Post Type: Insights

Jun 7th

Finding the Just Right Solution: A Multi-Family Office

A multi-family office offers highly personalized service, efficiency and streamlined staff 

When high-net-worth families think about a plan to manage their wealth, they often consider either a single-family office or a combination of firms, including a financial advisory firm that offers off-the-rack products. However, the best option is often a middle ground between the two, a sort of “Goldilocks” scenario that is not too big and not too small. That just right solution is likely a multi-family office that offers a low client-to-advisor ratio, highly customized service and the efficiencies that come with having investments, real estate, alternative investments, philanthropy, administrative services, trust services and more under one roof.

“Often, these considerations come up when an individual or family is faced with a significant liquidity event, such as the sale of a business,” says Whittier Trust Vice President and Portfolio Manager Jay F. Karpen. “Perhaps you’re about to sell the business you built for $30 million dollars, and you’re trying to figure out how to make the sale an asset that supports your family and legacy over the long term.” Here, Karpen shares insights about the advantages of a multi-family office tailored to your needs and how to know if this approach is right for you.

Financial Advisory: Scalable but less personalized than you need and deserve

Most people are familiar with financial advisory firms, which offer an economical solution. “There is a lot of scale because everything is homogeneous,” Karpen explains. “You show up, they give you a portfolio and you get what they have. Nothing is customized, everything is model-driven and fairly basic.” While a bank or financial advisory firm might meet your most simple needs such as buying and selling stocks and overseeing your portfolio, this approach can leave much to be desired. “This one-size-fits-all model approach doesn’t allow them to take into consideration your family dynamics, your estate plan or your values,” Karpen says. “When your portfolio, values and estate plan are not working together there can be a gap in the results and can be a strain on your peace of mind.”

Single-Family Office: All yours but costly, less efficient and stressful

In a single-family office, you get tremendous customization. You’re the boss and only “client” of the staff, so everything is high-touch and at your fingertips. “The challenge with single-family offices is that you're managing people,” Karpen explains. “It's very expensive. Even though you've got what you need at any given time, if you require a professional in any area, you will need to hire them.” For example, if you need a specialized tax attorney or real estate advisor, you’ll hire them either as a consultant or as a member of the staff. You essentially become a people manager, dealing with HR issues, payroll, coaching, leasing office space and more. “There can also be a level of emotional exhaustion that comes from forming and managing a single-family office,” Karpen says. It’s a trade off between the level of control and peace of mind you’ll get by having all of your employees focused on you.

Multi-Family Office: Efficient and highly personalized for peace of mind

If the two sides of the spectrum seem fraught with downsides that outweigh the benefits, never fear. A multi-family office, such as Whittier Trust, offers the best of both worlds: comprehensive wealth management where investments work in concert with the family’s estate plan and values with scalable efficiency that proves economically advantageous over not just one but multiple generations of the family.

“We are both customized and solution-oriented, having grown out of the needs of our clients," Karpen says. A multi-family office gives you control over your portfolio and advisors who are readily available and take the time to understand your goals and family dynamics. It’s essentially like having a single-family office without needing to manage it.

Why Whittier Trust

Whittier Trust was initially established in 1935 as a family office for the Whittier family and has since evolved into a multi-family office serving a wider range of clients. Their primary expertise lies in wealth management, offering a comprehensive array of services such as investment advice, family office management, family trusts, philanthropy and real estate. They distinguish themselves in the industry by ensuring that clients are paired with the right team of advisors who possess the necessary skills to simplify daily decision-making based on their needs and aspirations. Regardless of the specific expertise a client requires or how their needs may change over time, Whittier Trust maintains a remarkable ratio of only 25 clients per advisor. This level of personalized service is unparalleled in the industry.

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

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Jun 1st

4 Strategies for Wealth Preservation During Economic Downturns

By Brian G. Bissell, Senior Vice President and Client Advisor for Whittier Trust 

Wealth preservation is always a critical concern for individuals, families, and businesses, but it is especially a focus during economic downturns. When the economy contracts, businesses are distressed, the broad market declines, jobs are lost and investment portfolios experience reduced valuations. In this environment, it is essential to be strategic, calculated and prepared to protect the family assets and take full advantage of the opportunities available. Here are four smart, practical strategies that have helped families weather economic instability for generations. 

