perhaps they wish to be able to donate to multiple organizations in the future or spread out their contributions over several years rather than in one big payment. These possibilities are available through donor-advised funds, which are flexible accounts dedicated only to philanthropic giving.

Donors contribute a tax-deductible amount to the fund, which grows tax-free.

After that, the donor can make any number of payments from the DAF to any qualifying charity at any time.

– Use A Charitable Split-Interest Trust 

The taxable estate can also be reduced in the situation where giving to charity is to use a more charitable remainder trust or charitable lead trust. A charitable lead trust is a good option for those who want to give to charities in their lifetime to provide for their heirs. A charitable remainder trust operates in another manner. It first benefits a non-charitable beneficiary, such as the donor or a family member, and then provides the remainder to charity at the conclusion of the trust period.

Use A Grantor-Retained Annuity Trust 

Transferring assets to a grantor retained annuity trust—another form of irrevocable split-interest trust—can effectively lower a wealthy person’s taxable estate and bring it closer to the lifetime exemption limit. The assets are no longer considered part of the estate after they have been transferred to the GRAT. In exchange, they will receive an annuity payment from the trust for a certain period of time. The appropriate federal rate, or AFR, is connected to the annuity and any return above AFR can be transferred to a beneficiary tax-free.

The grantor, or the individual who creates the trust and gets the annuity, is still responsible for the trust’s income tax. Hamblet notes, “you’re getting more money out of your estate by paying income taxes rather than reducing the value of the trust.”

GRATs are only valid for a certain number of years. After the GRAT has ended, the assets can be transferred to the recipient or used to fund another GRAT. If the grantor is to die before the trust expiration date the assets don’t revert back to the estate for estate tax purposes. Advisors recommend shorter terms for older clients to avoid this from happening.

While the tax exemption beyond 2026 remains uncertain it is anticipated that it won’t stay at its current value. As wealthy individuals begin nearing the exemption limits, consideration of reducing the size of their taxable estate may be the best option.

For more information, you can download the full report here or visit Forbes to read more.

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Sep 16th

Changing Residency: Important Considerations When Building Tax Planning Strategies

Best Practices When Making a Residency Change

In today’s world, with state tax rates varying widely, more individuals and families are considering moves out of high-tax states. For example, California’s highest income tax rate is currently 13.3%. Other jurisdictions, like New York City, impose a city income tax of as much as 3.876%, on top of a state income tax rate of 8.82%. High taxes are not just limited to the income variety — currently, fifteen states impose an estate tax, and six states impose an inheritance tax. State estate and inheritance tax rates vary from 10% to 20% and some states have exemption amounts as low as $1 million.

The state-by-state variability of residency and tax laws underscores the importance of comprehensive tax planning services. Our tax management services can help you navigate the potential pitfalls of changing residencies, and our experts have provided their thoughts on tax planning strategies to help you manage this transition.

Although the rules vary among states, generally speaking, most states define a “resident” as an individual who is in the state for other than a temporary or transitory purpose. States consider a person’s “domicile” to be the place of his or her permanent home, to which he or she intends to return to whenever absent from the state for a period of time. Most states claim the right to tax an individual’s income if they are believed to be a resident and domiciled in that state. Usually, they also impose tax on 100% of a resident’s income from all sources. Many states have exceptions for military personnel in active service and for individuals receiving medical treatment for an extended period of time.

For those contemplating a change of residency, careful planning should be undertaken so as to clearly and properly establish a new state of residence. What follows is a checklist of items you may want to consider. Although there’s no explicit guidance on what must be done in order to guarantee a change in residency, the more tasks from this list you can implement, the more likely it is that you will be deemed to have changed your state of residence for tax purposes:

