Whittier Trust Company, the oldest wealth management firm headquartered on the West Coast, today announced the relocation of its South Pasadena office to 177 E. Colorado Blvd, Suite 800, Pasadena, CA 91105, effective November 20, 2023.
This move is a response to Whittier Trust's remarkable growth in recent years, fueled by its ever-expanding client base and its pledge to maintain personalized service.
"Our recent expansion is a clear reflection of our unwavering commitment to our clients," said David Dahl, President and CEO of Whittier Trust. "Our new Pasadena location will not only enable us to sustain our high standard of service but will also position us more strategically to connect with additional families."
The relocation is set to support Whittier Trust's burgeoning team, ensuring that the increasing demand for its premier wealth management services continues to be met with the utmost expertise. The new, larger space in Pasadena will underpin the firm's ongoing recruitment of exceptional talent and support its staff's professional growth.
By establishing its largest office in Pasadena, Whittier Trust reaffirms its devotion to its core pillars of wealth management services, including fiduciary services, family office, investment management, philanthropy, real estate, and alternative assets. Strategically situated near key transport links and amenities, the office enhances client accessibility to Whittier Trust's services.
As it solidifies its presence in Pasadena, Whittier Trust maintains a robust network with branches in West Los Angeles, Newport Beach, Menlo Park, San Francisco, Reno, Portland, and Seattle, reinforcing its mission to serve its clientele on a local and personal level.
The speed and magnitude of economic developments in recent years have been nothing short of remarkable. The last four years have felt like one endless sequence of unprecedented events in rapid succession.
2023 has been almost as extraordinary as the previous three years. Much like the spectacular spike in inflation, the pace of disinflation in 2023 has been remarkably rapid as well. Headline CPI inflation has fallen from above 9% to around 3% in the last five quarters. Core PCE inflation is now below 4% year-over-year and has grown at an annualized pace of just about 2% in the last three months.
The U.S. economy has also been remarkably resilient in the third quarter of 2023. As a result, the odds of a recession have receded steadily in the minds of investors. On one hand, this combination of lower-than-expected inflation and higher-than-expected growth should have given investors reason to celebrate. After all, it could have been viewed as a successful milestone in the journey to a soft landing.
However, these hopes are now at risk from perhaps the most remarkable outcome of the third quarter – a sharp rise in long-term interest rates. A swift increase of more than 1% in the 10-year Treasury bond yield was the primary driver of the stock and bond market selloff in September.
The recent market turbulence has ignited renewed fears about the future trajectories for growth and inflation. The potential outcomes range from stagflation in the near term to a deeper eventual recession from the adverse impact of higher interest rates.
We focus our analysis here on answering two key questions.
Why have long-term rates risen so sharply?
And what are the likely implications of such an increase?
Drivers of Higher Rates
Just as it appeared that we may be reaching the end of this tightening cycle, the Fed emphatically signaled a “higher for longer” stance at its September meeting. The hawkish Fed announcement on the monetary front coincided with a political disagreement on the level of government spending and fueled another upward spiral in long-term interest rates.
In its simplest fundamental framework, changes in long-term interest rates are influenced by three factors.
Changes in inflation expectations
Changes in growth expectations
Changes in the “term risk premium” or compensation for bearing interest rate risk
We take a closer look at each of these factors. Along the way, we also identify some peripheral influences that may be exerting upward pressure on long rates.
Probably Not Driven by Inflation
We have made significant progress with disinflation in recent months … probably more than many had expected. And yet the concern remains that inflation is still above 2% and any unusual economic strength will simply stoke it further, send rates higher and trigger an even deeper recession down the line.
We believe that inflation is firmly on its way down and remain optimistic that the recent trend of disinflation will continue. We summarize our inflation outlook in Figure 1 below.
Source: Factset
The dark blue line in Figure 1 shows headline CPI inflation. It peaked at 9.1% in June 2022 and has since declined to 3.7% in August. By now, it looks like we are well past the peak in inflation.
The small spike in headline inflation at the far right is attributable to the recent rise in oil prices. Barring a major escalation of geopolitical risks, we believe there is limited upside to oil prices after these gains. Besides, energy costs are notoriously volatile and core inflation, which excludes food and energy, remains in steady decline.
The decline in core inflation is particularly encouraging because it is known to be sticky. Wages are a key component of core inflation. The green line in Figure 1 shows growth in average hourly earnings as a proxy for wage inflation.
Wage inflation peaked almost a year and a half ago at around 6%. It has since fallen steadily to just above 4%. It is interesting that we have achieved this disinflation without any major disruption in the labor market.
The light blue bars in Figure 1 show that the unemployment rate was steady between 3.4% and 3.8% as wage inflation declined from 6% to 4%. This leads us to believe that we have not yet seen meaningful demand destruction. Instead, we suspect that the pandemic created transitory supply side shocks which have since abated to provide meaningful disinflationary relief.
We conclude from Figure 1 that recent disinflationary trends remain intact and will likely persist as the economy cools further in response to higher interest rates.
We have further evidence to support our conclusion that inflation is not the primary driver of higher long-term interest rates. Figure 2 shows 10-year Treasury yields and 10-year breakeven inflation expectations priced into inflation-protected bonds.
Source: Factset
The dark blue line in Figure 2 shows the dramatic increase in 10-year Treasury yields in recent weeks. The 10-year breakeven inflation rate in light blue has remained virtually unchanged over that period. Investors are clearly not pushing long-term interest rates higher because of higher inflation expectations over the next 10 years.
Likely Not Triggered by Growth Either
Since inflation expectations have remained practically unchanged, the rise in nominal interest rates has essentially led to an increase in real (nominal minus inflation) interest rates.
A typical driver of changes in real interest rates tends to be a change in growth expectations. At first glance, it is tempting to attribute higher long-term interest rates to higher long-term growth expectations. After all, we did allude earlier to unexpected recent resilience in economic activity.