Cash Reserves

Recessions don’t last forever. In fact, the average length of a recession is only about 10 months. Maintaining an adequate cash reserve can help you persevere through challenging economic environments that impact your business or investment portfolio. Liquidity can help cover expenses while income levels are temporarily depressed. The biggest consideration is trying to avoid the forced sale of an asset that has substantially decreased in value. We are essentially buying some time for the markets to recover and the economy to rebound. A good rule of thumb is to keep six months of business or household operating expenses in cash or cash equivalents.

We have been reminded with the current banking crisis that cash reserves shouldn’t all be held in deposits at a single bank if they are well above the insured limits. With 3- and 6-month Treasuries yielding around 5% right now, it is probably safest to keep deposits at any single bank near the $250K FDIC insured limits and position the rest in either short-term treasuries or Treasury-backed money market funds.

Having liquidity and dry powder during an economic downturn is a major step toward peace of mind, but it is more than just a security blanket. It provides ammunition to be opportunistic and gives you the ability to buy while others might be forced sellers. 

Diversification

Diversification is an essential strategy that has been a difference-maker in wealth preservation for centuries. Oftentimes real wealth is generated by concentrations and leverage, but while concentrated or leveraged investments have the propensity to create wealth, they have the same ability to take it away. Once a family or business has achieved a level of success or generational wealth, one surefire way of limiting the risk of total loss is diversification.   

A common storyline with wealthy individuals stems from them or one of their ancestors being an early founder or high-level executive of a successful business, leading to a large concentration in the company stock. They may struggle to overcome the psychological hurdle of the sentimental value they place on those shares. Sometimes this nostalgia spans generations. But all it takes is a technological advancement, shift in consumer behavior or black swan event within an industry to take a blue-chip large-cap stock and make it worthless or severely reduced in value (i.e., Kodak, Gannett, First Republic, Blockbuster, etc.). Diversification is the antidote to putting too much into one investment vehicle. For an individual’s investment portfolio, this means spreading risk across many different industries, businesses, and asset classes. For a family business, this means investing capital in other business lines that may provide exposure to a broader set of potential customers.

Tax Loss Harvesting

While economic downturns can be stressful and unnerving, they also present us with several opportunities to make some great strategic estate and tax planning moves. Tax loss harvesting is the low hanging fruit during challenging economic environments. There could be some low-cost basis stock positions you have been holding onto more so to avoid having to pay capital gains tax than your true belief in the prospects of the company. Harvesting losses allows you to offset other gains and reposition the portfolio with minimal tax ramifications.  

Consider Gifting

Many wealthy families and family business owners have estates that will exceed the lifetime exemption. All assets above the lifetime exemption amount for gift/estate taxes will be subject to a 40% tax when transferred to the next generation. If you are planning to give assets to future generations, an economic downturn might be the perfect time to accomplish the transfer. With values down, getting an appraisal done on the family business or any other asset you plan to transfer allows you to pass along more due to the temporary reduction in valuation. While it can be painful to see valuations fall, don’t miss your opportunity to use this time to maximize your planning. When the transfer is complete, and valuations have normalized, the true benefits will be realized.

Economic downturns and recessions can be scary for even the most optimistic among us. However, such seasons don’t have to be anxiety-filled. With the right guidance and plan in place, you can use such economic cycles to your long-term advantage.

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

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May 18th

5 Reasons Why Your Investments Need an Investment Policy Statement

By Craig Ayers, Senior Vice President and Senior Portfolio Manager for Whittier Trust 

At Whittier Trust, we know that clear communication with our clients is a cornerstone of the relationship. A critical aspect of clear communication is the Investment Policy Statement (IPS). An IPS is a document your advisor should provide that outlines investment goals, objectives and strategies. It serves as a roadmap and helps ensure that investments are made in a manner consistent with your overall financial goals and risk tolerance. Here are five reasons why having an IPS is critical for successful investing:

Clarity and Focus

An IPS clarifies investment goals and objectives. It forces you and your advisors to think critically about your goals and the timeline to achieve them. This clarity maintains focus on long-term goals and avoids short-term distractions.

