Post Topic: Investments

May 23rd

What Is a Trust Protector and Do I Need One?

Imagine this: You’re at a cocktail party talking about investing and estate planning and someone mentions naming their closest friend as the “trust protector” for their kids’ trust. What are they talking about? Trust protectors have long been used by jurisdictions outside of the United States as a mechanism to provide oversight of corporate trustees and hence, a measure of family control over trusts in general. Still confused? Here’s what you need to know.

In a typical irrevocable trust arrangement, assets are gifted to family members by transferring legal title to the assets in the name of a trustee who is held to the terms of a written document (the trust agreement). There are many benefits to trusts including professional management of assets, asset protection, and sometimes even gift and estate tax advantages. Families often like the idea of using trusts in wealth transfer planning but struggle with the question of who to name as the trustee.

Naming a family member provides comfort that the beneficiary's needs will be met by someone close to them, but a suitable family member may not always be available. Certain family relationships don’t lend themselves to a trustee/beneficiary relationship. Siblings of the beneficiary are a poor choice because the relationship dynamics may be negatively impacted. More distant relatives don’t always have the same level of contact that someone closer to the beneficiary might. The role of trustee comes along with a tremendous amount of legal liability for investments and recordkeeping which can deter even the most suitable of family members from serving in this capacity.

A professional trustee who is neutral and in the business of serving in a fiduciary capacity is frequently the best choice. Professional trustees come in two general categories—professional private fiduciaries and corporate trustees. Professional private fiduciaries are individuals with experience and training in trust administration. They may be located close to where the beneficiary lives and have the ability to interact frequently. However, they may not have additional skills in asset management and tax compliance. Many professional private fiduciaries are sole practitioners, so it will be incumbent upon the family to decide how successor trustees are to be selected.

Corporate trustees are either trust companies or the trust divisions of large commercial banks and brokerage firms. They have staff trained in trust administration and usually possess investment and tax expertise. Continuity isn’t an issue since the ability of the corporation to serve as trustee is not dependent upon a single individual. The risk often associated with corporate trustees involves possible mergers, impersonal service, and staff turnover.

If a family leans towards selecting a corporate trustee, how do they ensure the best possible service and advice? Enter the role of “trust protector.” A trust protector is an individual apart from the trustee but to whom the grantor gives certain powers. The most common power given to the trust protector is the power to “remove and replace” the trustee. This allows an individual, perhaps even a family member, to watch over the corporate trustee to make sure the grantor’s wishes are properly fulfilled.

The trust protector’s scope of duties may be expanded to include oversight or even direct management of specific assets, for example, a closely held business. Sometimes, a trust protector will be given an advisory role with respect to distributions. In such cases, the trustee may consult with the trust protector when a beneficiary requests extraordinary distributions from the trust. Another common power is the ability to move the governing law of the trust to another state (or “situs”) of the trust administration for income tax or other reasons. The trust protector’s powers may be held in either a fiduciary or non-fiduciary capacity. This is a matter to discuss with a qualified estate planning attorney since there are potential legal and tax ramifications.

When making a gift into an irrevocable trust, the grantor usually intends that the assets are removed from his or her estate for gift and estate tax purposes. For this reason, it is important for a trust protector to be independent of the grantor. Having said that, the role of trust protector is often a better role for a family member or close family friend than being a trustee.

For families seeking to use trusts in generational wealth transfers, it’s worth asking their lawyers about the advisability of naming a trust protector.

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Written by Thomas J. Frank Jr., Executive Vice President, Northern California Regional 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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May 9th

Ensuring a Smooth Generational Transfer

Transferring the ownership of a family business from one generation to the next can be challenging, particularly in today's world, where the financial values and business objectives of multiple generations may differ. As an advisor, I have witnessed the various difficulties families face while navigating the process of transitioning the family business to the next generation.

By prioritizing communication and seeking professional support, families can navigate the complexities of generational transfer with confidence and cohesion, while creating enduring value.

Understanding Current Complexities of a Family Business

There are natural challenges intrinsic to family business ownership succession planning and transfer. An array of hurdles — such as navigating shifts in federal regulations and economic landscapes, or balancing intricate family dynamics and evolving business management paradigms — stands in the path of each generation involved. Understanding and overcoming these obstacles is pivotal for ensuring the successful passage of the family business legacy.

Sunsetting Estate-Tax Exemption

Some of the most persistent issues family businesses face are a result of congressional actions. I recently attended a meeting of the Family Business Caucus in Washington, D.C., where I had the opportunity to hear family businesses speak to Congress about their issues. The most pressing worry among family business owners was the sunsetting estate-tax exemption in 2025. With this change, the current $13.61 million per person exemption will be reduced to $5 million, aligning with pre-2017 Tax Cuts and Jobs Act levels (adjusted for inflation).