But we rule out this possibility on further reflection. Yes, the odds of a recession in the near term may have receded. But it is unlikely that a burst of economic strength in the short run could materially increase long-term growth rates over the next 10, 20 and 30 years.
In fact, we know that the two drivers of long-term real GDP growth are labor force growth and productivity growth. We show how these building blocks have historically contributed to the potential growth rate of the U.S. economy in Figure 3.
We can think of the potential growth rate of an economy as the natural speed limit at which it can operate without unleashing inflation.
We see in Figure 3 that the potential GDP growth rate of the U.S. economy has slowed steadily over the last 70 years. Productivity gains held steady for most of that period before falling in the Global Financial Crisis and the Covid pandemic.
However, an aging population has dramatically altered the growth dynamics of the U.S. economy. As the baby boomers age, the labor force participation rate has declined steadily in recent years. Labor force growth has slowed down from around 2% in the first 40 years of this period to barely 0.5% in the last 15 years.
We project that this trend will continue well into the future. Demographic shifts are slow to unfold and predictable in their evolution.
We see nothing to suggest that the long-term potential GDP growth rate of the U.S. economy has risen in recent months. It is unlikely that changes in growth expectations can explain the rise in long-term interest rates.
We recognize that a dramatic shift in immigration policy or a significant increase in AI-induced productivity growth could change this dynamic. But we see these as more speculative possibilities at the moment.
Conceivably Related to Policy Risk
We finally assess if investors are pricing in a greater level of risk and uncertainty in their outlook for bonds. In that scenario, investors would demand greater compensation for bearing the risk of investing in long-term bonds in the form of lower prices and higher yields.
Let’s look separately at the risk of misguided central bank monetary policies and imprudent fiscal spending policies from the central government.
We know the Fed has signaled a higher-for-longer stance on short-term interest rates. The big risk with this approach is that monetary policy may become too restrictive at some point and throw the economy into a recession. However, such an outcome would lead to declining, not rising, long-term interest rates.
While monetary policy risk doesn’t inform our current inquiry into rising long rates, we will come back to it in the next section on the implications of higher short-term and long-term interest rates.
After ruling out inflation, growth and monetary policy risks as drivers of higher long-term rates, we may finally have a plausible candidate in the form of higher fiscal policy risk.
Federal debt has risen sharply as a result of the fiscal stimulus provided during the pandemic; it now stands at $33 trillion and 120% of GDP. While the magnitude of this debt burden has been known for some time now and is hardly new information, investors may finally be getting concerned about the lack of both fiscal discipline and bipartisan alignment in Washington.
The Congressional Budget Office now projects the public debt to GDP ratio to reach 200% in the next 30 years. And the political dysfunction in recent months has ranged from a protracted battle on the debt ceiling to a near-shutdown of the government and a subsequent change in House leadership from a revolt by Republican hardliners. In the meantime, interest rate volatility has picked up and bonds are now poised to generate negative total returns for an unprecedented third consecutive year.
It is quite possible that investors are repricing long-term bonds to higher yields in response to greater fiscal policy risk and higher asset class risk.
We also suspect that a couple of other factors may be accentuating the sharp rise in bond yields. After the debt ceiling crisis in May, Treasury issuance has been higher while Japan and China have reduced their purchases of U.S. Treasury bonds.
The imbalance arising from more supply and less demand may be creating a liquidity-driven price dislocation in the near term. And we would not rule out a speculative momentum-driven trend that continues to push prices lower and yields higher.
We summarize this section by attributing the recent rise in interest rates to a repricing of fiscal policy and asset class risks. In the process, we observe that neither long-term inflation expectations nor growth expectations have changed materially.
We also believe that short-term liquidity effects and speculation may have pushed interest rates beyond fair values based on the fundamental repricing of risks. We believe that the 10-year and 30-year Treasury bond yields are likely to normalize closer to 4% than above 5% in the coming months.
We next look at the likely impact of rising rates on the economy and markets.
Implications of Higher Rates
Rapid monetary tightening has led to financial accidents in the past. We almost got one in March in the form of a banking crisis. However, prompt and powerful policy actions contained the damage to the collapse of just a handful of regional banks.
The prospect of higher rates for longer is now raising concerns about what might break next. As these worries mount, investors are starting to bring the hard landing scenario back to the fore again.
Higher Recession Odds?
The ability of the U.S. economy to first withstand high inflation and now higher interest rates has caught many by surprise. Based on history, many conventional indicators have already been predicting the onset of a recession by now.
The more notable ones include an inverted yield curve for over a year, a continuous decline in the Leading Economic Indicators index for almost a year and a half and a collapse in year-over-year money supply growth to levels last seen in the Great Depression.
Instead, the job market and the consumer have remained resilient. Does the solid job market run the risk of creating an economy that is still too hot and, therefore, poised to unleash inflation at any moment? We don’t believe so.
Job growth has now declined steadily for several months from its torrid stimulus-induced pace. And the consumer and the economy will continue to face future headwinds from the eventual lagged effects of higher interest rates, the depletion of excess savings from the Covid stimulus and the resumption of student loan repayments.
We also show how higher interest rates may affect consumer spending differently than they have in the past.
Mortgages and auto loans are two of the bigger components of household debt. Consumers locked in low rates on those debt obligations during the long periods of easy money between 2008 and 2021. We see that clearly in Figure 4.
Source: WSJ, Moody’s Analytics
Only 11% of outstanding household debt in 2023 carries rates that fluctuate with benchmark interest rates. By contrast, this proportion was above 35% in the late 1980s.
Although floating rates on credit card loans are rising with the Fed’s tightening, a significant portion of consumer debt is fixed at low rates from a few years ago. This has allowed many households to continue spending despite the rise in interest rates.
Also, households are still paying less than 10% of their disposable income to stay current on their debts even with higher rates. This is well below the high from 2008 and is also lower than the post-crisis average.