Consistency and Discipline

An IPS establishes a framework for investment decision-making consistent with your goals and risk tolerance. It helps avoid impulsive decisions based on short-term market fluctuations or emotional reactions to market events. With an IPS in place, your advisors stick to the investment strategy over the long term, which can lead to better investment outcomes. 

Risk Management

An IPS helps investors manage investment risk by setting guidelines for asset allocation, diversification, and risk tolerance. Ensuring investments are appropriately diversified across asset classes, sectors and geographies helps to mitigate risk. By establishing risk management guidelines, your advisor has clear instructions.

Accountability and Monitoring

An IPS helps investors establish a clear benchmark against which investment performance can be measured. It also sets guidelines for monitoring investments and making adjustments to the investment strategy as needed. This accountability and monitoring keeps your advisor on track with your investment goals. Importantly, it can ensure that investments are selected within your comfort zone and risk tolerance.

Communication and Collaboration

An IPS is a communication tool between you and your advisors. It ensures that everyone is on the same page regarding investment goals, objectives and strategies. By collaborating on the development of the IPS, you and your advisors can work together to create an investment strategy that is tailored to your needs and goals.

In summary, an Investment Policy Statement is a critical tool for successful investing and reaching your goals. It provides clarity and focus, establishes consistency and discipline, helps manage investment risk, promotes accountability and monitoring, and facilitates communication and collaboration.  

 

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May 12th

3 Common Pitfalls of Trust Planning

How to avoid the downsides of an estate plan

Many considerations are at play when creating an estate plan. Parents and grandparents often want to make sure family members are taken care of, while simultaneously enacting their own vision for the family legacy and goals for their estate. However, sometimes those decisions might benefit from a different viewpoint. That’s when Whittier Trust client advisors step in to point out potential unintended downsides of trust planning so that the patriarch and/or matriarch of a family can make more informed decisions for their family’s future. Here, Dave G. Covell, Jr., senior vice president and client advisor at Whittier Trust, outlines a few common pitfalls of trust planning and alternative ways to address them. 

Appointing one child as trustee over another.

Parents might be inclined to make the more responsible or eldest child the trustee of their estate. However, this can create a rift between siblings. The parent has elevated one child over the other(s). This can create conflict and evoke emotional reactions (“Mom/Dad always liked you best!”) from the others(s). Conflict can occur where the trustee sibling doesn’t approve of his or her siblings’ spending habits and denies trust payments to them, which can then have a trickle-down effect on the grandkids if their families become estranged. As a result, “I would advise anyone creating an estate plan to have an independent party like Whittier or a trusted non-family member serving as the trustee, as there is too much downside to having one child making financial decisions over another child in the family,” Covell says.

He notes that not treating everyone the same, including a scenario where one child receives a trust and another does not, will likely have a ripple effect on the family down the road. He explains, “Typically, parents want kids to get together and be a family. So, it’s our job to raise a hand and say, ‘These choices are going to create problems. But if you want do things unequally, let’s see how best to approach it in your estate plan.’”

Creating a trust that does not include spouses. 

Parents often want to make sure that if their married kids get divorced or pass away, their assets don’t end up going to the non-family-member spouse. “If, say, their son or daughter passes away, leaving a surviving spouse and child(ren), there can be unintended consequences if the spouse isn’t provided for. If all the trust money goes directly to the grandkids, it can complicate the relationship between their mother or father, whoever is the non-family-member spouse, and their kids,” says Covell. He advises that there are ways to plan for these circumstances to maintain good family harmony. One way to provide for a non-family member spouse is to require the spouse to be married and living in the same household at the time of the family member spouse’s death. Another option is to give the family member spouse the power to appoint all or a portion of the net income to the non-family spouse. 