If Congress doesn't agree to extend the higher amount, it could mean significant challenges for family businesses and their estate plans. Many family business owners have their wealth tied to shares in the business, which are not necessarily liquid. For example, if a family member passes and there's no liquidity within their estate other than the ownership of the business, their family will have to identify a way to purchase back the shares so the heirs have the liquidity to pay their estate tax bill.

Recently, I spoke to a family who found themselves in this dire situation following the unexpected passing of a shareholding brother. Without proper transition structures in place, the surviving family business owners were faced with a more than $40 million tax burden, requiring them to sell some of the family's assets to satisfy it. This is just one example of what is at stake.

Planning Ahead

I often see family members who are so hyper-focused on the family business and its success that they forget to focus on the long-term, bigger picture. This approach is successful in real time but potentially hampers the future of the family business and the security of the next generation. Family business owners with this mindset often lack urgency in planning for the future and aren't aware of the potential implications this might have on the family's wealth and the future of their business.

To empower the family to manage the business as needed while ensuring long-term planning is not neglected, I recommend engaging the support of a third-party expert to develop a structure and plan for the business not only 10 years out, but also 30 and maybe even 50 years from now. A specialized advisor can help a family business succeed through their detailed and holistic approach to managing the family's finances as well as matters such as payroll, taxes and real estate assets.

Family Dynamics

Across different generations, there's a natural inclination to see their approach to running the family business as the definitive way forward. The founding generation typically holds steadfast to their vision for the business yet may struggle with relinquishing control to the next generation. Conversely, the second generation may prioritize personal pursuits over business operations, which can create tension with the founding generation. Meanwhile, the third (or sometimes second) generation may seek to carve out their own path within the family business or explore avenues beyond it.

These generational shifts can introduce divergent viewpoints on the business' direction, including debates over bringing in a non-family CEO. While these discussions are healthy and reflective of evolving perspectives, it's crucial to foster an environment where all family members feel heard and respected and tensions don't create divisions. Embracing diverse perspectives ensures that everyone's input is valued, ultimately contributing to the longevity and success of the business beyond the founding generation, as well as the family.

Implementing a Smooth Transition to the Next Generation

Now it's time to unravel the secrets of seamlessly passing the torch to the upcoming generation in a family enterprise.

Implementing a smooth family business transition to the next generation requires an orderly, multi-step process. Skipping any steps can lead to disaster, not only financially but also in terms of family harmony.

Step 1: Lay the Foundation

The first step is laying the foundation for the family office and future transitions. Families must start by creating a family mission statement or family charter that articulates family values, goals and objectives. Outlining clear lines of communication, rules of engagement and methods for conflict resolution is imperative to the success of this effort. For the mission statement to be relevant and enduring, members of all generations must be involved in this stage and allowed to share their thoughts and perspectives.

Step 2: Design the Family Office

Once the mission is set and agreed upon, families must develop a family office structure — a platform all family members can rely on for information about the business, estate plans and legacy plans. It's the centralized location of all family documents and becomes the main source of institutional knowledge that stays intact through multiple generations.

Far too often, I have seen issues arise when the founding generation doesn't spend the time on step one and moves directly to step two. When the founding generation creates an elaborate rule book and family charter that all future generations must live by without their input, the effort is usually met with great resistance, especially from the spouses of the next generation. However, when everyone feels like they are heard and have an opportunity to weigh in, there is a much better chance of achieving buy-in and family cohesion.

Step 3: Align Estate Plans with the Master Plan

The third step in this process is ensuring that each family member's estate plans conform to the master plan. The individual estate plans of each member can have an impact on the wealth of the entire family and enterprise. As such, it is important to develop individual estate plans that align with the mission, rules and architecture of the master plan. The master plan should serve as the family's financial North Star, helping to guide and align all financial decision-making to the stated mission and the family's best interest. Again, this step underscores the importance of step one, as family conflict related to individual estate plan choices is likely without buy-in.

Step 4: Consider Third-Party Support

Family office management and estate planning are serious responsibilities. For families that wish to utilize a single-family office, I encourage them to forecast how their business trajectory could unfold and create a framework for how funds and management should be allocated to future generations.

However, if these steps and efforts feel daunting or there is concern about family alignment on the architecture, business-owning families might consider hiring a multifamily office. A multifamily office can guide families in the collective development of a mission statement and manage the financial architecture to ensure the family maintains harmony while managing business endeavors and leadership transitions from one generation to the next.

When it comes to navigating the transition of a family business to the next generation, achieving flawless continuity is challenging. However, with meticulous preparation, a profound understanding of each stakeholder's perspective and values, and collaboration with a reputable advisor, smooth operation becomes not just a possibility, but a steadfast assurance.

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Written by Brian G. Bissell, 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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Apr 23rd

Are You Getting the Most out of Your Tax Planning Services?