  • Change your driver’s license to your new state and cancel your old state’s driver’s license.
  • Change your passport to reflect your new state.
  • Register your car in your new state and notify your insurance company of the change.
  • Register to vote in your new state and cancel your old state’s registration.
  • Move your religious affiliation and membership to a local group or house of worship in your new state; make local contributions.
  • Buy a home in your new state — and if possible, sell your home in your old state (or transfer it to family members or other entities). If you can’t buy a home right away, rent with a long-term lease.
  • Claim a homestead exemption in your new state (if applicable) and relinquish any homestead claim in your old state.
  • Revise your estate planning documents (wills, trusts, powers of attorney, health care powers of attorney, advance care directives, etc.) to recite your new state and use your new state’s forms.
  • Change your bank accounts to your new state without retaining bank accounts in your former state.
  • Move your safe deposit box to your new state.
  • If you plan on working, secure employment in your new state.
  • Obtain a library card in your new state.
  • Change social clubs and service clubs (Rotary, country club, Kiwanis, golf club, etc.) to your new state; serve on local charitable boards.
  • If you have school-age children, enroll them in your new state’s school as soon as possible.
  • Engage local medical professionals; send your medical records to them.
  • Change your address with the IRS — list your new address on your returns.
  • Notify vendors (credit cards, etc.) of your new address.
  • Generally, focus your activity (economic, social, financial) in your new state.
  • Change other local service providers to your new state, such as tax advisors and attorneys.
  • Have your family visit your new home state for important occasions, or have other family members move to the new state, too. The more family activities in the new state, the stronger the evidence that the new state is really your new domicile. Be careful of supporting a spouse or children located in your old state, which could be used as evidence against you in an audit.
  • Active business involvement in your old state is evidence that there has been no change in domicile. Work as much as possible in the new state and set up a “real” office in the new state, not just a home office. If you own the business, consider moving the principal place of business to the new state and withdrawing any business registration in the old state. Consider reorganizing the business entity in the new state.
  • Move items of personal or sentimental value to your new home. This includes photos, trophies, yearbooks, collections and the like. Funeral and burial arrangements should be made in the new state.
  • Keep a daily calendar (with receipts, if possible) showing that you were outside your former state for each day.

Keep in mind that the list above is not exhaustive and the burden is on the individual claiming the new domicile to prove a change from the former state to the new state; keeping documentation of all of these actions is vital to establishing a new domicile.

As a general rule, you want to stay out of your former state more than 183 days in each calendar year.

Although you don’t have to be in your new state for more than 183 days, your former state will look at how many days you spent in your new state as one factor in determining whether you have in fact established residency in the new state. The closer you are to the 183-day threshold, the more likely your former state will initiate a “residency audit,” requiring you to prove that you were not in your former state for more than 183 days.

Increasingly, states are challenging former residents who attempt to change their domicile to another state. Residency audits are on the rise, particularly in states where larger numbers of residents are more likely to spend winters elsewhere. Some states are so aggressive in their pursuit of those relinquishing residency that they will conduct a residency audit after the first year an individual claims non-residency, regardless of how close the individual is to the 183-day threshold. In a residency audit, an auditor will focus on a number of factors, including where you spend your time (days in your former state, days in your new state, and elsewhere), the number of residences you own and their respective values, where you claim a homestead exemption for property tax purposes, and other factors.

Highlighting the importance of tax management services, just about everything in your personal life can be relevant in determining the true location of your tax home, and taxing authorities will focus on where you spent your money and your time. Auditors will review credit card statements to determine where charges were incurred, and can also look into cell phone records and application data that tracks your time in different jurisdictions. They will examine freeway fast-lane pass charges and records of airline frequent-flyer miles. Given the pervasiveness and personal nature of the evidence needed, it follows that a residency audit can be much more intrusive than a traditional income tax audit.

Changing your residence can be complex. We recommend as part of your planning process, and as you build tax planning strategies, that you consult with your Whittier Trust team, as well as your legal and tax planning services before undertaking any action.

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BEST PRACTICES WHEN MAKING A RESIDENCY CHANGE

  1. Defining Residency
  2. Change of Residency Checklist
  3. 183-Day Threshold
  4. Residency Audits
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Jun 18th

How to Create an Estate Planning Blueprint

When it comes to estate planning, not having a plan is a plan. But not a good one.

That warning, according to Thomas Frank, executive vice president at Whittier Trust, goes for all ages. The wealth management and investment firm has high-net-worth clients in their thirties and forties who have yet to create an estate plan.

“Your assets can go to one of four places: family, friends, charity or the government,” said Frank, noting that’s a reminder that can give people the needed push to sit down and ensure their assets are being allocated how they wish.

Making sure your plan is optimized—so your beneficiaries can avoid probate and make the most of the gifts you plan to leave them—is crucial. Here are some tips on how to make sure your estate is as planned as possible.

Schedule Regular Check-Ins

“Estate planning isn’t a ‘set it and forget it’ task,” said Frank.