Setting up uber-limiting clauses in a trust.

Parents might want something specific for their children and insert a clause into the estate plan that may be potentially unattainable or shortsighted. For instance, parents might want their children to become high earners and set a financial incentive such that if they earn $100K per year, they’ll get a $100K match from their trust. “At Whittier, we would advise against that because it doesn’t take into account other scenarios, such as having a profession like a public service job that is less lucrative yet highly rewarding to the child personally and to their community,” says Covell. He offers the example of a client who could afford to accept a fulfilling, yet lower-paying teaching job because she was the beneficiary of a trust that greatly supplemented her annual income. Likewise, Covell says to beware of tight restrictions posed around education because one might not know how a child  or grandchild is going to develop—instead of college, they might opt for a vocational school, or there might be a developmental issue that requires alternative options to traditional higher education down the road. “Creating the flexibility to adjust to  future unknowns is indicative of a well written trust,” he notes. 

Additionally, parents might want to leave a property that is near and dear to their hearts and want it to stay in the family.  An example of legacy properties might be a cabin or family ranch. If the beneficiaries don’t live on or near it, don’t have the wealth of the parents to maintain it or aren’t interested in taking it over, the parents might need to rethink how it is written into their estate plan. “Parents might need to set aside funds for that property’s maintenance and hire a manager or others to oversee the property long-term. It might mean their kids get less of their other assets if that’s a focus for them,” Covell says.

While the wishes outlined in the estate plan are up to the parent or grandparent creating it, a professional estate plan advisor can help offer guidance to ensure the longevity of family legacy and avoidance of unnecessary conflict for the best outcome possible. 

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1. Appointing one child as trustee over another.

 

2. Creating a trust that does not include spouses.

 

3. Setting up uber-limiting clauses in a trust.

 

 

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

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May 4th

The Exciting Future of Federal Tax Credits

By Charles Horn, Vice President, Client Advisory/Tax

If you read the title and question how anything tax-related could be exciting, consider that for the first time in federal tax history, hundreds of billions of dollars’ worth of federal tax credits will be eligible for direct refund by the government or eligible to be sold to unrelated taxpayers on an open market. From the passage of the Tax Cuts and Jobs Act (the “TCJA”) in 2017 to the recent passage of the Inflation Reduction Act (the “IRA”), the Internal Revenue Code, colloquially known as the Tax Code, has recently undergone more change than at any time in the last thirty years. In the past three years alone, Congress passed the CARES Act of 2020, the American Rescue Plan and the Infrastructure Investment and Jobs Act of 2021 and the CHIPS and Science Act of 2022. Each of these laws contained billions of dollars in additional tax credits and incentives. While none of the recent laws resulted in the complete overhaul of the Tax Code, such as occurred in 1939, 1954 and 1986, the Tax Code has nevertheless added many new ground-breaking provisions. Two of these new provisions, which were introduced by the IRA, are sections 6417 – Elective Payment of Certain Credits and 6418 – Transfer of Certain Credits. 

The IRA contained more than $200 billion of corporate tax incentives that qualify for treatment under sections 6417 and 6418. This includes manufacturing tax credits, transportation and fuel tax credits, hydrogen and carbon capture credits and clean energy production credits. The impact of sections 6417 and 6418 will be historic and will likely serve as the most effective tools at Congress’ disposal to encourage environmentally friendly behavior in the private sector.  

Section 6417 allows applicable entities to make a direct pay election related to certain tax credits. This election will treat tax credits earned from eligible investments in renewable energy projects as tax already paid. In other words, taxpayers can request a cash refund from the IRS where the tax credit exceeds the entity’s tax liability or where the entity has no income tax liability at all. This creates a powerful incentive for applicable entities to invest in renewable energy projects, as the government is effectively writing a check reimbursing investment into the underlying credit activity.  

One key definition in section 6417 is that of “applicable entities”, which includes “any tax-exempt organization”, but does not include individual and most corporate taxpayers1. While most taxpayers do not fall into the definition of applicable entities, the direct pay election for tax-exempt organizations is a game-changer, allowing such entities to monetize their tax credits even though they would not normally incur income tax liability.  

