Post Type: Insights

Jul 25th

Baby Boomers Passing the Torch: Navigating the Challenges and Opportunities of Wealth Transfer

As the Baby Boomer generation ages, a significant wealth transfer is expected to occur over the next few decades. This phenomenon has prompted discussions among financial planners and investors about the best practices for transferring wealth to the next generation. Understanding the intricacies of generational wealth transfer is crucial for ultra-high-net-worth individuals (UHNWIs) to ensure their assets are preserved and efficiently passed on, minimizing tax liabilities and fulfilling their legacy objectives. 

The Importance of Protective Planning

Generational wealth transfer encompasses various strategies and considerations to establish a smooth and efficient passing of assets from one generation to the next. Proactive planning is essential in this process. By taking early and strategic steps, individuals can mitigate estate taxes, avoid probate, and provide financial security for their heirs. One of the primary tools in wealth transfer is the use of trusts, which can help manage and protect assets while confirming their distribution according to the benefactor's wishes, all without the need for probate—a process that can be both time-consuming and costly.

Utilizing Tax Advantages

Another critical aspect of proactive planning is understanding and utilizing the various tax advantages available. For instance, the annual gift tax exclusion allows individuals to give a certain amount each year to as many people as they wish without incurring gift taxes. However, it's important to stay informed about upcoming changes to the gift tax rule, which are set to take effect soon and could impact the amount that can be gifted tax-free. Additionally, establishing and funding education savings accounts or medical trusts can provide significant tax benefits while directly supporting the next generation.

Potential Challenges: Family Disputes and Complexity

However, the process is not without its challenges. One significant hurdle is the potential for family disputes. When large sums of money and valuable assets are at stake, differing opinions and expectations among heirs can lead to conflicts. Clear communication and detailed estate planning documents can help mitigate these risks. It is essential to have open discussions with family members about the benefactor's intentions and expectations, potentially facilitated by a neutral third party such as a family office.

The Intricacies of Estate Planning

The complexity of estate planning is another challenge that cannot be underestimated. Crafting a comprehensive estate plan involves more than just drafting a will. It requires a detailed understanding of various legal and financial instruments, as well as the ability to foresee and plan for potential changes in the benefactors' and beneficiaries' circumstances. This is where the need for continuous adjustments comes into play. Laws governing estate taxes, gift taxes, and trusts are subject to change, and family dynamics can evolve. Regularly reviewing and updating the estate plan is crucial to verify it remains aligned with current laws and the benefactor's wishes.

Securing Financial Stability for Future Generations

Properly managed, generational wealth transfer can secure financial stability for future generations. It can provide heirs with the resources they need to pursue education, start businesses, or support charitable causes, thereby extending the benefactor's legacy beyond their lifetime. However, the success of this process hinges on careful planning, transparent communication, and professional guidance.

The Role of Professional Guidance

Professional guidance is indispensable in navigating these complexities. Estate planning attorneys, financial advisors, and tax professionals bring expertise and experience that can make a significant difference in optimizing wealth transfer strategies. They can provide personalized advice tailored to the individual's financial situation, goals, and family dynamics. Additionally, professionals can help in identifying and addressing potential issues that the benefactor might not foresee, safeguarding a more robust and resilient estate plan.

Advanced Estate Planning Techniques for UHNWIs

For UHNWIs, the stakes are particularly high, and the opportunities for optimization are significant. By leveraging advanced estate planning techniques such as charitable remainder trusts, family-limited partnerships, and generation-skipping trusts, UHNWIs can achieve substantial tax savings while preserving their wealth for future generations. Involving heirs in the planning process and educating them about financial responsibility can help make certain that the wealth is managed wisely and lasts through multiple generations.

The generational wealth transfer expected as Baby Boomers age presents both challenges and opportunities. Proactive planning, clear communication, and professional guidance are key to navigating this complex process. By addressing potential challenges head-on and taking advantage of available strategies and tools, UHNWIs can optimize their wealth transfer, ensuring that their legacy endures and provides financial security for their heirs. The Great Wealth Transfer is not just a financial event; it is an opportunity to shape the future and make a lasting impact on the lives of loved ones and the community at large.

Safeguard your family's legacy with Whittier Trust. Discover our comprehensive resources and expert insights to learn how to protect your wealth.

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For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.

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Jul 18th

Market Insights – Third Quarter 2024

The Big Central Bank Dilemma

The U.S. economy and capital markets continued to surprise investors through the first half of 2024. The year began with high hopes that the rapid disinflation of 2023 would continue in an orderly and uninterrupted manner. This in turn spurred optimism that the Fed would be able to cut rates as early as in March. At that stage, the consensus expectation for monetary policy was 6 to 7 rate cuts in 2024 alone.

These hopes were dashed in the first quarter as inflation readings came in higher than expected. The economy remained unusually resilient as job growth and consumer spending exceeded expectations. In a matter of just
a few months, the timing of rate cuts has changed dramatically. In early July, the Fed’s projections called for just one rate cut in 2024; the market was pricing in two. Not surprisingly, bond yields have also remained higher; most bond market indices generated flat returns in the first half of 2024.

Under normal conditions, such a hawkish pivot in monetary policy might also have derailed stocks, especially at their loftier valuations during most of 2024. Instead, U.S. stocks performed remarkably well in the first half of 2024. The S&P 500 index rose by 15.3%, the Nasdaq 100 index surged 17.5% and the Russell 3000 index gained 13.6%.

Even as monetary policy expectations disappointed, the stock market derived its strength from stellar earnings growth. Most investors were caught flat-footed by their belief that the consensus double-digit earnings growth rates for 2024 and 2025 were simply too high. On the other hand, we had formed the minority view in our 2024 outlook that not only were these earnings levels likely to be achieved, but they could even be exceeded. Stocks handily outperformed bonds in alignment with our tactical positioning.