We believe the prevalence of fixed-rate debt on consumer balance sheets has made the U.S. economy less rate-sensitive.
Here are a few observations which highlight a similar effect on corporate balance sheets and income statements.
Corporations also refinanced a lot of their debt to longer maturities at lower fixed rates. Almost half of S&P 500 debt is set to mature after 2030.
The notional share of investment grade and high yield debt maturing within two years is around 15%, well below its 25% share in 2008.
Despite the sharp increase in Fed funds rates, net interest payments for companies in 2023 are actually lower than they were a year ago.
We acknowledge that the lagged effects of higher rates will continue to slow growth. We do not, however, expect a significant recession in 2024.
Policy and Portfolio Considerations
The Fed funds rate is currently at 5.4%. The latest Fed projections point to one more rate hike in 2023 and two rate cuts in 2024. With policy rates projected to remain above 5% for over a year, we understand investor concerns about a potential Fed misstep.
As inflation falls below 4%, short-term interest rates are becoming restrictive by historical standards. Any continued decline in inflation will make current monetary policy even more restrictive. The resulting increase in real rates could trigger a recession.
While we recognize this risk, we feel that a sufficiently responsive Fed will manage to avoid it. To the extent that the next recession will be induced by Fed policy, we believe the Fed will also have the ability to manage it before it becomes entrenched.
We believe that the growing evidence of a slowing economy and declining inflation gives the Fed more flexibility than what can be inferred from their forecasts. We discuss potential Fed actions across different economic outcomes.
Let’s assume that growth begins to slow materially to risk a recession. In this setting, inflation is also likely to come down. Now the Fed no longer needs to be restrictive because the inflation war has been won; it can begin to cut rates. However, if inflation doesn’t subside to desired levels, it may well be on the heels of a stronger economy in which case a recession becomes moot.
We do not expect to see either of the two scenarios that invalidates our outlook – high inflation in the midst of a recession or a stubborn Fed which keeps rates high going into a recession.
At a portfolio level, we remain constructive on both the stock and bond markets. Long-term bond yields have already risen significantly. The 10-year bond yield reached a high of 4.88% in the first week of October; we believe it may have more room to fall from this level than to rise further. Bonds have clearly repriced to offer more compensation to investors.
The rise in interest rates has also taken a toll on stocks. By the first week of October, stocks had fallen by almost -8% from their July highs. On one hand, the rise in interest rates reduces stock valuations. On the other hand, lower odds of a recession improve cash flows. At current valuations, we believe stocks still offer above-average returns relative to bonds over the next year.
Summary
We set out to understand the drivers and implications of the recent rise in long-term interest rates. Here is a summary of our key observations.
We rule out higher inflation, growth and monetary risk as the drivers behind the recent rise in long-term interest rates.
Instead, we attribute the recent rate increases to a higher risk premium (i.e. risk compensation), reduced liquidity and greater speculation.
Monetary policy is getting restrictive and, even without any more rate hikes, will become more so if we see less inflation.
Policymakers will eventually avoid the risk of major financial accidents from remaining overly restrictive.
Both stocks and bonds are attractive after repricing lower in recent weeks.
We recognize that the coast is far from clear and a lot of uncertainty still persists. We respect the need for greater vigilance in portfolio management during these turbulent times. We continue to exercise caution and care in client portfolios.
Teague Sanders, Senior Vice President and Senior Portfolio Manager
It's an interesting time to be an investor. Artificial intelligence is making its mark on the world in continuously more profound ways. The Federal Reserve has increased interest rates from virtually zero to over 5% with a goal of tamping down inflation. As growth in the U.S. looked like it was slowing over the last few months, experts have been debating whether we would be able to achieve a "soft landing" or whether we could potentially see a recession.
Even though it has seemed like a roller coaster ride through the COVID pandemic and beyond, there are reasons for optimism. Take, for example, consumer debt. Many consumers, bolstered by stimulus checks and reduced spending during the pandemic, paid down debt, bolstered their cash reserves and, generally, got more financially stable. While debt levels have ticked up more recently, the nature of that debt is less impacted by moves in interest rates. Just prior to the mortgage-induced financial crisis of 2008, many borrowers were seduced by the allure of Adjustable Rate Mortgages (ARM), especially in the subprime portion of the market. Today the proportion of home mortgages that are ARM is a fraction what it was in 2007. Since consumer spending accounts for 65 to 70% of GDP growth, it's important to consider what impact all of those things will have on how consumers spend their money.
Ultimately, as the consumer goes in the United States, so goes GDP growth, which has a tremendous impact on the global economy. To that end, here are five key things and categories to keep in mind as you're thinking about investing and considering the economic landscape in the coming months and years.
In the pre-pandemic years, some retailers operated on the assumption that they could conduct business exclusively online. E-commerce businesses such as Amazon were in a steady state of growth. However, when it comes to shopping categories such as grocery and apparel, it's clear that consumers want to have the option for a hybrid shopping experience. Amazon knew this, and in 2017 the retailer acquired Whole Foods Market for $13.7 billion. It was an admission that online shopping wasn't going to be able to take over the entire world: There is still a need for brick and mortar. People like to be able to shop online with fast shipping, but they also like to be able to shop in person and choose their own produce, meats and other perishable goods. The Amazon and Whole Foods model is a shining example of successful omnichannel retail.
Similarly, Nike has been able to demonstrate this phenomena. It has been shifting from a wholesale model, where their products were sold in partner retailers such as Foot Locker and department stores, to a direct-to-consumer model. This gives consumers a variety of opportunities to interact with the brand.
From an investment perspective, it's wise to keep an eye on how omnichannel retailing is revolutionizing consumer behavior and fundamentally changing the retail landscape. Companies that are successfully integrating physical stores with digital platforms are likely to have an edge over those with less diverse distribution, demonstrating resilience and growth potential.