To further incentivize investment into three specific activities found in sections 45V: Clean Hydrogen Production Tax Credit, 45Q: Carbon Capture and Sequestration Credit, and 45X: Advanced Manufacturing Credit, Congress chose to include in the definition of applicable entities other taxpayers2.  This effectively creates three new refundable tax credits. Congress could easily choose to add new credits to this list in the future. A list of tax credits eligible for direct payment can be found on the table at the end of this article.

Section 6418 may become one the most consequential tax provisions passed in decades and may pave the way for the creation of new and sophisticated markets specializing in the trading of billions of dollars in federal tax credits. Eligible taxpayers will make an irrevocable one-time election to transfer all or a portion of certain credits to an unrelated taxpayer. The transfer must be made in cash and can be elected no later than the due date of the tax return for the year in which the credit is to be claimed. Notably, the amount transferred is not includable in the transferee taxpayer's income nor deductible by the transferor taxpayer. 

This new provision addresses a significant problem with most tax credits, which is that they lose their value for taxpayers with little or no income tax. Corporate taxpayers are especially confronted with this reality when they find they are unable to utilize tax credits within the statutory time requirement. For many years now, state governments have made certain tax credits “transferable” to unrelated parties in order to encourage the underlying credit activity. A whole cottage-industry of what are effectively tax credit brokers match taxpayers engaged in the incentivized activity but who cannot use the credits with taxpayers who are willing to purchase the credits. Taxpayers pay for these third-party providers a fee, usually based on a percentage of the tax credit. At the federal level, however, taxpayers were forced to enter into complex tax credit finance structures in order to capitalize on the unusable credits. Section 6418 is the federal government finally allowing taxpayers to sell their credits, as has been done on the state level for many years now. 

Section 6418 will benefit from its broader user base. The provision defines “eligible taxpayers” as all those who are not “applicable entities” under section 64173. In other words, section 6418 will include individuals and most corporations. Section 6418 will prove to be an attractive benefit for taxpayers wishing to sell their tax credits to unrelated third parties. Congress will no doubt add additional credits in the future to incentivize other activities. 

One major restriction in section 6418 is that the tax credit transfer is limited to one transfer. The transferee in the exchange cannot resell the tax credit to another party. The purchase of the credit must be done in cash and receipt of the cash by the transferor is excluded from gross income. The expense of the cash payment is not deductible by the transferee as well. A list of tax credits eligible for transfer can be found on the table at the end of this article.  

There remain several unknowns at this point, and the IRS is already in the process of collecting comments related to forthcoming guidance on these two tax provisions. Both provisions are effective starting in 2023. One area not yet addressed is how the states will address these two IRA provisions. States can generally be broken down into two broad categories when it comes to new federal tax provisions, conforming states and non-conforming states. Conforming states are those that either automatically or regularly adopt federal tax definitions and provisions into their own state tax code. For taxpayers doing business in these states, there are usually fewer tax adjustments that need to be made to their state returns since the states will adopt most federal tax treatments. Non-conforming states are those that generally do not conform or adopt new federal tax provisions, though many of these states still adopt certain federal tax definitions. For taxpayers doing business in these states, there may be legitimate concern related to the transfer of tax credits, whether these states will consider the receipt of cash taxable instead of not taxable. California is an example of a state that is notorious for being non-conforming. Taxpayers will also need to pay close attention to states in which they have nexus and how they address section 6417 direct pay election and the section 6418 credit transferability.

The direct pay and tax credit transfer options introduced by the IRA will create new opportunities in the tax industry for taxpayers and tax professionals alike. Tax professionals specializing in credits and incentives will have their hands full in the coming years. In 10 years’ time we may look back at the passage of the IRA and recognize it as the start of the period where tax planning was dominated by markets of transferable credits and incentives. 