The resilience in economic activity and inflation at the beginning of the year gave rise to a new theory in support of higher-for-longer interest rates. By historical standards, a Fed funds rate of 5.4% should have been significantly restrictive in slowing the economy down. In fact, many had expected the 11 rate hikes in this tightening cycle to cause a recession by 2024.

A plausible explanation for the muted impact of higher interest rates is that the post-pandemic economy is operating at a higher speed limit. This possibility has several implications. It suggests that the neutral policy rate to keep this economy in equilibrium is also higher. If this were true, then the actual policy rate is not nearly as restrictive as what history would suggest. A higher neutral rate also suggests that eventual Fed easing won’t be as significant as expected. And finally, in this setting, all interest rates would end up higher than expected as well. We explore the possibility of a change in the neutral rate in our analysis.

Recent economic data, however, is now beginning to reverse. The last couple of months have seen renewed evidence of cooling inflation, a weaker job market and a softer economy. By the end of the second quarter, both headline and core inflation had receded to 2.6%, the unemployment rate had risen above 4% and real GDP growth in 2024 was tracking below trend at around 1.5%.

This recent decline in inflation and economic activity poses a difficult dilemma for the Fed. As long as growth was resilient, the Fed had the option to remain patient and keep rates high. Indeed, their policy so far has focused on avoiding the policy mistakes of the late 1970s. If they ease too soon, a potential surge in economic activity might rekindle inflation and send it higher.

However, as growth deteriorates and inflation heads lower, the risks of waiting too long may now outweigh the benefits of being patient. Several sectors of the economy remain vulnerable to the prolonged impact of higher interest rates. These include the highly leveraged private equity and commercial real estate businesses and the less regulated private credit markets. The balance of risks may well tilt towards growth and away from inflation. The Fed is clearly focused on this dynamic; Chairman Powell began his semi-annual July congressional testimony by observing that “reducing policy restraint too late or too little may unduly weaken economic activity and unemployment.”

As a result, the Fed finds itself at a crucial juncture in formulating future monetary policy. In addition to getting the timing of rate cuts right, it also needs to assess the proper neutral rate in this new cycle to calibrate the eventual magnitude of easing.

We focus our article on fully understanding this big central bank dilemma. We offer policy recommendations that may yet allow the Fed to thread the needle and engineer a soft landing. Finally, we juxtapose the Fed’s likely course of action with the divergent easing paths of foreign central banks.

  • Is there a new neutral rate at play? How has it changed? What are its policy implications?
  • When should the Fed make its first rate cut? How many should they do? At what speed?
  • What are the implications of divergent central bank easing policies across regions?

The Neutral Rate

We have previously written about how the U.S. economy is now less rate-sensitive than ever before. Consumers and corporations alike have locked in low fixed rates well into the future; they are more immune to rising rates than they were in the past.

However, the unexpected resilience of the U.S. economy is also starting to spur a new theory about future Fed policy. The key concept in this line of thinking is the so-called neutral interest rate. First, a quick definition. The neutral rate is the equilibrium policy rate that allows an economy to achieve its full potential growth at stable inflation. In other words, it is the steady-state policy rate that is neither restrictive nor accommodative; it is neither expansionary nor contractionary.

While it is intuitive, a major practical limitation of this framework is that the neutral rate is unobservable and, therefore, cannot be measured. It can only be estimated ex-ante; it is eventually validated ex-post by trial and error from actual realized outcomes of growth and inflation.

Many believe that the neutral rate is now permanently higher. They, therefore, contend that there are far fewer rate cuts ahead of us. The more profound implication of this assertion is that higher rates may prevail forever, not just for longer. Market expectations have clearly moved in this direction. We see this in Figure 1.

Figure 1: Market Expects A Higher Neutral Rate Than The Fed Does

Source: Bloomberg, FactSet

The navy line in Figure 1 depicts the market’s estimate of the neutral rate. It is derived from a useful, but less widely followed, measure of future expected risk-free rates. We describe this technical metric as simply as possible and explain how it becomes the market’s proxy for the neutral rate.

The Overnight Index Swap (OIS) is a useful tool to hedge interest rate risk and manage liquidity. For our purposes here, we can think of the OIS rate as the fixed rate for which one is willing to receive a floating rate in exchange. This floating rate is typically tied to an overnight benchmark index such as the Fed Funds Effective Rate. The OIS 5y5y rate shown as the navy line in Figure 1 can be interpreted as the fixed rate for a period of 5 years, starting 5 years from now, at which one would be willing to receive the overnight floating rate in exchange.

In its simplest form, it reflects the market’s projection of the average overnight or risk-free rate over a 5-year period, which begins 5 years from now. Because the OIS 5y5y rate is a proxy for the overnight rate in the longer run, it is the market’s estimate of the neutral policy rate.

The setup for defining the market neutral rate was tedious, but analyzing it is fascinating. Before we do so, here is a quick and far simpler word on the light blue line in Figure 1. It is the Fed’s projection of the long-term or neutral policy rate.

In Figure 1, we see that the market neutral rate has long been anchored by the Fed’s estimate of the neutral rate. Since 2012 in the post-GFC era, the market neutral rate (navy line) has consistently remained below the Fed’s neutral rate (light blue line).

This trend has reversed in the last two years. In recent weeks, the overnight swaps market has been pricing the neutral rate at just below 4% (e.g. it was 3.7% on July 8). On the other hand, the Fed’s long-held estimate of the neutral rate has been 2.5%; the Fed has now revised it up to 2.8% as of June 2024.

The market neutral rate burst above the Fed’s neutral rate in early 2022. We believe the initial 2022 spike in the market neutral rate was driven by expectations of higher inflation. We believe its subsequent rise in the last 12 months has been fueled by expectations of long-term economic resilience.

The Fed’s policy rate is currently at 5.4% and the true neutral rate will determine how low it can go. If the market is correct about the new neutral rate being closer to 4%, cumulative Fed easing will be a lot less than what may have happened in previous regimes of a lower neutral rate.