2. The Shift Back to the Office: It Impacts More Than the Workplace
Now that the pandemic is officially over, 100% remote work is becoming more the exception than the rule.
As such, the resurgence of office work presents investment prospects in various sectors. Commercial real estate, transportation, quick service restaurants and travel are all likely to see a resurgence because consumers will be spending more disposable income on commuting and services related to being in-office. Office workers will likely need a wardrobe refresh after years of comfortable, ultra-casual work-from-home attire, presenting a possible surge in profits for apparel retailers and personal care products. Employees will also be spending more time on the road, communing back and forth between their homes and offices, so fuel prices are likely to remain high. And they'll be interacting with other businesses along the way, such as restaurants with drive-thru offerings and gas stations.
3. AI and Shopping: Enhanced Response and Prediction
The role of artificial intelligence in shopping is an area of near-unlimited opportunity, but it is still evolving. We are in the early stages. AI-powered bots can act as "assistants" to do tasks such as making a shopping list based on the meal you're planning to cook, a stylist to virtually try on clothing or an erstwhile travel agent to plan a vacation. While these services are still in their infancy, they are primed to leave their mark on how consumers shop. Anyone who has purchased something online knows that user reviews can be valuable when making a decision about a product you can't see in person. However, as AI chatbots are deployed to "stack" reviews to sell products, it can be difficult to tell the truth from marketing speak. One significant AI opportunity for online retailers that want their reviews to be truthful as a service to shoppers, will be to use sophisticated programs to "scrub" untruthful reviews from their sites. They can also use AI to help further refine their searches to serve up products customers want, based on their past shopping history and search criteria. Online retailers that differentiate themselves with a seamless shopping experience and the quality of the information they provide about the products they're selling are primed to succeed.
4. Experiences Are Expensive, But Many Consumers Are Still Spending
When travel and in-person gatherings were rare, many consumers spent money on durable goods such as home appliances, vehicles and home improvements. Now that those things are bought and paid for—and don't yet need to be replaced—consumers have turned their attention to experiences, chief among them being travel. Another contributing factor: During the pandemic the upper half of the U.S. population mostly kept their jobs and saw salary increases that increased their spending power. Plus, if those people had a home mortgage at 2.75% and still saw a 5 or 6% salary increase, their housing costs have diminished over time. Now, they have more disposable income than ever and an intense interest to get out and see the world.
It's intuitive that there's a finite amount of inventory when it comes to travel—there are only so many resort rooms, seats on an airplane and rental cars in any given destination. The hotel group Hilton recently announced that RevPAR—that's the revenue per available room—is up 12% year on year. Hotels are seeing a strong return already, and bookings are going to continue to increase. Beyond traditional hotels, less traditional models—such as Airbnb and villa rentals—are continuing their climb in popularity as hotels are overbooked. Similarly, there are new ways of renting a car. Beyond the typical rental companies such as Alamo and Hertz, startups like Turo and Sixt are making an impact on the marketplace, potentially offering new opportunities for investors. To combat increased demand and unavailability, expect to see more and more alternative travel service providers entering the market.
5. Mobile Payment Adoption: How to Use It and How to Protect Yourself
More of a long-term trend, as mobile payment adoption grows, companies are increasingly providing secure payment platforms and digital identity verification solutions while the world continues to move away from fungible paper currency. Cryptocurrency was an offshoot of this—combining the convenience factor and a means with which to be able to track your transactions. The digital age means we're increasingly not exchanging goods face to face and, as a result, there is a level of trust that's been broken. Companies are stepping in to alleviate these concerns with services like Apple Pay. Now, we can simply tap our iPhone or Apple Watch and never need to pull out a credit card or cash. Visa and MasterCard have done a phenomenal job of continuing to prove out the security measures. Most people have had some sort of fraud, even if it's minor, on their accounts and most will attest that it's been resolved in their favor with minimal hassle. As such, consumer protections around this adoption of mobile technology mobile payments will continue to chip away at the legacy credit card transaction and cash. Understanding and capitalizing on emerging trends is imperative for building successful investment strategies. These consumer spending trends—and others—can help position us to maximize returns and navigate the evolving financial landscape with confidence in an ever-changing world.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
Why You Need More Than Just an Estate Planning Attorney
No one looks forward to estate planning. It’s one of those items on the checklist that starts at the bottom and can stay there for years—for that “someday” when you have time. And yet, when it’s done right, a good estate planning solution is likely to bring you much more enduring peace of mind and well-being than many of the other things you’ve marked off that list.
Whether you’re just starting out planning your estate or you’re updating an existing trust, most of us have the same goals:
to know that your estate planning solutions are in competent hands;
to ensure the estate will be settled quickly when the time comes;
to minimize administrative costs that reduce the inheritance; and perhaps most importantly,
to avoid conflict over distribution of assets and management of the process.
Dream team: estate planning attorney and other pros
Finding a good estate planning attorney is often the expected first step, and not an easy one, since you want someone you can trust who is accessible, strategic and responsive. But in fact, the legal aspect of creating a trust is only a portion of what you should be considering. What’s at stake, after all? Money and other assets. And who do you trust with your money? If your answer was a financial consultant, wealth manager or investment advisor, then you’re on the right path. It takes the combination of legal and financial expertise to make sure that all elements of the estate are covered.
Ideal plans include well-rounded estate planning solutions
The best solution is a team that holds legal, accounting and advanced business degrees, which may include a Chartered Financial Analyst, Certified Trust and Financial Advisor, Certified Financial Planner and Certified Public Accountant. Here are four reasons why:
1) Legal concerns are only the beginning of estate planning solutions. In death, as in life, there are always taxes. Even with the best planning, taxes are an inevitable gauntlet trustees must pass through, including not just estate taxes, but also income tax and generation-skipping transfer tax laws. In addition to taxes, administering a trust often involves federal securities laws, principal and income accounting principles, and real estate, business, insurance and other concerns. Even the most adept estate lawyer will be challenged to manage all of that alone. And it’s not a lawyer’s job to warn you about tax implications of your estate, which is why estate taxes are often one of the most unwelcome surprises for family members.