1 Internal Revenue Code (“IRC”) section 6417(d)(1)(A)(i)

2 IRC section 6417(d)(1)(B), (C) and (D)

3 IRC section 6418(f)(2)

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Apr 24th

Whittier Trust Presents: US-Taiwan Relations, China, and the Future of Regional Security

Indo-Pacific security and specifically deteriorating US-Chinese relations, at their lowest point in decades, have focused additional attention on US-Taiwan relations in light of China’s oft-stated designs on Taiwan. In his talk with Whittier Trust and leading members of the wealth management industry, Dr. Green focuses on Washington’s relations with and security commitments to Taipei within a broader Indo-Pacific security framework. The US currently finds itself at a key inflection point in its relations with Asian allies, all of whom share a deep concern about Beijing’s increasingly militant and bellicose behavior. It is incumbent upon us all to have deeper insights into these dynamics, which have not only Asian but global implications.

Dr. Jerrold D. Green, Member of the Whittier Trust Board of Directors and President and CEO of the Pacific Council on International Policy, discusses US-Taiwan Relations, China, and the Future of Regional Security with Whittier Trust.

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 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.

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

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Apr 7th

The Importance of Coordinating Professional Advisors

By: Steve Beverage, Senior Vice President, Client Advisor in Whittier Trust

As a family's asset base and balance sheet grow, so does the corresponding financial complexity. A number of wealth planning strategies can be employed to accomplish a family's goals, from multi-generational wealth transfer, tax mitigation and liquidity planning for estate taxes to philanthropic and legacy planning. To properly execute these strategies, having the right team in place is critical. A family will need legal counsel to advise upon and draft estate planning documents and a CPA, to ensure an optimized strategy from a taxation standpoint and that filings are done accurately. There is often an investment strategy that needs to be crafted and maintained by a portfolio manager. Sometimes an insurance or philanthropic expert may be needed. It is important to have someone coordinating with a family's team of professionals, effectively serving as the quarterback. When developing and executing a complex strategy, having a trusted advisor at the center of the process can help increase the likelihood of a positive outcome. Here, we highlight a couple of these strategies and the necessary coordination.

A charitable remainder trust (CRT) is an irrevocable trust that provides a payout to a non-charitable beneficiary for a determined term of years (or the life of the grantor), after which the remainder goes to a charitable beneficiary. A philanthropic specialist can help the family choose the desired charitable organizations they would like to benefit and help them decide if a donor advised fund (DAF) is appropriate for their plan. It often makes sense for the donor to fund the trust using highly appreciated assets as the gift because it removes the asset (and its unrealized gain) from the donor's estate, and they receive the extra benefit of a charitable income tax deduction in the year the trust is funded. The portfolio manager can work with the family to identify the most appropriate funding assets. Because the trust is irrevocable, the attorney drafting the trust, the CPA, the portfolio manager and the trusted advisor must be all on the same page as to the funding source, amount, income tax and deductions, as well as the trust's annual payments to the beneficiaries. Without someone coordinating these efforts, there could be unintended—and irreversible—consequences.

Another frequently employed estate planning strategy is an irrevocable life insurance trust (ILIT). The trust typically will own a life insurance policy that is either purchased inside the trust or gifted by a grantor to the trust. At the death of the grantor, the policy pays a death benefit to a named beneficiary. Often, some of the proceeds are used to pay estate taxes that are typically due nine months from the date of death. The primary benefit is that the estate's executor can utilize the life insurance proceeds to pay the estate taxes rather than having to sell assets that may not be as liquid in a short amount of time.

While ILITs can be effective tools for funding estate taxes, they are complex and can contain pitfalls if the proper experts are not in place at the onset of the planning process. The grantor needs to work with an attorney who is very familiar with these vehicles—inexperienced legal counsel and drafting errors can cause serious issues down the road for both the grantors and the beneficiaries. A reputable trustee who is familiar with all the administrative and fiduciary responsibilities that come with ILITs, and who is comfortable with the potential risks and liabilities involved will also need to be selected. The trustee needs to work with an insurance expert to have projected premiums, cash values and death benefits reviewed. It is crucial to analyze existing policies every 2-3 years to determine that the financial health of the insurance company is in good order, whether it is prudent to keep the current policy or obtain a new one, and whether the current amount of premium paid and resulting cash value is sufficient. Without a thorough analysis by an insurance expert, the trustee can run the risk of the policy lapsing. Once again, it can be very beneficial to have a trusted advisor who can quarterback and coordinate the various aspects and experts involved.