We offer our own view on where the new neutral rate may emerge in the coming months. We believe it is higher than the Fed’s 2.8% projection, but it is nowhere close to the market’s expectation of around 4%.

As we mentioned at the outset, the neutral rate is unobservable and hard to measure. But we do know that the nominal neutral rate is influenced by inflation. It is also affected by changes in the trend growth rate. We believe each of these factors will be higher in the next cycle and create a new neutral rate of 3.0-3.2%.

We have maintained for a couple of years now that the Fed’s 2% inflation target will likely be elusive. An aging population, along with new potential immigration barriers, will constrain the supply of labor and create a higher floor for wage inflation. We also believe that impediments to global trade in the form of tariffs and a populist mindset of de-globalization will potentially lead to higher inflation. We expect trend PCE inflation to settle at 2.3-2.4%.

We also expect a small increase in trend GDP growth. We have seen a recent rebound in productivity growth; we expect this to become a more secular trend as technology, AI, robotics and automation drive further productivity gains. We also expect the U.S. economy to be modestly more resilient and impervious to higher inflation and interest rates.

We summarize this section with the following observations.

  • We believe a new neutral rate is at play in this economic cycle.

    • It is higher than the Fed’s estimate of 2.8%, but well short of the market’s expectation of 3.7%. We peg it to be around 3.0-3.2%.

  • The market may be mistaken in expecting significantly higher trend inflation or trend GDP growth.

    • Technology remains a powerful disinflationary force.

    • Increases in trend GDP growth will inevitably be bounded by a slowing labor force and only modest productivity gains. The market may be erroneously extrapolating recent economic resilience too aggressively, too far out into the future.

Future FED Policy

Magnitude of Rate Cuts

Our discussion on the likely neutral rate going forward makes it easier to anticipate future Fed policy. The Fed funds rate is currently at 5.4%; we estimate the new neutral rate to be 3.1%. We believe this leaves room for 8 to 9 rate cuts in the next 18 to 24 months. The speed at which the Fed is able to implement these rate cuts will depend on how rapidly inflation and economic growth can cool off.

Timing and Trajectory of Rate Cuts

We preface this discussion with our most startling takeaway. We believe the timing and trajectory of rate cuts, to a large extent, will simply not matter. In many ways, we already have evidence to that effect; they haven’t mattered so far in 2024. Expectations for rate cuts this year have gone down from 6 starting in March to just 2 now by December. And yet, the stock market has been strong; the S&P 500 index was up more than 15% through June.

Our logic for this assessment is simple. As long as the market can anchor to the total magnitude of likely rate cuts based on an understanding of the neutral rate, it will likely look through the timing of the first rate cut and the subsequent speed of the next few.

We, nonetheless, believe that the following sequence of rate cuts may be optimal in balancing both inflation and growth risks.

  • We see sufficiently softer inflation and growth to implement the first rate cut in September and two more by December 2024.

  • We believe the Fed can get to a neutral rate of 3.0- 3.25% before the end of 2026.

  • We hold out the caveat that no Fed action for the next 6 months would be a policy misstep.

Global Central Bank Divergence

Global central banks have been remarkably coordinated and synchronized since the onset of the Covid-19 pandemic in 2020. All of them eased immediately and dramatically to support economic growth during the global lockdowns. Post-pandemic inflation, induced by this flood of liquidity, was also a global phenomenon, which then led to a synchronized global tightening cycle.

As inflation and growth begin to cool down across the world, there is some angst that global monetary policy will not be fully in sync during the upcoming easing cycle. We have already seen this happen. The Fed is still on the sidelines awaiting its first rate cut. In the meantime, the Swiss National Bank has already cut rates twice this year, the European Central Bank (ECB) has eased once, the Bank of England hasn’t moved yet and the Norges Bank has indicated that they won’t ease until 2025.

We believe that the more disjointed global easing cycle is actually justified from a fundamental perspective. These differential easing paths are largely being driven by different growth dynamics across the world. We see this in Figure 2.

Figure 2: 2024 Real GDP Growth Estimates Across Regions

Source: FactSet

Recent GDP growth has been higher in the U.S. than in Europe. It is no surprise, therefore, that the Fed has more flexibility to ease at a slower pace than the ECB does.

We still expect the overall trend towards easing to be consistent across central banks. We believe that the Bank of Japan will be the only major central bank that won’t cut rates by the end of 2025. Many others will begin to do so in 2024. A global easing cycle is about to begin and global short rates are expected to decline by almost 150 basis points over the next 18 months.

We believe stronger growth fundamentals will continue to favor U.S. stocks and the U.S. dollar. As a convenient and desirable byproduct, the strength in the U.S. dollar will continue to be disinflationary and bolster the case for a sustained Fed easing cycle.

Summary

We explored several nuances of the upcoming central bank dilemma. We examined the prospects of a new neutral rate for the U.S. economy, the magnitude and timing of likely Fed rate cuts and the potential for any adverse effects from divergent easing across global central banks.

We summarize our key takeaways below. We believe:

  • There is a new and higher neutral rate of 3.0-3.2% for the U.S. economy in this cycle.
  • While above the Fed’s long-held view of 2.5%, our estimate of the neutral rate is well below market expectations of around 4%.
  • The market is likely overestimating the neutral rate by extrapolating significantly higher trend inflation or trend GDP growth.
  • With the Fed currently at 5.4%, our 3.1% estimate of the neutral rate leaves room for 8 to 9 rate cuts in the near term.
  • Inflation and growth dynamics suggest that the Fed can get to the neutral rate in 18 to 24 months.
  • As long as the markets can anchor to the likelihood of 8-9 rate cuts in aggregate, the actual timing and trajectory of Fed rate cuts will not matter to a large extent.
  • We see enough weakness in inflation and economic growth to advocate the first rate cut in September and two more by December 2024.
  • No Fed action for the next 6 months will likely constitute a policy misstep.
  • Global monetary policy is likely to be less synchronized in the upcoming easing cycle, but not in a materially adverse manner.