Are you maximizing your after-tax returns to the fullest extent possible? This question holds immense weight for ultra-wealthy individuals as they navigate the complex landscape of taxation. Despite employing the expertise of traditional financial advisors and tax professionals, many find themselves falling short of truly optimizing their tax planning strategies. The seasoned wealth management advisors who make up the backbone of Whittier Trust’s family office services recognize the intricate challenges our clients face, and we pride ourselves on offering tailored solutions and tax planning services that are always geared to optimize their tax efficiency. Let’s delve into the role family office services can play in navigating the complexities of tax administration for ultra-wealthy individuals and families.

Benefits of Receiving Guidance and Administration from a Family Office

Family office services serve as the cornerstone of comprehensive wealth management for wealthy individuals and families. By entrusting their tax planning and administration to experienced advisors, clients gain access to a host of expertise tailored to their unique financial circumstances. Family offices develop a holistic tax plan considering the family's income, investments, trusts, and estate. This minimizes tax liabilities across estate, gift and income taxes, which includes pass-through, individual, corporate and fiduciary taxation. A family office can also act as your eyes and ears, constantly monitoring tax law changes and identifying opportunities to further optimize the family's tax situation. Our team of professionals possesses an in-depth understanding of tax laws, regulations, and industry trends, enabling us to devise customized tax planning strategies that align with our clients' long-term objectives while ensuring smooth day-to-day tax administration. We handle everything from filing returns and record keeping to expense tracking and payroll taxes. We also collaborate with external tax professionals for seamless compliance and accuracy.

Understanding the Complexity of Personal Taxes for the Ultra-Wealthy

Our clients operate within a landscape of multifaceted tax regulations and obligations. With diverse income sources–including investments, business ventures, and real estate holdings, many of which have been passed down intergenerationally–their tax liabilities extend far beyond the scope of conventional taxpayers. Here's how our advisors approach some of the most important considerations for our clients:

Multiple Jurisdictions:

We understand the complexities of managing assets and income across various locations, including both domestic (state and federal) and international jurisdictions. Each jurisdiction has its own unique tax laws, including income taxes, property taxes, and estate taxes, with varying rates and regulations. We help clients navigate these complexities to minimize tax burden and avoid double taxation. Our advisors can assist with navigating the nuances of multi-state taxation within the U.S. This includes understanding how state and federal income taxes interact, as well as property and estate tax implications across different states. For clients with international assets, it's crucial to remember that U.S. citizens and residents are taxed worldwide. We help navigate the intricacies of tax treaties, foreign tax regimes, and potential inheritance taxes impacting these assets. Our family office can coordinate with experienced tax professionals in both domestic and international jurisdictions. This ensures your assets are managed by experts with in-depth knowledge of the specific tax laws and applicable regulations. By understanding your unique circumstances and goals, our advisors can also provide insights on potential residency or asset location strategies that may enhance tax efficiency.

Non-Traditional Assets:

Investments in private equity, real estate, and alternative assets pose unique tax considerations. We help our clients value these assets for tax purposes and devise strategies to optimize their tax efficiency. When considering unique asset classes, our clients know that access to the best investing professionals and specialized tax advisors is crucial for performance. A multi-family office with a hybrid architecture is uniquely suited to managing such a team of experts. 

Estate Taxes:

We provide comprehensive strategies to minimize estate tax burdens across generations, incorporating careful planning and knowledge of complex tax laws surrounding trusts, gifts, and inheritance. Strategic planners are already eyeing the crucial shift in estate tax exemption for 2025 and beyond, with the amount in 2026 slated to be half of the 2025 amount with an inflation adjustment. Past experiences, such as the panic-inducing sunset of the lifetime gift tax exemption in 2012, highlight the necessity for proactive planning with family offices to navigate impending changes, ensuring access to estate planning attorneys and informed decision-making.

Pass-through Entities:

Many of our clients utilize complex structures like partnerships and LLCs for wealth management. Our advisors are well-versed in the tax implications and filing requirements associated with these entities, ensuring our clients remain compliant while maximizing tax benefits. Currently, our advisors are monitoring the impact of tax changes on pass-through entities, particularly regarding the Qualified Business Income (QBI) deduction under the TCJA. While pass-through entities initially had a tax advantage, the expiration of the QBI deduction and increased individual tax rates post-2026 diminish their appeal compared to C corporations, which are subject to a consistent 21% tax rate.

Charitable Giving:

Optimizing tax benefits from charitable contributions requires a deep understanding of foundation management. Our advisors assist clients in structuring their charitable giving to maximize tax advantages while aligning with their philanthropic goals and family values. Keeping the books for philanthropic efforts can often be a large undertaking. Our family office and philanthropic department ease this burden by handling quarterly and annual financial statements, issuing checks, and organizing necessary files for taxes and audits. We collaborate with the foundation’s CPA to facilitate tax preparation. For California-based private foundations or charitable trusts earning over $2 million annually, an audit is mandated the following year. This number can be challenging to track, so our advisors vigilantly monitor this threshold for our clients.