Think of your estate as constantly evolving. That means regularly sitting down with your advisor to make sure all your assets, plus circumstances such as the birth of a grandchild, are accounted for in your will. Ideally, these check-ins should be about every two years—but may be more frequent due to occurrences such as a birth or divorce.

Think Toward the Future

Of course, it’s not pleasant to think about what would happen if you were no longer around. But forecasting into the future can give you peace of mind in the present—and make things simpler for your beneficiaries. Not planning now can create problems down the line for your heirs.

“Estate and trust litigation is a booming field for attorneys, mostly because someone didn’t want to spend the time and money on legal fees to get it right and keep the plan up to date,” said Frank.

While a professional trustee typically charges a percentage of the assets of the trust, using a trustee may also mitigate the need for your beneficiaries to use additional professionals—such as investment managers or bookkeepers—regarding your estate.

Consider Your Options

As you set up your trust, know your options and discuss different setups—and their tax implications—with an estate planner. Irrevocable trusts, for example, cannot be altered or amended by a grantor and may offer tax benefits that a revocable trust—one that can be edited—may not. Talking through the pros and cons of options can help you figure out the best option for you.

“An irrevocable trust can be an effective asset protection vehicle, as well as a long-term management tool,” said Frank. On that note, it’s important to understand the laws of your state, since laws differ regarding who can and can’t modify a trust agreement.

You may also wish to assess whether lifetime gifting makes sense. This conversation is especially relevant now that the unified exemption amount is at $23.16 million per couple of lifetime and at-death gifts. For individuals and families with estates valued in excess of that per-couple threshold, strongly consider making lifetime gifts now before the possible drop in the exemption—which was temporarily increased through the Tax Cuts and Jobs Act. The IRS has indicated that such gifts will not be “clawed back” into the estate if the exemption amount does indeed drop in 2026, said Frank.

Appoint a Pro

It’s also important to consider the responsibility your estate will bring to your heirs. Are they competent, capable or willing to act in a trustee capacity? Depending on your assets, they may not be, said Frank. For example, your surgeon sister or attorney brother may not have the bandwidth to take on your real estate investments if you were to die. In a case like this, you may wish to consider a professional trustee to manage your complex portfolio.

A professional trustee has a fiduciary duty to do what’s best for the trust and for future generations. Depending on circumstances, it could make sense to give family members the right to remove and replace a trustee, which still gives your family a degree of flexibility and control in how the trust is handled.

Notify Your Beneficiaries of Your Wishes

When it comes to your estate plan, it’s smart to loop in your beneficiaries so there are no surprises or hurt feelings.

“Surprises tend to give rise to old family resentments,” said Frank. “If you’re leaving money to children, whether outright or in trust, a best practice is to give them a heads-up about the general plan.”

This doesn’t necessarily mean divulging all the financial details, just a broad summary of what you anticipate, as well as details about who will be trustees and executors of your estate.

The bottom line: When it comes to your estate, paying for professional services now can help you avoid headache and heartache later. A professional trustee can be a valuable sounding board as your estate evolves. And adding one now can ensure they get acquainted with your assets, your wishes and your beneficiaries.

Written in partnership with Forbes BrandVoice.

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May 13th

Why You Should Plan Now for a Big Tax Event in 2025

Here’s an incentive to move estate planning to the top of your to-do list: The next few years are an opportunity to maximize wealth transfer to the next generation.

The Tax Cuts and Jobs Act of 2017 increased the federal gift and estate tax basic exclusion amount (BEA) to $11.58 million per individual, or $23.16 million per couple, adjusted for inflation. But this increase doesn’t last forever — and in 2025, the exclusion is, as of now, supposed to go back to 2018 levels.

“Under the current tax law, the BEA automatically revert back to $5 million (adjusted for inflation) on January 1, 2026,” said Thomas Frank, executive vice president and Northern California regional manager at Whittier Trust.

For those with estates valued in excess of the current $23.16 million per-couple exemption, it may make sense to consider making lifetime gifts now, before a possible drop, he added. Here’s why you should discuss the opportunity with your advisor—and how it can benefit you and your heirs.