We have been increasingly confident that high inflation and interest rates will soon subside. We also remain confident in the earnings outlook. With the tailwinds of accommodative monetary policy and strong earnings growth, we rule out a bear market scenario or even a prolonged correction for U.S. stocks.

Our sustained risk-on positioning in the last two years has worked well. We maintain a similar, but more modest, posture going forward. We continue to exercise prudence in managing client portfolios.

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

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We believe there is a new and higher neutral rate of 3.0-3.2% for the U.S. economy in this cycle.

 

We believe the market is grossly overestimating the neutral rate at around 4%.

 

With the Fed funds rate at 5.4%, our 3.1% estimate of the neutral rate leaves room for 8 to 9 rate cuts in the next 18 to 24 months.

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

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Jul 16th

Whittier Trust Honored as a Finalist for ‘Multi-Family Office Team of the Year’ for the Second Consecutive Year at the 2024 STEP Private Client Awards

Whittier Trust, the oldest multi-family office headquartered on the West Coast, has been named a Top 5 Finalist in the 2024 STEP (Society of Trust and Estate Practitioners) Private Client Awards in the category of

Multi-Family Office Team of the Year for the second year in a row. This recognition is a testament to Whittier Trust's commitment to prioritizing clients' needs, goals, and legacies and providing the utmost professional service in wealth advising.

"It's a true honor to be recognized by STEP for a consecutive year," said David Dahl, CEO at Whittier Trust. "Relationships are everything in family office services, and we would not serve our clients as faithfully as we do without the exceptional and tireless work of our energetic, passionate, and dedicated team of professionals. They think like true entrepreneurs, deliver exceptional service and investment results, and take the time to get to know our clients. We take pride in often being our client's second call (after their spouses) in times of both triumph and challenge, and we will continue evolving as a company to meet our clients' changing needs."

The STEP Private Client Awards celebrate firms' and professionals' achievements and outstanding performance worldwide. With a record number of entries, Whittier Trust's nomination as a finalist in the Multi-Family Office Team of the Year category for a second year further solidifies its position as a leader in delivering exceptional service to clients. It highlights the company's expertise in serving multi-generational families with complex wealth management needs.

Whittier Trust is dedicated to providing personalized and tailored wealth management services and is proud to be recognized among the Multi-Family Office Team of the Year category. The nomination serves as a testament to its culture of internal promotion, mentorship, open communication, professional growth, and dedication to clients by meeting their everyday needs.

The recognition from STEP comes on the heels of unprecedented growth from the company, having opened three new offices in the last three years, and relocating the company's headquarters to a larger office in Pasadena, CA, to better serve an expanding client base locally. Several Whittier Trust offices were also recently recognized as top places to work by the Puget Sound, Orange County, and Los Angeles Business Journals.

A panel of judges will decide upon a winner for each category. The honorees will be announced at the black-tie dinner and awards ceremony, hosted by Susie Dent, writer and broadcaster, on Sept. 19 at the London Hilton on Park Lane.

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

 

 

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

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Jul 12th

Estate Planning for Trusts with Real Estate Assets

Future generations can gain the full benefit of your business legacy with a seamless transition to a successor trustee. 

Investors with significant real estate portfolios often have an enterprising spirit to grow net worth through real estate, and succession planning may be difficult for this type of successful wealth builder. Many are reluctant to relinquish control to a successor, and some never do—until it’s too late. 

“You shouldn’t wait to pass down practical knowledge of real estate assets in your trust,” advises Whittier’s Chuck Adams, Executive Vice President, Real Estate. “Whether your successor is going to be a family member, corporate fiduciary, or both, everyone needs to understand your business strategy and history. Even in a business with perfectly maintained files, much of the valuable information regarding ownership and operation of properties can be lost when the family’s wealth creator dies or is incapacitated.”

Partners in Planning

Preparation is imperative to an organized and efficient transfer of family assets, particularly for real estate owners who have been actively involved in property acquisitions, development, and management. Although there’s no blueprint for passing down that kind of hands-on knowledge, working with a corporate trustee can facilitate the transition and ensure that your estate plan will be carried out as intended. This is especially helpful if family members have no interest or aptitude to learn the ins and outs of the business, or if they are overwhelmed at the prospect of inheriting a multi-property portfolio. 

“Bringing on a corporate fiduciary who understands the asset class prior to the transfer of holdings can reduce stress and confusion among family members,” says Adams. “We work with the wealth creator to gain valuable knowledge of their portfolio, along with any family dynamics or issues, then create a comprehensive plan documenting their intent for both the assets and the beneficiaries.”

Facilitating the Transfer

Assuming your heirs are likely to keep any or all the property you plan to leave them, even for a short period of time, it is important to share your business history and strategy. Here are five steps Adams recommends:

  1. Provide any successors the opportunity to earn your trust by learning about the real estate, along with your values and goals, to ensure continuity in how the portfolio is managed.

  2. Map out your portfolio's composition—locations, property types, and challenges—so successor trustees are ready to make informed decisions and can begin to assess, for example, the asset’s potential for development or sale or measures they should take to maintain value and avoid costly surprises.

  3. Introduce successors to the property management team, leasing agents, and other important partners.

  4. Minimize misunderstanding and potential disputes among beneficiaries by delivering and modeling clear communication about ownership, expectations, and long-term vision.

  5. Foster confidence in the next generation by involving them in asset management discussions and helping them understand the complexities of the unique assets, which will continue to provide family wealth.

Sharing your knowledge will empower your heirs to become responsible stewards of your legacy, and partnering with an experienced corporate fiduciary with significant real estate expertise will ease your mind through this process. The partnership can provide security for family members as the wealth creator’s role evolves, helping to ensure the family’s personal and financial prosperity in the future.  