We understand that maintaining meticulous records and complying with complex reporting requirements can be burdensome for our clients. That's why we provide dedicated support and guidance throughout the process, ensuring effective management of these considerations while alleviating the administrative burden for individuals and families.

The Importance of Access to Tools and Techniques for Effective Tax Planning

Another boon to working with a family office is the access to sophisticated tools and increased exposure to industry-leading tax administrative and strategic techniques, which Whittier Trust advisors consistently update to ensure optimal tax efficiency. Our family office uses cloud-based tax software which facilitates secure and efficient management of tax and other data, enabling real-time collaboration and infallible storage. Advanced data processing and analytics tools help identify tax optimization opportunities and potential risks based on historical tax data and current strategies. Robust cybersecurity measures protect sensitive financial data, ensuring clients' peace of mind.

From income-shifting strategies to charitable giving, we employ diverse tactics to minimize tax liabilities while preserving wealth. We’re also always looking for new ways to optimize your assets with a long-term approach. With potential changes to the estate tax exemption looming, one of the levers we’ve been bullish on over the past few years are Grantor Retained Annuity Trusts (GRATs). GRATs have emerged as a strategic tool in tax planning thanks to their tax efficiency and flexibility, especially during periods characterized by high interest rates 

Unlike conventional gifting methods, a GRAT facilitates the transfer of only the appreciation on trust assets, rendering it potentially gift and estate tax-free. This makes GRATs particularly appealing for individuals who have already maximized their lifetime gift tax exemptions or those uncertain about their utilization. Despite being an irrevocable trust, GRATs possess unique characteristics, such as the ability for the grantor to retain certain powers, including substituting trust assets, which enhance their flexibility. The success of a GRAT hinges on the assets' appreciation outpacing the annuity stream, especially vital in high-interest rate environments. Notably, a "rolling GRAT" strategy, comprising short-term GRATs funded by annuity payments from preceding ones, mitigates mortality and interest rate risks, exemplifying adaptability in tax planning. 

Personalized & Comprehensive Guidance: The Cornerstone of Family Office Services

The complexities of tax administration for ultra-wealthy individuals and families necessitate a comprehensive approach grounded in expertise and personalized guidance. It’s important to engage with a family office committed to empowering you with the tools, strategies, and support you need to consistently adapt to, and proactively navigate, the intricate landscape of tax planning and administration successfully. By leveraging our extensive experience and resources, we enable our clients to achieve their financial objectives while minimizing tax liabilities and preserving wealth for future generations. It’s never the wrong time to ask yourself if your tax planning strategies are working for you.

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If you’re curious about our family office and tax planning services and how they might ease the administrative burden on you and your family, we invite you to speak with one of our wealth management advisors 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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Apr 12th

Want a Tax-Efficient Portfolio? Focus on These 3 Areas

Deploying tax-efficient strategies within an investment portfolio is one of the most critical roles of a financial advisor, especially because many investment managers focus on pretax investment returns. By emphasizing after-tax returns, advisors may better meet the needs of their high-net-worth clients—particularly in high-tax states.

Here are three key areas to focus on to improve after-tax returns:

Think asset location.

Not to be confused with asset allocation, asset location is one of the most effective tactics in maximizing after-tax gains. This means tax-inefficient assets—corporate bonds, private debt, high-turnover strategies—belong in tax-deferred or tax-exempt accounts, compounding tax-free.

For taxable accounts, prioritize tax-efficient options such as low-turnover stock strategies, direct index solutions, low-dividend growth equities, municipal bonds, or preferreds with qualified dividends. Let compounding work its magic in a tax-efficient way. Growth assets should be allocated to accounts for future generations, while income-oriented assets belong in accounts with shorter time horizons.

Emphasize long-term capital gains.

Sometimes the best strategy is patience. Despite the potential for tax law changes ahead, time-tested tax-efficiency strategies will continue to reward high-net-worth families.

The longer assets are held, the more returns compound with minimal tax drag. Let time be your ally and factor in the long-term capital gains advantage. Over time, the difference between realizing or deferring long-term capital gains and avoiding higher short-term capital-gains tax rates will lead to better after-tax results.

Plan ahead for 2025.

Truly strategic planners are already looking ahead to 2025 and beyond when there may be a crucial shift in the lifetime exemption from estate taxes.

The current $13.61 million per person exemption is slated to be effectively cut in half, aligning itself with pre-2017 Tax Cuts and Jobs Act levels (adjusted for inflation) if Congress doesn’t act. The situation facing advisors and clients is similar to that of 2012 when gift tax exemption provisions were set to expire at the end of that year. Proactive measures, including early collaboration with estate planning attorneys, will ensure well-considered decisions and prevent last-minute decisions made under pressure.

Incorporating tax sensitivity into everyday portfolio management, along with proactive planning for potential tax law changes, strengthens the compounding power of client portfolios.