2) Bureaucracy is another unavoidable aspect of all tax and real estate transactions. With all the paperwork and judicial processes, settling an estate can take years, even with a trust in place. Transparent and accurate bookkeeping is critical during this time, as trustees must keep documentation of expenditures for the trust beneficiaries. It saves significant time, money, frustration and further legal issues in the end when a certified accountant works in partnership with the estate planning attorneys on your team.
3) A trust portfolio should be increasing your family’s wealth while you are alive as well as during the settlement of the estate. And of course, your portfolio should be constructed and managed according to your particular investment objectives and risk tolerance. A Certified Financial Planner or dedicated client advisor can weave together all of the investments and aspects of your life in concert with an estate planning attorney to ensure your assets will meet the goals for your estate.
4) Estate management is one of the most stressful elements in a person’s life, and it’s not unusual to see family members buckle under the weight of it, particularly when they are grieving from the loss of a loved one. Why not make sure your family has the best resources and expertise possible during this challenging time, and has someone on their side throughout the difficult process? An individual estate planning attorney will rarely step out of their role to address your personal concerns during this time, nor should they, as their mission is to execute legal issues in the most efficient way to save you money on their billable hours. But with a team looking out for you and your family, you will have not only an attorney but also a portfolio manager, a client advisor and an advisor assistant who can respond to whatever you need, when you need it. This team will act objectively, mitigate any conflicts among family members and ensure ethical decisions are made in the best interest of the trust and its beneficiaries.
The truth is that this seemingly simple item on the checklist—estate planning—can quickly grow complex. A misstep in any aspect of the estate settlement process—legal, financial, administrative or interpersonal—can lead to disputes, missed deadlines, delays and unexpected costs and complications. The good news, though, is that all you have to do is find a team you trust and leave it to them to navigate the maze of estate planning and settlement for you, according to your wishes. Your family will thank you, and you will ensure peace of mind and well-being both for yourself right now and for your beneficiaries, in perpetuity.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
A Google search today for “states without an individual income tax” will yield numerous articles on where to retire and will invariably list the following nine states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Well, as of 2023, some high-net worth taxpayers might argue that Washington no longer belongs on that list.
On March 24, 2023, the Washington State Supreme Court (“WSC”) held as constitutional the state’s so-called Capital Gains Tax (“CGT”), which levies a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests or other investments and tangible assets. The CGT applies only to individuals and includes a standard deduction of $250,000, though individuals can be liable for the tax because of their ownership interest in a pass-through or disregarded entity that sells or exchanges long-term capital assets.
According to the WSC, the CGT is truly a unique tax, one-of-a-kind in fact. While most tax practitioners would consider a “capital gains tax” as falling into the bucket of an income tax, the WSC disagreed, instead ruling it an excise tax. As of today, Washington State is the only jurisdiction in the country with a capital gains excise tax.
Many tax practitioners, including me, predicted a judicial death for the CGT. Washington State’s Constitution requires taxes on property to apply uniformly and cannot exceed an annual rate of 1%. In the landmark case of Culliton, the WSC held that net income is property, and income taxes must therefore be applied uniformly and cannot exceed 1%. It is for this reason most were not surprised when the Washington Superior Court ruled that the CGT was unconstitutional. But not so according to the WSC, which held:
The capital gains tax is a valid excise tax under Washington law. Because it is not a property tax, it is not subject to the uniformity and levy requirements of article VII, sections 1 and 2 of the Washington Constitution. In light of this holding, we decline to interpret article VII or to reconsider our decision in Culliton. We further hold the tax is consistent with our state constitution's privileges and immunities clause and the federal dormant commerce clause.
The WSC further reasoned that the CGT was an excise tax because it taxes transactions involving capital assets and “not the assets themselves or the income they generate.” It was a brilliant and very clever workaround to keep in place a tax most big-city residents largely support. Seattle has since proposed its own capital gains tax that appears to have a polling majority in support. It’s worth noting that many polls showed that a majority of Washington State residents did not support the CGT, and the CGT was largely referred to as the Capital Gains Income Tax before the WSC’s ruling.
Exceeding Expectations
Washington State’s Department of Revenue is not complaining though, the new CGT blew away expectations. The new tax brought in a whopping $849 million in the first two days following the April 18 deadline (the normal deadline is April 15 unless April 15 falls on a weekend or a holiday). These proceeds amount to more than three times what the Department of Revenue projected in March 2023.
The Department of Revenue projected $248 million in 2023, $442 million in 2024 and more than $700 million in each of the following three years. The Department of Revenue expected that the CGT would apply to approximately 5,000 taxpayers, which is less than one-tenth of 1% of the state’s total population, or 7.739 million according to the United States Census Bureau’s 2023 report. What is perhaps more astounding is that the revenue from the tax came from just under 4,000 total returns filed and extended, and 500 of those taxpayers have not yet paid the tax.
Understanding the CGT Exemptions, Deductions and Allocations
The CGT was designed to largely affect taxpayers in the top one-tenth of 1% of the state’s total population. The $250,000 standard deduction means that taxpayers who owe the tax in one year may avoid the tax in future years as their long-term capital gains slip below that threshold. The CGT also has significant carve-outs from long-term capital gains, which includes the following exemptions:
Sales of real estate.
Interests in privately held entities to the extent that the capital gain or loss from such sale or exchange is directly attributable to real estate owned directly by such entity.
Assets held in certain retirement accounts.
Assets subject to condemnation, or sold or exchanged under imminent threat of condemnation.
Certain livestock related to farming or ranching.
Assets used in a trade or business to the extent those assets are depreciable under the Internal Revenue Code or qualify as business expenses under the Internal Revenue Code.