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For more information about real estate assets within estate planning, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

 

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

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Jul 10th

Keys for Maximizing After-Tax Returns: 4 Strategic Elements for Income Generation

In a world full of financial uncertainties, tax-sensitivity is one aspect of investing that you can control. At Whittier Trust, we have been laser-focused on after-tax returns—the dollars you keep—since the early 1980s. That focus has become a key differentiator and one of the many reasons clients tend to stay with Whittier from one generation to the next. 

Most of the investment industry continues to focus on pre-tax returns, an approach that is woefully inadequate for taxable investors, especially in locations that combine state taxes with Federal tax rates to tax portfolio returns at 50% or more.  

We’ve found that there are four elements that allow investors to unlock superior after-tax returns: asset location, time horizon, structure, and a total return approach for income generation. Here’s why. 

Asset Location

The first key to consider is asset location. Not to be confused with asset allocation, asset location is the most impactful tactic in maximizing after-tax returns. Assets that are tax-inefficient, such as corporate bonds, private debt, or high turnover strategies, should be placed in tax-deferred accounts where they can generate high returns while compounding tax-free. On the other hand, assets that are tax-efficient, such as high-quality low-turnover stocks, low-dividend equities with long-term growth opportunities, and tax-favored bonds like municipal bonds or preferreds should be held in taxable investment accounts where compounding can still occur tax-efficiently. For our clients, the Whittier team is laser-focused on maintaining the optimal mix of assets and the right asset locations to maximize ROI. 

Time Horizon

The second key is the time horizon. Patience is a tax saver. The longer assets are held, the greater the ability to compound returns with minimal tax friction. It is important to let time be your ally. One of the easiest time horizon tax enhancements is to factor in the difference between short-term and long-term capital gains. Over long-term time horizons, the difference between a tax-sensitive investment management style and a tax-agnostic style is stunning. Patient, long-term investors can generate significantly higher after-tax returns than impatient short-term investors without regard to taxes. Having an advisor and portfolio manager who advocates this approach can help temper knee-jerk reactions to market fluctuations and help encourage patience along the way. 

Structure

The third key is structure. Structure pertains not only to the entity the investment is formed in, but also the structure of the investment itself. A few key items to consider are whether the entity is an LLC, a Limited Partnership, or a Trust that owns the asset, or whether the asset itself is taxable as ordinary income. The investment may have tax benefits from the structure such as depreciation offsets or preferred returns rather than phantom income. The structure of the investment can be the difference maker when taxes are due. Having tax specialists and attorneys as part of our team at Whittier is key, as we’re always optimizing our clients’ structure in light of changing laws and regulations. 

Total Return Approach

Finally, using a Total Return Approach to enhance after-tax wealth. Generating income in a tax-efficient manner will allow for sustainable withdrawals of the portfolio while it continues to grow after taxes and inflation. The adage that more wealth has been lost chasing yield than at a barrel of a gun, holds even more true today than ever before. Legendary investor Warren Buffett never paid a dividend from Berkshire Hathaway, yet the compounding of the company’s stock has more than covered the lifestyle of his early investors. The market has many investments with yields that seem enticing but are not commensurate with the risk incurred. Remember that some companies pay out significant dividends because they have no better reinvestment opportunities.   

In today’s world, where every dollar retained counts, embracing a tax-conscious strategy becomes essential for building a resilient and prosperous investment portfolio.

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Written by Caleb Silsby, Executive Vice President, Chief Portfolio Manager at Whittier Trust. To learn more about maximizing after-tax returns, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

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

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Jun 27th

Don’t Forget Fido: How to Help Clients Include Pet Care in Estate Plans

Financial planners are charged with protecting the things that matter most to their clients — and those things often include pets.

June is National Pet Preparedness Month, a time for making sure pets are incorporated into emergency plans. It presents a perfect opportunity for advisors and planners to connect with pet-owning clients to help them plan for their beloved pets’ long-term care by incorporating their needs into estate plans.

Below are a few areas to consider and questions to ask to help your clients ensure their pets are cared for after they’re gone.

The importance of pre-planning for pets

Estate plans usually provide for family members, but, incredibly, most of them fail to mention those with fur or feathers. Everplans reports that only 9% of people with a will include provisions for their cats, dogs, horses or exotic birds.

To help a client remember their pet during estate planning, ask toward the beginning of the process: “What can we do now to ensure the best outcome for your pets after you’re gone?”

Determine a pet caregiver — and cover their future costs

Once the conversation is started, the key question is: “Who have you identified as a potential caregiver for your pet, if you were no longer able to care for them?”

For clients who already have a caregiver in mind, advise them to confirm that the caregiver has agreed to accept this responsibility. It’s a big one, and even close friends may be reluctant to take it on.

Once the client has a willing caregiver, advisors should then craft a letter with instructions to guide the caregiver. The letter should include information about the pet’s medical history and conditions, prescription medications and dosage, veterinary contact, special dietary restrictions, habits, etc.

Finally, ensure your client’s chosen caregiver will have enough financial resources to care for the pet (or pets). This can be accomplished either via an outright bequest to the caregiver for this purpose, or by arranging a pet trust. Which option to choose will often depend on the client’s tolerance for complexity and the circumstances of the chosen pet caregiver. Some clients may prefer a pet trust because it helps ensure pets are taken care of and financially secure — even if the selected caregiver falls on hard times, becomes ill, or passes before the pet does.

If the client has no designated pet caregiver, they can instead name a trusted animal shelter or other nonprofit to receive the pet, along with a monetary bequest to cover the care costs until the pet can be re-homed. Larger and/or more unusual pets may require additional legwork upfront. For example, clients with horses may need to contact a ranch or stable to ensure a willingness to accept and board them for the remainder of their life.

Pet-specific financial planning

Once it is determined who will take care of your client’s pets after the client’s death, then you can ask: “Can you estimate how much money needs to be allocated to ensure your pet’s well-being?”

This discussion is significant, as pets can be expensive.

Most pets haven’t amassed their own fortunes (apparently, Taylor Swift’s cat boasts a net worth of $97 million), and providing for their daily care falls squarely on their caretakers’ shoulders. According to the American Pet Products Association, in 2022 Americans spent $136.8 billion on their pets, up nearly 11% from 2021.