The ever-growing U.S. budget deficit increases the likelihood of tax changes, potentially including a decrease in the estate tax exemption and a rise in the tax rate. By focusing on these three key areas of tax efficiency, advisors can empower their clients to navigate these changes effectively and achieve superior after-tax returns.

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Written by Caleb Silsby, Executive Vice President, Chief Portfolio Manager at Whittier Trust. For more information, 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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Mar 20th

Six Reasons Why Most UHNWIs Choose a Multi-Family Office

Your family office is a point of pride as well as a smart way to manage your business and personal affairs. But you don’t have to have a gold nameplate and command your own staff to reap all of the family-office benefits. In fact, a multi-family office typically offers greater advantages—and ironically, more control—than a single-family office. Here are six ways that a multi-family office gives you more.

Security & Compliance

Infrastructure, cybersecurity, compliance training . . . it’s tedious, it’s frustrating, and if you’re not out in front of it, you're putting yourself at risk. That’s a lot of pressure for your staff and family. At a multi-family office, we have expert teams on top of changing trends, regulations, and demands.

Flexibility to Evolve

It’s a common misconception that a single-family office will better address your family’s unique needs. But how can it, when it means you have to hire staff for each new development in your life? When your time is spent handling payroll, office space, and interpersonal dynamics, you’re left with less control of your life. The multi-family office infrastructure is designed to give you all the flexibility you need without worrying about reducing, reorganizing, or adding to your team. We hold your business and interests together as you evolve.

Trust & Objectivity

How well do you know your staff and trust their commitment to your goals? Are you certain they won’t be swayed by their own interests? Can they safely suggest different points of view, or do they perhaps feel pressure to agree and conform? How do you gauge their loyalty while allowing dissent? By its very nature, the multi-family office has checks and balances against rogue players or people pursuing their own self-interest. We act as fiduciaries, bound to manage your affairs to your greatest benefit, not ours.

Proactive Leadership

Successful executives are problem-solvers and often visionaries as well, always looking down the road for the next big thing and for solutions to potential issues. But a healthy company doesn’t rely on one leader to see everything. The cross-pollination among executives at a multi-family office creates an acutely proactive environment. Staff at a single-family office, on the other hand, tend to be more reactive to their specific set of circumstances, because focusing on that one family’s needs is the efficient thing to do.

Plus, some multi-family offices, such as Whittier Trust, have robust service offerings spanning various departments. Whether you need help launching a family foundation, acquiring or managing real estate, exploring alternative investments, or working through estate planning options to fit your unique needs, it’s all under one umbrella and at our fingertips.  

Privacy & Continuity

By definition, a single-family office should excel at protecting your privacy. But it can be difficult when multiple branches of a family want to keep their affairs separate. Sometimes you may even end up competing for staff loyalty. Your advisors at a multi-family office act as neutral mediators to help prevent these sorts of conflicts and maintain each family member’s interests and privacy. You can rely on that same team to help facilitate succession planning and generational wealth transfer and provide continuity for decades.

Help with Family Dynamics

No matter which type of office you have, family governance is typically led by a powerful patriarch or matriarch. But with a multi-family office team, there’s a counterbalance to that control dynamic. There are other voices suggesting governance structure and helping organize a family council or regular family meetings, ensuring everyone is heard and respected, and that everything can run smoothly.

How to Transition

So what if you currently have a single-family office and want to transition to a multi-family office? It doesn’t have to be complicated. There are natural points in any business for pausing and reassessing, and given how expensive and stressful a single-family office can be, simplicity and cost-effectiveness are always good reasons for a change. 

Let everyone know it’s time for a fresh analysis and audit of operations. Make it clear that during this transition, you will be analyzing risk and cash flow, prioritizing different investments to accommodate family member’s preferences, digitizing documents, etc. Perhaps you will be adding new services as well, such as philanthropic strategy, trust services, real estate, private equity, or direct investment in alternative assets. Because your team at the multi-family office will be accustomed to working with a wide variety of families, you can maintain relationships with existing staff and integrate key players into your new multi-family office.

Why Whittier Trust

Whittier Trust brings your investments, real estate, philanthropy, administrative services, trust services, and more under one roof—without you having to manage it. You maintain control over your portfolio, while your trusted team of advisors ensures that your investments work in concert with your estate plan. You get holistic, personalized, and responsive service with scalable efficiency. And you and your family get your lives back to enjoy.

For those seeking a seamless transition to a multi-family office, Whittier Trust stands out as an optimal choice. By entrusting your affairs to Whittier Trust, you not only maintain control over your portfolio but also gain access to a dedicated team of advisors committed to aligning your investments with your estate plan. Experience the benefits of holistic, personalized, and responsive service, all while enjoying the freedom to focus on what truly matters—your life and your family. Make the switch today and discover the peace of mind that comes with having Whittier Trust by your side.