Timber, timberlands, and dividends and distributions from real estate investment trusts derived from gains from the sale or exchange of timber or timberlands.
Commercial fishing privileges.
Goodwill received from the sale of a franchise auto dealership.
The CGT also has significant tax deductions. One such deduction that will be appreciated by small business owners is that of the deduction from long-term capital gain of an individual’s sale of all or substantially all of the qualified family-owned small business. Qualified family-owned small businesses are defined as those where:
The taxpayer holds a qualifying interest for at least five years immediately preceding the sale or transfer of the small business;
The taxpayer or members of the taxpayer's family, or both, materially participated in operating the business for at least five of the 10 years immediately preceding the sale or transfer of the small business, unless such sale or transfer was to a qualified heir; and
The Business must have had worldwide gross revenue of $10,000,000 or less in the 12-month period immediately preceding the sale or transfer of the small business.
Washington taxpayers will also receive a tax deduction for charitable donations. However, in order to qualify the charity must be principally directed or managed in Washington State. Taxpayers will also be provided tax credits for taxes paid to the Washington Business and Occupation (B&O) Tax as well as any legally imposed income or excuse tax paid by the individual to another taxing jurisdiction on capital gains derived from capital assets within the other taxing jurisdiction to the extend such capital gains are included in the individual’s Washington capital gains.
Lastly, Washington residents may have the option to “allocate” their long-term capital gains where tangible personal property is at issue. Taxpayers that can show that tangible personal property was not located in Washington at the time of the sale or exchange can allocate the capital gain outside of Washington.
When and How to File the CGT Return
The CGT is due each year on April 15. Taxpayers who extend their federal individual tax return (Form 1040) will also receive a filing extension for the CGT. However, Taxpayers must pay their CGT in full by April 15. Taxpayers who fall under the $250,000 threshold do not need to file a return. The return, extension and payment are all filed online. There is no paper filing. The online filing references as a starting point a taxpayers federal long-term capital gain as it appears on Schedule D of Form 1040.
Taxpayers that fail to timely file their returns or pay the tax due could be subject to interest as well as late filing penalties, which are 5% per month, up to a maximum of 25%, and late payment penalties, which range from 9% to 29%. Criminal penalties could also apply. Because of the significant penalties and interest in place, it is imperative that taxpayers work with their advisors to determine if they have a filing obligation. This determination must be made each year.
Despite the WSC’s ruling, the CGT is as much of an income tax as any other state income tax imposed on capital gains. To play on the words of the popular adage, an income tax by any other name still hurts. While it’s true that this tax will affect only the very rich, Washington state should no longer be considered a state without an income tax.
Preparing the successors for sustainable intergenerational wealth management
It’s back to school season all across the U.S., the time to get back into routines and more structured schedules. It also can present teachable moments for families, who might use the school calendar to motivate activities focused on finance, specifically around the topics of intergenerational wealth, stewardship, their role in the estate and the family business.
Surprisingly, personal finance classes are not as prevalent in our school system as we might hope. Currently, only 30 states require schools to offer personal finance classes in high school. However, of the 30, only 17 states at present actually require that a course be completed prior to graduating. That leaves responsibility to parents and grandparents to discuss intergenerational wealth with children, teens and young adults. As children of all ages head back to school, it can be an ideal time to involve them in financial discussions and model good stewardship and decision-making, fostering a sense of responsibility and empowerment around family wealth.
Once you have determined that it’s time to begin having discussions with the younger members of your family about how to build intergenerational wealth, “It’s essential to take into consideration the personalities of your family members and how familiar they already are with the status of your wealth, “ says Whittier Trust Senior VP, Client Advisor, Kim Frasca-Delaney. For the high net worth families who are Whittier Trust clients, there are myriad resources at their disposal to help with these age-appropriate discussions.
Ready to get started? Here are some activities and ideas that can make the topic of intergenerational wealth approachable no matter the ages involved.
Little ones: Age-appropriate discussions about generational wealth
For younger, elementary school-age children, begin with simple activities such as tracking what is spent while shopping or deciding how to spend on a particular project. This can help model good financial decision-making and stewardship. If you’re in a position to save some money on a particular project, you could give that to the child and help them start an interest-earning savings account. Children can see the money they add accumulate and grow over time. This can spark a discussion about compounding interest and why saving is so important, particularly when it comes to growing wealth.
This can also be a great time to tell the family’s “story”—sharing details about how the family or ancestors came to acquire what is now generational wealth. It might be information about a grandparent who worked hard to start a business or a great-grandparent who had the courage to immigrate to the United States and saved carefully to give his or her descendants a better future. These bits of family history can be meaningful, teachable moments that showcase good values and financial responsibility.
Teens: Open discussions about generational wealth transfer
Even in families that have the financial means to provide everything their children need (and want), it can be wise to give them opportunities to rise to the challenge of saving for their personal goals. For pre-teens and teenagers, such discussions may center around saving for college, that first car, or even an upcoming trip they would like to take. Parents who don’t wish to simply hand over funds for a big goal might consider offering to match whatever they save or work for.
Using both budgeting and the setting of clear financial goals, teens can calculate how much income they will need to reach their stated goal. If the teenager already has college funds set aside by parents or grandparents, this is the perfect opportunity to discuss intergenerational wealth and generational wealth transfer. Actions by previous generations have led to the accumulation of wealth that makes it possible for them to attend college debt-free. It is important that teens understand how the wealth was accumulated and what the expectations are for the stewardship of this generational wealth going forward.
Young adults: Generational wealth transfer may start to become a reality
As your children or grandchildren make their way through college or into adulthood and the workforce, it’s the perfect time for frank discussions about investment strategy, the family business, philanthropy and even how estate planning can (and should) occur. College age and young adult children should be prepared to be successors for their family legacies and estates, which is at the core of intergenerational wealth.