The Current Law May Affect Your Estate

While the law may seem most germane to individuals who have estates in excess of $11 million ($22 million for couples), it’s also relevant for individuals who have estates in the $6 million to $11 million range (double that for couples). That’s because, if the BEA were to fall back in 2025, you may find yourself with an estate that is subject to taxation. Considering gifting now can be a smart strategy to ensure that your estate won’t be taxed upon your death.

Planning Now Gives You Time and Flexibility

“People often wait until the last minute, but it can be smart to start strategizing, even if you’re unsure of your gifting plans,” said Frank. Lifetime gifting may bring up additional complexities to explore.

Many states have their own estate tax laws, most with much lower exemption amounts, added Frank. So while an estate may be tax-free at the federal level, it may be subject to taxes at the state level. Getting your ducks in a row and assessing several “what if” scenarios about lifetime gifting allows you flexibility and time to make sure your plans make the most sense for you and your beneficiaries.

Don’t Fear the “Clawback”

When the BEA was increased, some individuals worried that the BEA would be “clawed back” if the exemption were to drop before the estate owner died. But IRS regulations clarify that the higher BEA will shield gifts made during this time period, regardless of the date of death.

“Moving assets out of an estate during lifetime not only removes the assets from estate taxation, it also removes any future appreciation on the assets from your taxable estate,” said Frank.

Stress-Test How Your Options Affect Your Heirs

As you consider lifetime gifting, it’s important to assess several strategies to figure out the option that makes the most sense for you and your heirs. The current law allows a “step up” in tax basis for all assets included in an estate. “The new basis becomes the value of the asset at the date of death, which helps heirs avoid capital gains taxes on appreciated assets upon the death of a benefactor,” said Frank. “Because of this, lifetime gifting of highly appreciated assets is discouraged.”

Since you can’t predict the future, it’s best to assess several gifting options now and weigh the pros and cons of each. In the case of highly appreciated assets, the cost of capital gains taxes may be more than your heirs would save on estate taxes. A professional can walk you through options to help you find the smartest strategy.

Consult the Pros with Questions

“I like to say, ‘Don’t try this at home,’” said Frank.

Your unique situation—the mix and allocation of assets in your estate and the laws in your state—will affect how wealth transfer occurs. And the best plan is to have a plan. Speaking with an attorney, accountant or financial professional can guide you through all aspects of the process, so there are no surprises—or unexpected tax bills—along the way.

Written in partnership with Forbes BrandVoice.

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Apr 27th

Webinar: Wealth Planning In Today’s Volatile Environment

In the past decade, we have seen an unprecedented era of low market volatility and positive returns. Conversely, what goes up must come down. With the recent return to bear market territory and high volatility, now is an opportune time to consider wealth planning strategies for your family. Although market volatility can be unsettling for investors, this type of climate can also present estate planning opportunities. In fact, when markets enter into correction, there are several estate planning options that become more attractive.

In this webinar, you’ll learn how to:

  • Leverage gifts to avoid taxes
  • Structure your estate plan for maximum flexibility
  • Identify which planning tools are best in times of market volatility

Join Whittier Trust’s Victoria Kahn, Senior Vice President, Nevada Regional Manager, Nevada Office, and Barbara Spector, Editor-in-Chief and Associate Publisher of Family Business Magazine, as they discuss wealth planning strategies for your family in the face of volatile markets.

This webinar is sponsored by Whittier Trust & Family Business Magazine.

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.
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Apr 7th

Wealth Planning in Down Markets and Low Interest Rates

The down market and low interest rates present significant estate planning opportunities – making this a very favorable time to consider wealth planning strategies for your family.

In the past decade, we have seen an unprecedented era of low market volatility and positive returns. However, in a matter of just a few weeks, the stock market has plunged from record highs back to levels from 2017. This downturn is coupled with a move to record low interest rates. While in the short-term it is unsettling, current market conditions create opportunities for long-term family enrichment. In 2020, an individual can transfer up to $11.58 million ($23.16 million per married couple) during lifetime or at death, free of federal gift and estate tax to children, grandchildren and future generations. Additional amounts transferred are subject to a federal tax at 40%. After December 31, 2025, exemption amounts are set to return to roughly half of that, meaning that any estate valued at over roughly $5.75 million in current dollars ($11.58 million per married couple) may be subject to that 40% tax in future years. For those seeking to transfer wealth over several generations, there is a similar amount available as an exemption from the generation skipping transfer tax (“GST tax”). (It should be noted that these taxes may be seen as convenient sources of tax revenue, resulting in an acceleration in the timing of the return to lower levels, or in a significant reduction in the exemptions to even lower levels, or an increase in rates if Congress and the President choose to do so. Thus, it is appropriate to consider making current use of these exemptions.)