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Written by Elizabeth M. Anderson, Vice President of Business Development at Whittier Trust. For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

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Mar 7th

5 Estate Planning Priorities for 2024: An Essential Checklist

2024 is in full swing, and the start of a new year is a good reminder to take stock of our lives and plan for the future. Effective estate planning is a crucial aspect and its importance cannot be overstated. A well-thought-out estate plan ensures that your assets are distributed according to your wishes, minimizes tax liabilities, and provides for your loved ones while building your legacy. This estate planning checklist covers five priorities for 2024 that should be on your radar.

Work with your estate planning attorney to review and update your will and trusts

One of the fundamental elements of estate planning is having a valid and up-to-date will. Life is dynamic, and circumstances change, so it's crucial to review your will regularly, especially after significant life events such as marriages, births, or deaths in the family. Engage your trusted estate planning attorney to revisit and update any trusts you may have established. This ensures that your assets are distributed as you intend and that your loved ones are provided for according to your current wishes.

Don’t overlook digital estate planning

In this digital age, our lives are increasingly intertwined with online platforms and digital assets. Make 2024 the year you address your digital estate planning. It’s smart to create a comprehensive list of your digital accounts, including usernames and passwords, and store this information securely offline. If you have photos, documents, and other valuable information stored online, consider tapping a trusted individual to act as your “digital executor” to share your digital assets with your beneficiaries. 

Long-term care planning

As life expectancy increases, planning for long-term care becomes more critical. Evaluate your options for long-term care insurance and make decisions regarding potential care facilities. If you already have long-term care insurance, review your policy to ensure it aligns with your current needs and circumstances. Planning for long-term care can protect your assets and provide financial security for you and your family in the event of extended healthcare needs.

Estate plan tax strategies

Estate taxes can significantly impact the distribution of your assets. In 2024, consider working with a financial advisor or tax professional to explore tax planning strategies that can minimize the tax burden on your estate. This may include gifting strategies, setting up trusts, or taking advantage of any available tax credits. A proactive approach to tax planning can help preserve more of your wealth for your beneficiaries. Some of the key changes to be aware of in 2024 include that the gift tax exclusion amount has increased (last year it was $17,000 per individual and $34,000 per married couple). The new amount in 2024 is $18,000 per individual and $36,000 per married couple. Another update to consider: The Federal Estate and Gift Tax exemption has increased to $13.61 million per individual (double that, at $27.22 million for a married couple). In 2026, the amount is expected to drop down to $7 million per individual, so it’s important to work with your tax expert to strategize about how best to maximize your wealth via tax and estate planning, and the start of a new year is a great time to begin. 

From IRS Rev Proc 2023-34

Healthcare directives and powers of attorney

It’s important to ensure that your healthcare directives and powers of attorney are up to date. These documents designate someone to make medical decisions on your behalf if you are unable to do so. Now is a great time to review your choices for healthcare agents and make sure they are still willing and able to fulfill this responsibility in accordance with your wishes. It’s vital to discuss your wishes regarding care with your chosen healthcare agent, providing them with clear guidance on your preferences. This step can alleviate the burden on your loved ones during difficult times and ensure that your healthcare decisions align with your values.

The new year presents an excellent opportunity to reassess and update your estate plan. By working through this simple estate planning checklist you can boost your peace of mind that everything is in order and help safeguard your legacy, protect your assets, and strategically provide for your loved ones. Take the time to consult with legal and financial professionals to ensure that your estate plan is comprehensive, up to date, and aligned with your current goals and circumstances. Planning for the future is not just for yourself; it's a gift to those you care about most.

If you have any questions about estate planning or how Whittier Trust’s wealth management services can help you navigate maximizing your legacy for future generations, we’re here to help. Start the conversation with an 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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Feb 21st

Post-Sunset Taxation of Entities: Decoding the Changes

Efficient tax planning demands a forward-thinking approach, strategically organizing financial affairs to minimize tax liability. An essential element of this approach is the anticipation and understanding of changes in tax laws over time.

The last major overhaul of the tax code came in 2017 when many tax code provisions were changed or added by the Tax Cuts and Jobs Act, commonly referred to as the TCJA. Most of the TCJA provisions that impact individuals, estates, and pass-through entities will expire or phase out in 2025, an event being referred to as the Great Tax Sunset. However, the TCJA’s biggest change impacting the taxation of C corporations, reducing the corporate tax rate from 35% to 21%, will not sunset. This means that while the highest individual income tax bracket will increase from 37% to 39.6% after 2025, the C corporation tax rate will not change and will remain at 21%. 

The TCJA also introduced the Qualified Business Income deduction, or QBI deduction. This allowed taxpayers to deduct up to 20% of business income from flow-through entities, such as businesses that appear on Schedule C, as well as S corporations and partnerships. The QBI deduction was originally intended to help businesses that were not C corporations compete with the new 21% tax rate for C corporations. The QBI deduction is currently scheduled to be eliminated after 2025. 