The wealth management landscape is constantly evolving, and the tax laws that help inform a family's decisions may also change. Without proper counsel and specific expertise, a family may be led down an unintended path and, sometimes, one that is not reversible. Often an entire team is needed to execute a strategy effectively. It is important to understand that no individual can make a complex wealth planning strategy work by themselves. Having a knowledgeable and trusted advisor at the center of your planning can help a family stay on task, organized and communicative with those critical team members.

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

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Mar 9th

Is Becoming a Financial Professional a Good Career Path? Advice From Whittier Trust Wealth Management Advisors

Whittier Trust pros share insights about why a career path in finance can be rewarding—and challenging

Pursuing a career as a finance professional, especially in investment wealth management, can be worthwhile and fulfilling. At Whittier Trust, advisors are the heartbeat of the company, making a career path in finance an opportunity to impact the lives of their clients in a positive way. What are the important skills to cultivate and the steps required for success in this field? Two of Whittier Trust’s client advisors weigh in with some things to consider. 

For a finance professional, even in a high-tech world, human competency still matters. 

Although technology has introduced new methods to manage finances, including online banking, web-based investing platforms and digital wallets, the expertise of a wealth advisor, accountant or financial analyst cannot be substituted by any application. That personal touch and tailored approach is evident at Whittier Trust, where the company maintains a low client to advisor ratio. “The personality traits and skills needed at Whittier include insight and analysis, problem solving, interpersonal skills, confidence, knowledge of digital tools, strategic and analytical skills, adaptability, honesty and strong values, strong leadership skills, industry-specific knowledge and more,” says Whittier Trust SVP and Senior Client Advisor Lauren M. Peterson. She adds that being adaptable and agile to accommodate clients’ varying needs is another lynchpin for success. 

Finding the best careers in finance: a well-rounded skill set primes advisors up for success. 

Cultivating that mix of hard and soft skills is one of the many keys to success for a financial professional. They must be able to evaluate the risks and opportunities of any financial decision and create a detailed plan to accomplish their goals. This includes staying current on industry and economic news, growing relationships with other professionals in the industry and knowing how to execute the agreed upon course of action. 

Finally—and importantly—they must communicate effectively while considering emotional factors that could be in play for a client, Peterson notes. “This career path as a financial professional would not be good for someone who is not numbers savvy, disciplined, able to think strategically and lacks interpersonal skills,” she says.

A client-first approach makes a difference. 

At Whittier Trust, no client request is too big or too small to garner attention from an advisor. “Whittier Trust encourages all employees to exhibit the entrepreneurial spirit that allows us to wear more than one hat within our role for serving clients,” explains Associate Client Advisor Thomas Porter. “That means finding innovative solutions for our clients while carefully considering all factors of a decision in a timely manner. It means being able to clearly communicate to clients or your colleagues, while also being an effective listener who can address and understand what is being communicated.” 

The industry continues to grow, making a career path in finance a bright one. 

Even in an uncertain economy, some industries are on the rise. According to predictions by the U.S. Bureau of Labor Statistics, opportunities in business and finance are expected to increase by 7% from 2021 to 2031, slightly surpassing the average anticipated growth rate for all occupations in the United States. Some of the best careers in finance made the U.S. News and World Report “100 Best Jobs” list in 2023. A financial manager, actuary, accountant and financial analyst all made the list. 

It’s good news, both for the clients who rely on savvy finance professionals and for those strategic thinkers who would choose this career path. “Working in finance becomes rewarding when you realize the impact you can have on others,” Porter says. “Using my background, I can help others make otherwise difficult decisions about their lives to minimize stress allowing for more time doing the things they enjoy with the people they love.”

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

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