Here are some planning opportunities to consider:

Make Intra-Family Loans

It is now possible to loan money at a nominal interest rate to a family member without being deemed to have made a gift. The IRS requires that the interest rate on loans between family members not be lower than the Applicable Federal Rate (or “AFR”). This rate changes monthly, but can be fixed for the life of the loan. In fact, the rate has fallen dramatically and may continue to decline. By way of example, for April 2020, the “mid-term” AFR (for loans of 3 to 9 years) is 0.99% – declining from 1.53% in March 2020. The loan can be structured as “interest only” with a balloon payment due at maturity.

Make an Installment Sale to an Intentionally Defective Grantor Trust

An Intentionally Defective Grantor Trust (“IDGT”) is an irrevocable trust that is designed to make the grantor responsible for the trust’s income taxes including capital gain taxes (with this tax payment not being deemed a gift). An installment sale to an IDGT is another way to freeze the value of assets in the grantor’s estate, with appreciation above the IRS required rate of interest going to the trust beneficiaries. This appreciation is further enhanced due to the “defective” feature of these trusts which requires the grantor/lender to pay taxes – thus allowing assets in the trust to grow income-tax free.

Create a Grantor Retained Annuity Trust or Charitable Lead Annuity Trust

A Grantor Retained Annuity Trust (“GRAT”) is an irrevocable trust that pays back to the grantor a percentage of the value of the assets contributed for a period of two or more years, and at the end of the term, the assets remaining either distribute to the remainder beneficiaries (i.e. the beneficiaries other than the grantor) or remain in trust for their benefit. With careful planning, a GRAT strategy can work to shift this future appreciation at little or no gift tax cost. For a GRAT to be successful, the appreciation must exceed the IRS’s assumed rate which is based upon (but is slightly higher than) the AFR rate described above. Creating a GRAT and funding it with stocks that have dropped significantly due to the present downturn can be a great way of increasing the potential for a significant transfer of wealth — again, at little or no gift tax cost.

A Charitable Lead Annuity Trust is similar to a GRAT, with the payments over the initial term of years being made to charity (which can include a donor-advised fund created by the grantor) instead of the grantor. Depending on how the CLT is structured, the grantor may receive a current income tax deduction. And like a GRAT, the value of the trust at the end of the initial term of years passes free of gift tax to the remainder beneficiaries. For individuals with philanthropic inclinations, a CLT in the current environment presents an excellent opportunity to benefit both charity and their family.

Gift Interests in Family Businesses

Giving interests in family businesses, including investment vehicles such as family limited partnerships, is another excellent planning tool during times of market volatility. The business itself may be facing issues which have decreased its overall value significantly. And similarly, the value of the underlying assets owned by the business, whether publicly-traded securities, real estate or an operating business, may have been impacted by market swings or other economic factors. Making a gift when the asset has dipped in value can maximize the assets passed to future generations. And if you transfer a partial interest in the business, discount opportunities (sometimes as much as 30% or more) off the pro rata share of the business’s value remain possible under current IRS rules due to the lack of control and lack of marketability associated with the partial interest. An appraisal will be needed to support the valuation.

Establish a Multigenerational Nevada Irrevocable Trust

Now also may be an excellent time to gift securities or interests in a family business through the use of a multigenerational Nevada irrevocable trust. Gifts for the benefit of your family can be made to long-term trusts using your exemption from GST tax (currently $11.58 million per individual). A Nevada irrevocable trust can exist for 365 years, allowing families to pass wealth into the future through many generations, without incurring federal transfer taxes. In addition, Nevada does not impose income tax on individuals or trusts, so income can accumulate and grow over time, free of state income tax – thus further enhancing overall growth over the life of the trust.

Convert a Traditional IRA to a Roth IRA

An individual with a Traditional IRA should consider converting it to a Roth IRA. A Roth IRA is a retirement account that grows income tax free, allows contributions to be made at any age (subject to limitations), generally provides for tax-free withdrawals after age 59 1/2, and has no required minimum distributions (RMDs) – and importantly, future distributions will be income tax free. The cost of Roth conversions amounts to income tax (which can be paid from non-IRA assets) due on the conversion amount. With IRAs at lower values due to the market downturn, the tax bill on Roth conversions will be significantly less than would have been the case just weeks ago and the appreciation in the account following recovery will be tax free.