While it is impossible to predict what tax legislation will be implemented by a future Congress and POTUS, the sunsetting of QBI, the increase of the highest marginal tax rate for individuals, and the continuation of C corporation tax rate makes choosing the appropriate entity for a small business owner less straightforward than it was before 2017. 

To illustrate, imagine five taxpayers, each owning an equal share of a C corporation doing business in 2017, before the implementation of the TCJA’s modified tax rates. The C corporation has a net income of $1,000,000 and pays 35% income tax, or $350,000. For the sake of simplicity, all remaining income is distributed to the five taxpayers and none of the distribution is considered compensation. The taxpayers pay tax at the highest long-term capital gains tax rate plus net investment income tax on the dividend, or 23.8%. The tax paid by all taxpayers in this example is $504,700, for an overall effective tax rate of 50.47%. 

Compare this to the taxation of an LLC owned and operated by five partners with equal ownership. The LLC has a net income of $1,000,000, pays no income tax, and passes the income to its five partners. For the sake of simplicity, all remaining income distributed to the five partners is subject to the highest marginal individual tax rate of 39.6%, and none of the income is considered compensation. The five partners pay a total of $396,000 in tax for an overall effective tax rate of 39.6%. The basic illustration demonstrates why C corporations were seldom used as an entity of choice by small business owners since one level of taxation is considerably lower than two levels of taxation for C corporations.  

After the TCJA, C corporation taxation became more appealing as the tax rate was lowered from 35% to 21%. Using the same example above, let’s imagine that the same C corporation doing business in 2018 has a net income of $1,000,000 and pays 21% income tax, or $210,000. The remaining net income is distributed to shareholders who then pay tax at the highest long-term capital gains tax rate plus net investment income tax on the dividend, or 23.8%. The total tax paid by all taxpayers in this example is now $398,020, for an overall effective tax rate of 39.8%. That’s a huge improvement for the two levels of tax for C corporations. 

Pass-through owners also had a new advantage under the TCJA with the QBI deduction. As a comparison, the same LLC with a net income of $1,000,000 passes its income to its five partners. Each of the five partners can fully utilize the 20% QBI deduction, which reduces the taxable income from $1,000,000 to $800,000 for all five partners. The five partners pay $296,000 in tax at the highest marginal tax rate for individuals, now lowered to 37%. While C corporation taxation became more appealing, it was still not as appealing as a pass-through entity where individual taxpayers could take a QBI deduction.

However, this is about to change. That same C corporation doing business in 2026, after the Great Tax Sunset will continue to have its $1,000,000 of net income taxed at 21%. Nothing else changes for C corporations in this example, and the total tax paid by all taxpayers is again $398,020, for an overall effective tax rate of 39.8% 

The five partners of that same LLC can no longer take advantage of the QBI deduction, which was eliminated in the Great Tax Sunset. Furthermore, the highest marginal tax rate for individuals increased from 37% to 39.6%. The five partners now pay $396,000 in tax for an overall effective tax rate of 39.6%. Suddenly, pass-throughs no longer have the dominant tax advantage they had a few years before. 

Lastly, one intriguing side-effect of the corporate tax rate reduction was the renewed interest in the Qualified Small Business Stock exclusion, also referred to as the QSBS exclusion. This tax benefit allows C corporation owners to sell stock without incurring capital gains tax after a statutory period. This additional benefit may tip the balance in favor of C corporations for many small business owners. 

Does this mean small business owners should run out and check the box of their LLCs to be treated as C corporations? It is impossible to know what the future holds for tax law changes. While it is not so difficult from a tax perspective to move an LLC treated as a partnership to an LLC treated as a C corporation, it is far more difficult to go back the other way. Nevertheless, if nothing else changes, the analysis of entity choice for small business owners is far more interesting. The Great Tax Sunset will play a significant role in tax planning for several years to come.

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Feb 7th

Are AI and Wealth Management Compatible?

There’s no denying that artificial intelligence is developing quickly—at warp speed, even. In fact, in March 2023, some of the biggest names in technology—including Elon Musk and other professors, researchers, and business leaders—signed a letter asking for a pause for artificial intelligence labs training AI systems out of concern for the dangers such technology may present. Additionally, the United States and the United Kingdom have held high-level summits about AI safety in 2023. 

Even with such concerns about what a proliferation of AI could mean for society as a whole when it comes to AI and wealth management, there’s a place for using tools based on technology. “When you’re looking for a statistical or high-level outcome or solution, it’s helpful,” says Whittier Trust SVP and Senior Portfolio Manager, Teague Sanders, who notes that quantum computers, such as the one built by Google, are approximately 158 million times more powerful than the supercomputers used today. That means that answers—from researching companies that may present investment opportunities to pulling numbers to analyze industry trends—can be at our fingertips more quickly than ever. Savvy client services advisors can leverage such technologies to inform expedient answers, recommendations, and reporting.