Encourage your client to catalog what they spend annually on their pet. The list should include food, grooming, vet bills, walking services, toys and medications, as well as things like dental cleanings, boarding for vacations and even plane tickets. Once you have that number, the estate plan can specify a formula for funding a pet trust or for a bequest amount: e.g., the annual expense amount multiplied by the animal’s life expectancy at the time the owner passes.

Most people who own pets consider them to be integral members of the family. Though advisors can use National Pet Preparedness Month as a reminder to clients to not to overlook pets in the estate planning process, this same reminder can be made at any time of the year. Incorporating pets into estate plans ensures their continued care and well-being and provides clients with peace of mind, knowing that their beloved animal companions will always be protected, no matter what the future holds.

Written for FinancialPlanning.com.

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Written by Pegine Grayson, JD, CAP, Senior Vice President, Director of Philanthropic Services with Whittier Trust. For more information on estate planning or to start a conversation with a Whittier Trust advisor today, visit our contact page.

 

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Jun 24th

Putting Your Trust in Nevada

You don't have to live in the Silver State to benefit from its trust tax advantages.

As a lifelong resident of Nevada, I've welcomed countless new neighbors from California who have discovered the many benefits of my state. Of course, I'm not just talking about fresh powder on the slopes of Lake Tahoe. The absence of state income tax in Nevada regularly brings high-net-worth individuals to our state, as do our numerous tax-friendly laws for trusts and wealth preservation. 

But you don't have to reside in Nevada to take advantage of some of these benefits. At the Whittier Trust Company of Nevada, many of our clients live in California, but we serve as their trustee—because what matters is the state in which your trust is administered.

Advantages of Irrevocable Trusts

This geographical choice has the greatest implications when it comes to the benefits incurred through an irrevocable trust. Most people are familiar with revocable, or living, trusts, which are relatively simple to set up and can be modified at any time, changing beneficiaries and managing the assets within the trust as you like. Why, then, would anyone opt for an irrevocable trust, which can't be modified without legal action? 

The answer is that an irrevocable trust offers greater protection and tax benefits. It effectively removes your taxable estate assets, freeing them from estate tax after you pass. It also shields your assets from creditors in the event you are sued. This safeguard can be particularly important for attorneys, doctors, and other professionals at high risk of lawsuits. 

Because of these significant protections, irrevocable trusts can be difficult to set up. Our Whittier team includes qualified fiduciaries and expert investment advisors to help clients weigh all options. We consider not only state taxes but also other laws, such as privacy issues in regard to public record laws for trusts in different states. We take the time needed to understand each client's lifestyle and long-term goals, applying those objectives to the purpose and implications of the trust.

Nevada 1-2-3

Once a client has decided that an irrevocable trust is the best fit, we often suggest that we administer that trust from Nevada because of the three key benefits: no state income tax, no state estate tax, and no state inheritance tax. In short, you can accumulate wealth in Nevada and pass it to future generations with minimal taxation. In California, any income from your trust could be subject to state taxes. If, for example, you have a $10 million trust in California and it generates $500,000 in annual income, you could lose upwards of $100,000 per year to taxes. 

Nevada also allows for the appointment of a trust protector, in addition to a trustee, who can modify your trust terms if your circumstances change. What's more, in Nevada, you can start planning for 25th-century relatives because 365 years is the limit of the "dynasty trusts" offered in our state.

Foreseeing Complications

Estate and trust rules differ significantly from state to state, and it quickly gets complicated. Some states require that a trustee or beneficiary be a state resident, while others tax any trust set up by a resident of that state, no matter where the trustees or beneficiaries live. 

As much as I love California, I can't help but use their far-reaching tax laws for comparison (you pay a price to live in paradise!). If you set up your trust in Nevada or some other tax-friendly state, California may try to claim taxes if you use California employees to administer the trust. If a trustee dies and the successor trustee lives in California, the trust is now at risk of getting taxed in California. The bottom line is that it is best to work with your professional advisors to eliminate the possibility of exposing your trust to the long arm of the California Franchise Tax Board. 

Tax law is ever-changing as well. For example, beginning in 2024, California was able to tax trusts called Incomplete Non-Grantor Trusts (ING trusts), even when they were managed in Nevada (NINGs), but because we anticipated this change, our team was able to help clients pivot to lessen the impact of the new legislation. 

Few trust companies have more experience negotiating the finer points, financially speaking, of the California-Nevada relationship than Whittier Trust. Whatever state you choose, or even if you choose both—living in California with your trust based in Nevada—Whittier Trust will work to safeguard your family's financial future as we have for multiple generations of clients, protecting your assets and your legacy for beneficiaries for many years to come.

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Written by Keith Fuetsch, Vice President with the Whittier Trust Company of Nevada, a CFP and CTFA, providing financial and fiduciary services for high-net-worth individuals and families. He serves on the boards of the University of Nevada College of Business Alumni Association and the Reno Connection Network. For more information on The Nevada Advantage, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

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Jun 13th

Making the Puzzle Fit: Aligning Your Concerns with Your Investment Timeline

Asset allocation is widely regarded as the single most important factor driving portfolio returns. It is grounded in financial theory and historical data but also incorporates the individual circumstances and risk tolerance of each investor. In essence, it is mostly science but does incorporate some art.

Time horizon is one of the most fundamental considerations in determining appropriate asset allocation. Investors with a longer time horizon are better equipped to withstand market downturns and recover from short-term losses. This allows them to invest in asset classes that offer greater long-term returns in exchange for certain risk factors such as interest rates sensitivity, relative illiquidity, and volatility.

Many clients at Whittier, due to their multi-generational level of wealth, inherently have long-term investment horizons. Simultaneously, the Whittier investment team is a proponent of U.S.-listed public equities for their returns, inflation protection, tax efficiency, and liquidity. The combination of our clients’ circumstances and our own investment preferences means that public equities have considerable weight within our growth-oriented investment accounts.