Each of these age groups benefit from open lines of communication, leading by example, and even allowing a child to fail or encounter a dilemma. These situations open the door for having a conversation about how wealth is accumulated, how it compounds and the importance of preserving wealth for future generations.
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Whittier Trust has been named one of L.A.’s 100 Best Workplaces by the Los Angeles Business Journal. The Whittier Trust offices rank as number 25 out of all midsize companies in the Los Angeles area. This is the second year in a row Whittier Trust has been included on this prestigious list. The award underscores the wealth management company’s dedication to prioritizing people and their achievement in cultivating an outstanding work environment.
Recognition on the 100 Best Workplaces list by the Los Angeles Business Journal compliments Whittier Trust’s Newport Beach office and Whittier Trust Company of Nevada’s Seattle office which were recognized on the best places to work lists of the Orange County Business Journal and the Puget Sound Business Journal, respectively.
“I am humbled by the recognition of our company as one of Los Angeles's top 100 best workplaces, and I’m proud of each and every member of our team. We have always placed our people at the heart of our success, fostering a culture that values passion, collaboration, and above all, a shared commitment to our clients. It is through their collective efforts and a belief in our shared vision that we continue to thrive and make a positive impact on the lives of the families and the community we serve. This acknowledgment not only reaffirms our commitment to fostering a supportive and empowering environment but also motivates us to reach for even greater heights" - David Dahl, CEO & President, Whittier Trust.
Companies on each local list are selected as a result of a months-long research process focused on identifying the culture, mission and values that shape the employee experience, the core tenets of what defines an ideal workplace. For Los Angeles, The Workforce Research Group administers surveys to employees of participating companies. The survey ranks small, medium, and large companies on subjects such as leadership, corporate culture, communications, and more.
The Whittier Trust Seattle Office, an arm of The Whittier Trust Company of Nevada, has been named one of Washington’s 100 Best Workplaces by the Puget Sound Business Journal. Recognition on this esteemed annual list highlights Whittier Trust’s commitment to putting people first and their success in fostering an exceptional workplace environment based on the feedback and opinions of its employees.
Washington's Best Workplaces list goes beyond the superficial perks and amenities typically associated with office environments. It delves into the core aspects that truly define an ideal workplace: the culture, mission and values that shape the employee experience. Quantum Workplaces administers surveys to employees of participating companies, facilitating an in-depth evaluation of various aspects of their experiences. The survey results are then meticulously analyzed and tabulated by The Puget Sound Business Journal.
Whittier Trust credits its recognition as one of Washington's Best Workplaces to the exceptional qualities of its team. With a remarkable employee retention rate, Whittier Trust endeavors to foster a dynamic and family-oriented culture that celebrates innovative thinking, communication and cultivating strong relationships. They take great care when composing teams, choosing dedicated individuals from diverse backgrounds, who are eager to contribute to a vibrant professional atmosphere. Whittier Trust also understands that delivering outstanding client service starts with a culture of leadership and collaboration built through knowledge sharing, professional development and mentorship. They strongly believe in the mutual growth of employees and the organization, understanding that their success is intertwined with the growth and well-being of their team.
"We are immensely proud to be recognized as one of Washington's Best Workplaces,” says Nickolaus Momyer, Whittier Trust Northwest Regional Manager, Senior Vice President, & Senior Portfolio Manager. “Our employees are at the heart of our success, and this achievement is a testament to their unwavering commitment, talent and shared passion. At Whittier Trust, we firmly believe that a strong workplace culture built on trust, collaboration and respect empowers our team to excel and deliver the unparalleled service to our clients for which we’re known.”
In the fast-paced world of family office advisory, helping clients find just the right setting to have meaningful conversations about family finances can be a challenge. If you’re planning a family getaway to a relaxing tropical locale or an active ski trip with your loved ones, it might be tempting to consider bringing up serious financial topics. Clear communication within families, especially when it comes to wealth, is vital and there are risks and benefits to this strategy of turning a vacation into a family meeting. Read on for some things to consider.
Pros: Why a family vacation could be an ideal time to discuss wealth. Vacations create a relaxed and open atmosphere. It’s no secret that a getaway can create a unique environment where families can leave behind daily stresses and embrace a more relaxed mindset. Science backs this up: a 2022 study from the Journal of Frontiers in Sports and Active Living showed that vacations help people reduce stress in a quantifiable way for a wide variety of reasons. When all of the members of your family are relaxed and calm, it could be a good time to initiate a financial discussion and take advantage of this low-stress atmosphere.
Dedicated quality time brings loved ones together. Traveling as a family gives individuals segments of dedicated quality time you’re not likely to get within your daily routine at home. Whether it’s lounging on a beach, setting out on an adventure or exploring a new city together, these shared experiences can strengthen family bonds. Broaching financial topics during this quality time can leverage the emotional openness to make discussing wealth-related matters more comfortable.
Financial goals and family legacy come to life. Taking a curated or luxury trip can bring the benefits of stewarding wealth to life for future generations. While buying things or paying for once-in-a-lifetime experiences isn’t the only goal of wealth-building, those are compelling benefits. Vacations can also serve as a reminder of what truly matters: spending time with loved ones, pursuing passions and creating memories. Drawing a correlation to the freedom that comes from stewarding wealth effectively with positive experiences that the whole family enjoys can help give family members a clearer picture of the significance of financial planning in achieving their desired lifestyle.
Leading by example can educate the next generation. Family vacations offer an excellent opportunity to involve younger family members in discussions about finances. This approach not only helps prepare the next generation for their financial roles but also reinforces the importance of long-term family cohesion.
Cons: Reasons family vacation might not be an ideal time to discuss wealth. Disruption of quality time and relaxation Picture this: You have invited your family members on a lovely getaway—perhaps to a remote tropical island or a dude ranch out West.
They’re anticipating a week of low-key relaxation or exhilarating adventure activities. Then when you spring a serious discussion about family wealth on them, they might feel ambushed and emotionally unprepared for such a conversation. The strategy could backfire, and you might end up having an unproductive discussion and putting a damper on quality family time.