Substitute Assets in Existing Trusts

If you have previously created an irrevocable grantor trust, such as an intentionally defective grantor trust which permits a substitution of assets, swapping assets with better potential for growth can optimize the ultimate benefit of the trust. This may be an excellent time to review the tax basis and fair market value of the assets currently in a trust and identify those that have low basis and high value – while also reviewing your balance sheet and identifying assets with high basis and low value that will likely appreciate over time. You can then develop and execute a plan to substitute assets with your trustee and tax advisors.

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Nov 13th

The Myth of the Triple Net Lease

Demand for triple net lease investment opportunities has been rising consistently over the last two decades. Triple Net Leased Properties (“NNN”) are properties leased to tenants, typically a single tenant, who is responsible for all of the operating expenses of the property including maintenance, insurance, and property taxes, on top of their monthly rent payment. The most desirable properties are leased for a long term (10 to 15 years) to Class A tenants and often contain options for the tenant to renew.

Investors flock to these properties due to the perception that they are low-risk, low maintenance, require little labor from the landlord and provide consistent cash flow for a long period.

The largest myth of triple net leases is that the tenant doesn’t always renew or exercise their lease option. Many investors go in thinking the tenant will stay in the property indefinitely. There are several reasons a tenant might ultimately vacate a property — business models change, the store does not perform well, or they decide to relocate to a newer property.

When considering an investment in a triple net lease property, it is important to figure into the mix the implication of a tenant vacating the property. Here are a few things to think about when looking at a triple net lease property to ensure you are buying only the highest quality properties with the best downside risk.

Location is Key

In real estate investing, never overlook the location of the asset. Even with a long-term lease in place, it is important to consider location since that factor alone can determine if a business will survive and/or whether the landlord will be able to re-lease the building if the tenant vacates. It is vital to analyze the long-term population size and economic conditions within the immediate area and consider the area’s potential to experience positive growth. In the case of retail buildings, assure that it has good frontage on a well-trafficked street. As well, know how many pieces of vacant land and new commercial development are near the property, since tenants will consider moving to a newer building at the end of the lease. If you can find a well-located property in an infill location with high barriers to entry, the risk of inability to re-lease the space will be much lower.

Credit of the tenant/signatory on the lease

Just because a tenant has signed a long-term lease does not mean they will be able to make their lease payments over time. Be wary of leases that are signed by a franchisee whose only credit backing is their personal balance sheet. It is very hard to collect from individuals who vacate the space in the middle of the lease term. Make sure the lease includes a guarantee from the corporate entity operating at the location and request the financials of that entity. An accountant will be able to run through the company’s balance sheet and determine their financial viability.

Built-to-suit buildings

Often single tenant NNN buildings are built very specifically for the tenant’s needs. Buildings with high tenant-specific build-outs can be problematic. Why? If the tenant ever vacates, it can be very costly to bring the building back to a standard condition in order to lease it to a tenant who may have significantly different needs.

Capital needs over time

NNN lease landlords often think there will be no long-term capital needs. Unfortunately, that’s wishful thinking. Wise landlords plan ahead knowing that over time a significant capital investment will be required to maintain the property; the roof of the building will need to be replaced, the HVAC units upgraded, and the parking lot will require resurfacing. It is important to create a reserve for those items since, if a tenant does vacate, those costs will all hit at once.

Absentee management

A novice mistake investors make with NNN leases is assuming that the tenant will maintain the property to the original standards. That is often not the case. Landlords need ongoing oversight to ensure the tenant is meeting their lease obligations to keep the property in good shape. In the worst of cases, the tenant can leave the property without fulfilling any of their capital expenditures responsibility to the property, betting that the cost to litigate versus the cost to repair is prohibitive for the landlord to pursue. This can leave the landlord with significant rehabilitation costs that otherwise would have been addressed and paid by the tenant during the lease period.

While the list of considerations may sound daunting, Triple Net Leased Properties can be a great long-term investment. Our advice? Be wise. Before jumping in, perform due diligence upfront and fully understand the risk/reward proposition to help assure a successful investment.

The Myth of the Triple Net Lease

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