Still, due to their volatility over shorter intervals and their unparalleled price discovery, stocks can inherently invite concern and shift an investor’s attention away from their long-term goals. When it comes to stocks, media outlets, pundits, and even our social networks produce reasons for us to madly switch between euphoria and capitulation. Stock market-driven anxiety becomes particularly acute during bear markets. The more volatile the market is, the more immediate and narrow one’s investment perspective seemingly becomes. 

Daily news and near-term market developments can be fascinating topics, but they are not particularly relevant to someone with a long-term investment horizon. Even the most seasoned investment professionals need to regularly align their concerns with their investment timeline. To do that, there are a series of helpful questions that should be asked on a regular basis:

Over the course of your investment timeline, we’ll ask:  

  • Do you think that GDP will be higher or lower than it is now?
  • Do you think that consumer prices will be higher or lower?
  • Do you think that corporate profits will be higher or lower?
  • Do you think that stocks will be higher or lower?

This list of questions could be longer but the point is obvious. If you are an investor with an intermediate to long-term time horizon then the answer to each of these questions is “higher.” Here are a few facts to prove it:

  • Over the last 100 years, there hasn’t been a single 10-year period where GDP declined.  
  • Over the last 100 years, the U.S. Consumer Price Index has been higher 10 years later 93% of the time.
  • Over the last 100 years, U.S. housing prices increased 97% of the time.
  • In all rolling 10-year periods over the last 100 years, the S&P 500 has delivered positive total returns 95% of the time. It only failed to do so following the Great Depression and the Great Financial Crisis.

Whittier’s investment team goes to great lengths to alleviate the anxiety that stock market volatility can create. We utilize our experience and your input to understand your risk tolerance. We match the duration of your portfolio and your goals. We ensure that our clients’ liquidity needs are comfortably reserved with an appropriate margin of safety. We will be there to answer your questions, address your concerns, and share our best thoughts in any market environment.  

Finally, and perhaps most importantly, we know that asset allocation isn’t static. It evolves through time. As your investment time horizon, liquidity needs, and risk tolerance change, we will adapt accordingly. 

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Written by David R. Ronco, CFA, Senior Vice President, Senior Portfolio Manager at Whittier Trust. For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

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Jun 11th

Why Use a Corporate Trustee?

An expert third party can help create efficiency and avoid conflict.

For many families, it makes sense to consider a corporate trustee, which is a company that acts as the trustee of a trust (rather than a family member or friend). I was a practicing estate planning attorney for 15 years before moving into the family office space. At the time, my bias was not to recommend a corporate trustee. I thought in most cases it was an unnecessary expense for a family. But over the years in practice, I witnessed enough conflict within personal relationships related to trusts to change my tune. In most cases now, I truly believe a corporate trustee is a preferred choice over a family member.

To begin with, a corporate trustee does not age out or lose capacity. I had a situation last year where a family member trustee called me to request a distribution, and of course, I took direction from her and made the distribution. Two days later, the same family trustee called again and asked me to make the same distribution. I scratched my head, thinking maybe our conversation slipped her mind and told her we had already taken care of this. She insisted we had not, and I came to realize she did not remember our call from two days before.

It’s a tough situation when a trustee starts to lose capacity. Most trusts include provisions for the appointment of a successor trustee, but going through the process of determining whether a trustee has reached the threshold for incapacity can be challenging. And who is the right person to initiate and see through this process? This alone can lead to tension between the trustee and the family member who is trying to make the determination. Even with the best of intentions, a matriarch/patriarch trustee can end up feeling hurt and offended.

Another factor to consider is undue influence on a trustee. I am dealing with a situation now where the family matriarch (mom) passed away, so the patriarch (dad) is serving as the sole trustee. Dad’s health is declining, so his children hired round-the-clock help for him in his home. I received a panicked call from one of the children telling me that one of the caregivers had moved in with Dad, changed the locks, and told the kids they were no longer welcome to visit. Soon after, the family patriarch funded an education trust for the caregiver’s grandchildren. Is the caregiver unduly influencing Dad by keeping his children away and isolating him, while he is in declining health and completely reliant on her help for his basic needs? Or is this his choice?

This leads to the main reason for appointing a corporate trustee: to preserve healthy family relationships. Any of the scenarios I just mentioned could put incredible strain on a family. A corporate trustee does not have an emotional attachment that can compromise decision-making. I have a situation now where parents have passed away and left their estate to three adult children. One of the assets of the estate is a strip mall in Los Angeles that was purchased by the grandparents. The property is a disaster with multiple issues. It would require a massive influx of capital to fix the property. It is clearly in the kids’ best interest to sell the property, and a potential buyer has made a good offer. However, one of the kids feels that this property connects her to the grandparents and does not want to sell. She has an emotional connection that her siblings do not share, and she has the power to deny the sale as successor trustee of her parents’ trust. It is creating conflict between her and her siblings at a time when all three are grieving the loss of their parents. If this situation were managed by a corporate trustee, a decision would have been made taking into account all the stakeholders, and any anger about such a decision would not be directed toward a family member.

Probably the main factor that makes a corporate trustee a good choice is that trustees carry liability—and who wants to saddle a family member with that? A trustee is liable to current beneficiaries as well as to all remainder beneficiaries. Even with the best of intentions, most lay people serving as trustees do not know the laws pertaining to a trustee’s obligations, duties to beneficiaries, tax filings, notices, accounting, interpreting discretionary provisions, and other complicated matters. I had a client who was the trustee of a family trust, and his children sued him for making a discretionary principal distribution that they argued prioritized the current beneficiary over the remainder beneficiaries. They ended up settling and appointing a corporate trustee, but the damage to the family was done.

Every situation is different and every family dynamic is different. But having done this work long enough, I know that the financial cost of a corporate trustee is negligent compared to the possible loss of family harmony. 