Finding the right setting and focus might be challenging. Depending on the vacation destination and your family’s travel style, it could be difficult to find the right environment to have a discussion about family wealth. If you’re in a bustling city where some family members are off to museums, others are shopping and still others are seeing shows, everyone’s schedules could be challenging to match up. Similarly, if you’re at a resort where activities from water sports to spa services fill up your loved ones’ days, squeezing in a thoughtful discussion session might feel like a distraction from the primary goal of rest and relaxation.
Emotions about finances may overshadow enjoyment. Wealth discussions can be fraught with strong feelings. Even in the most harmonious families, minor disagreements about the optimal course of action, what philanthropic causes to pursue or how to best administer future trusts can dampen the mood.
Additionally, if family members don’t know the extent of your wealth, introducing that information for the first time could be a shock. Bringing up financial topics during a vacation could exacerbate existing issues or create new conflicts, detracting from the vacation’s purpose of strengthening relationships.
Lack of preparation and ready resources could be unproductive. When family office advisors come to a family meeting, they’re prepared with comprehensive data, analysis and resources to facilitate informed discussions about family wealth. Vacation settings may lack access to these resources, making it difficult to provide accurate information. This could lead to misunderstandings or incomplete discussions, potentially causing more harm than good.
Every family is different. While discussing family finances on vacation can present unique opportunities and potential risks, it’s essential to take into consideration the personalities of your family members and how familiar they already are with the status of your wealth. Every family is unique because of their financial landscape and the unique personalities and concerns each family member brings to the table.
For Whittier Trust clients, we often recommend scheduling a dedicated family finance retreat to discuss family wealth in detail. This allows members to arrive mentally and emotionally prepared to engage in productive conversations in a focused environment. Whittier Trust advisors work with family leaders in advance to collect all the pertinent information. We can also help create structure around these discussions, as appropriate. If clients still feel strongly about initiating wealth talks during a vacation, it could be advantageous to prepare family members ahead of time by saying something like, “This trip will be mostly fun, but we want to build in an hour or so to talk about some family business.” That way, no one feels caught off guard and the group can focus on what’s most important: spending time together.
How artificial intelligence is showing up in financial services and family office offerings, and why human intelligence is still vital
By Teague Sanders, Senior Vice President and Senior Portfolio Manager, Whittier Trust
It’s nearly impossible to open an article these days without someone—journalists, pundits, commentators—talking about how artificial intelligence (AI) is a game-changer, primed to revolutionize just about every industry. But what about AI in financial services and in family office services?
“AI and artificial intelligence have taken a giant leap forward with large language models and the ability for more normalized speech recognition patterns,” says Whittier Trust SVP and Senior Portfolio Manager Teague Sanders. “But to say that it's precise and accurate, in every respect, is still far from true.” Being precise and accurate should be a mandate for anyone offering financial or family office services, so using such technology judiciously is important. Read on to learn how it’s showing up in the industry.
AI in Finance
“As an industry and as a company, we have been using various forms of AI for a long time,” Sanders explains. “Anytime you're using a data aggregator, such as Bloomberg or FactSet., that’s a form of artificial intelligence. When we graph and combine various data sets, we’re not doing that manually, so the industry hasn’t been completely caught off guard by AI in finance.”
By implementing AI technologies, financial institutions, advisory firms and family office services can improve data analysis and enhance risk assessment, sometimes allowing for faster, more precise decision making by the advisors. AI-powered algorithms can quickly analyze vast amounts of data, enabling professionals to gain valuable insights and make informed decisions. Additionally, AI-driven risk assessment models can spot anomalies and identify possible risks, protecting investments and ensuring regulatory compliance.
What is a Chatbot? Understanding the potential
Chatbots have gained significant attention in recent years, and their potential in the financial sector is immense. In fact, you’re probably already seeing some of your financial institutions, such as banks and credit card companies, use chatbots to address simple questions on a digital portal (either by smartphone or computer). A chatbot is a virtual assistant, powered by AI, that can engage in conversations with users, providing instant responses and information. By leveraging natural language processing (NLP) algorithms, chatbots can understand and interpret user queries, allowing professionals to offer efficient services and responses to their clients. For example, if you have a question about a charge you don’t recognize on your credit card statement, a quick query through your credit card app may be able to help without the hassle of making a phone call.
Within a family office, chatbots could be leveraged to automate routine tasks such as trade execution and performance reporting, freeing up skilled professionals' time to focus on strategic activities. There are also some interesting applications of AI programs such as the much-talked-about ChatGPT. For example, if someone is looking for help planning a vacation itinerary or researching a new neighborhood, ChatCPT can help with the initial research before a skilled client services manager steps in to refine what the client will ultimately see.
The Future: AI in financial services paired with human expertise
As AI continues to evolve, it is important for professionals in all industries to stay informed, adapt to changing trends, and harness the technology’s power. Sanders sees plenty of opportunities to leverage AI for the good of his clients. “We always try to avoid a group-think mentality, so putting an idea into an AI-driven program and asking for ideas can be a great way to start a brainstorming session. It can help us view a problem or challenge from a different perspective,” he says. “It can help get a team’s creative and analytical juices flowing.”
The human element of family office services and managing clients’ wealth is never going to go away, particularly in a high-touch, highly relational company such as Whittier Trust. While the team at Whittier is open to embracing smart uses of AI technology, there is, and will always be, a thoughtful human behind every client interaction. AI is something that can enhance or supplement that human intelligence but never replace it.
Ultimately, Sanders says, it’s vital to keep growing with the industry. “We embrace new technologies and new ideas. We’re not afraid of them,” he says. By leveraging the capabilities of AI, professionals can unlock new opportunities, elevate their services, and create a brighter future for the industry as a whole.
Source: Factset
Source: Factset