To learn more about corporate trustees or Whittier Trust's estate planning and trust services, we invite you to speak with one of our wealth management advisors by visiting our contact page.

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Written by Sharon R. Perlin, JD, Senior Vice President, Client Advisor at Whittier Trust. For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

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Jun 6th

Raising Financially Resilient Kids

The Importance of Developing Financial Literacy and Generosity in The Next Generation:

Every family is unique, but virtually all parents hope their children will grow up to be confident, self-sustaining, and happy as contributing members of society. Families of significant means face unique challenges in this arena, however, because the same wealth that affords them educational, vocational, and recreational opportunities has the potential to undermine achievement in their children. 

A study in the Journal of Youth and Adolescence found that, as wealth increases, the pressure for children to succeed amplifies. Some might dismiss these children as entitled or ungrateful, but there is scientific evidence of a link between the adversities these children could face if wealth isn’t framed and addressed properly. They are at a higher risk of anxiety and depression, and they might struggle with their identities and finding purpose in life. 

A good emotional foundation in addition to a financial one can help tremendously. “Ensuring that a family’s wealth has a positive, rather than negative, impact on kids requires intentionality and thoughtful communication,” says Pegine Grayson, Director of Philanthropic Services at Whittier Trust. “Beginning with our roots as a single-family office nearly 90 years ago, we have been working closely with high-net-worth families and we’ve seen that the key here is to focus on fostering children’s individuality, resilience, financial fitness, and philanthropic activities and values.”

Individuality

One of the key ways to help children of wealthy parents overcome potential challenges is to encourage their individuality and help them envision what success looks like on their own terms, rather than their family’s. By promoting a child’s interests and passions, parents and grandparents can guide a child to rely on their inner compass rather than external validation and alleviate the pressure to live up to others’ expectations of them.  

“A child’s creative or intellectual pursuits can be nurtured in tandem with information about the family and its financial position,” says Grayson. “It doesn’t have to be one or the other. By showing an interest in a child’s world, parents and grandparents can build up trust that can lead to deeper, more authentic connections. Many are thrilled when a child’s internal compass points them in the direction of upholding the family’s financial success, but to have it stem from a child’s true intent and wishes is much sweeter than if it comes down as an edict or external pressure to conform to a certain model.” 

Financially fit children learn to embrace from an early age that two things can be true—they can be part of a financial legacy and be successful in their own right. Parents may envision their children succeeding them in the family business, but wise ones realize that long-term outcomes are better for all involved if their children choose that path for themselves. And if they don’t choose it, everyone will be better off with a new succession plan in place.   

Raising Resilient Kids

Parents’ natural tendency is to want to protect their kids from pain, but too much coddling deprives them of the opportunity to discover their own courage as well as limits. The Whittier Trust Philanthropy Services team encourages clients to model patience and tenacity for their children and openly share stories about their failures and how they bounced back from them. Emphasize that the goal is not to avoid mistakes; we’re human and erring is inevitable. 

Grayson knows this firsthand. “My mom used to tell me, ‘I can protect you from many things, but one thing I won’t do is save you from the logical consequences of your own actions,’” says Grayson. “I learned important lessons from that philosophy, and also from watching my parents conduct themselves in the community as I grew up.” 

The goal is to own our mistakes, apologize when necessary, and take steps to avoid the same ones in the future. Children who learn to treat mistakes and failures as opportunities for improvement will use those skills for the rest of their lives. They’ll learn how to take calculated risks with the confidence that, if they fail, they have the skills and competence to try something new, without expecting others to bail them out. 

Financial Fitness

Members of the Silent and Baby Boomer generations were often taught that talking about money is unseemly, and that orientation can be magnified when it comes to raising their children and grandchildren. Many clients tell us they don’t want to burden their kids with information they may not be ready to understand. 

However, by the time kids are in middle school, they’re usually aware that their family is wealthy. What they lack is the wisdom and perspective to make sense of generational wealth, which can make life with peers difficult if not handled correctly. “We encourage clients to begin discussing financial matters in age-appropriate ways once children are old enough to notice disparities between their situation and that of other families,” says Grayson. “This doesn’t mean you should share a detailed balance sheet or even include any numbers. But it’s important to talk about where the family wealth came from, how the family uses it wisely to add value to their lives and communities, and how financial decisions about saving, spending and sharing are made.” 

Come up with a strategy to give children age-appropriate ways to practice financial resilience and literacy. For example, rather than giving allowances to reward good behavior or as payment for household chores (which should be done just because it’s what family members do), instead use those funds intentionally as a tool to teach budgeting skills. 

Share an Ethos for Giving Back

“Wealthy parents often focus primarily on passing on their assets to their children, which of course is important,” Grayson observes. “In our experience, though, the most successful intergenerational families pay just as much attention to passing on the values and skills that will equip their children to be good stewards of those assets and thriving adults in their own right.” 

“When clients ask us to help them ‘save their kids from their wealth’,” Grayson notes, “invariably, we recommend establishing a foundation or donor-advised fund to get kids actively involved in the family’s philanthropic endeavors to understand early on how money can be used.” By participating in the family’s philanthropy, kids develop a spirit of generosity and feel proud of their family’s legacy. They also learn important life skills such as investment strategies, budgeting, research, humility, respectful listening, and communication, and they experience the joy that comes from making a positive impact on someone else’s life. This strategy also helps keep the family united in a common purpose, even as kids grow up and move away.

Our advice: Help kids make sense of the family’s wealth and become good stewards of what they stand to inherit by being overt about how the family aligns its wealth and values. Talking about what matters most to you and the positive changes you want to see in the world, encouraging your kids to do the same, and then deploying some of the family wealth to promote those changes through charitable giving is incredibly empowering for kids. 

To learn more about navigating wealth and family dynamics or how Whittier Trust's philanthropic services can help your family with financial literacy to protect and grow your legacy, we invite you to speak with one of our wealth management advisors by visiting our contact page.

 

 

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