Fact-checking: a vital component for the use of AI in wealth management

Large language models (LLMs) are deep databases pre-trained on mind-boggling amounts of information. That’s why ChatGPT Bard, LLaMA, PaLM2, and many more have become popular tools for asking a question and waiting for an (almost instant) answer. While Sanders says that Whittier Trust has subscriptions to some LLMs because they can be useful for summarizing things and finding links and patterns, Whittier Trust team members always thoroughly double-check the results to verify the veracity of the information. Case in point: “There can be ‘hallucinations’ within a dataset,” Sanders explains. “If you ask an AI-driven LLM such as Bard a question like, ‘What was the revenue generated by X business?” and it gives you an answer you don’t think is right, it will re-generate a different response. You have to make sure that, when an LLM does a calculation, it’s analyzing the right thing and using authentic data.” Again, it comes down to focused human oversight. 

AI and LLMs can also be useful for shaking up the thinking on a particular topic, sparking creativity and brainstorming. “If we have a client situation or an investment we’re considering, we might throw six or seven different prompts about a topic into one of the LLMs and just see what comes out,” Sanders explains. “That can be a catalyst for creative thought.” For example, if the team is thinking about an investment, an AI-driven tool can help. “If we’re looking at Mr. Carwash, we might ask the LLM to show us the entire landscape of car washes in the United States or the last six quarters of earnings of car washes in the American Southwest.” Such queries can help frame issues the team is considering, but it won’t be the deciding factor.

Why wealth management AI won’t replace a human touch

Artificial intelligence (AI) is everywhere, it seems, from predictive text in our Google searches and chatbots in customer service to facial recognition when we check in for a flight at the airport. Even though those things and more have become commonplace, there are some areas of our lives where such technology isn’t compatible: namely, the expansive use of AI in wealth management. “Wealth management, specifically, our style of wealth management simply doesn't lend itself to leaning heavily on AI,” says Sanders. “Even with all the advantages and efficiencies AI can bring, when you look at our clients and what we do for them, it’s really about the integration of our complete service offering; specifically our five pillars of expertise [family office, investments, philanthropy, real estate, trust services]. The comprehensive service these areas of expertise bring allows us to provide the personalized and compassionate approach that makes us successful, unique, and powerful for our clients.” The use of AI in wealth management can be valuable in some instances, while simultaneously complementing human expertise and intelligence for even greater results. 

One of the primary ways Whittier Trust serves clients and sets itself apart from other firms is its highly personalized approach to serving the whole person or family. “An AI-driven solution does not exhibit empathy right now, it does not get to know someone’s hopes for family continuity or heart-felt goals for making a difference in a philanthropic endeavor. A computer doesn’t hold someone’s hand as they’re going through a difficult season,” Sanders says. “Those things require a lot of human touch because there's still a lot of emotional involvement when you're trying to come up with a customized, tailored solution for each very complex family.”

 

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Feb 1st

The Magnificent 7 and the Imperfect Index

Despite domestic and geopolitical uncertainty, equity portfolios performed quite well in 2023 as measured by the S&P 500 Index. The market return was largely driven by the seven largest constituents of the S&P 500, also known as the Magnificent Seven. The Magnificent Seven includes: Apple, Microsoft, Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla. These companies account for over twenty-eight percent of the S&P 500 Index and collectively more than doubled in 2023.  The spectacular returns concentrated in a few names left the average stock returning less than half of the S&P 500 Index overall.  The Magnificent Seven masked the underlying share price weakness of most stocks in the S&P 500 Index.  The concentration of returns and weightings raises the question of whether the S&P 500 Index should be dissected for opportunities and imperfections.

S&P 500 Index

This leads us to our next point in which we discuss the construction of the S&P 500 Index and lessons to learn from the evolution of the index.  The S&P 500 Index is often referred to as a “passive index,” meaning there is not an active manager changing the constituents of the Index on a regular basis.  It may come as a surprise that in any given year there are several changes to the S&P 500 Index.  As companies are acquired, merged, or face challenging times, they must be replaced in the index so there remain exactly 500 companies.  Over the past decade a shocking 189 companies were added to the S&P 500 Index! 

Before we delve into the implications of the 189 additions to the “passive” S&P 500 Index, we should highlight that over 28% of the S&P 500 Index is now in just seven companies, aka the Magnificent Seven.  These seven companies are the largest because of their extraordinary performance over the past 15 years.  The magnificent seven returns (measured in multiples) since the market peak before the Great Financial Crisis (12/31/2007) through the most recent quarter (12/31/2023) are as follows:

  • Apple 32.1x
  • Google (Alphabet) 8.1x
  • Nvidia 63.4x
  • Amazon 32.8x
  • Tesla 156.3x (since IPO in 2010) (1.1x since S&P 500 Index inclusion in 2020)
  • Microsoft 14.5x
  • Meta 12.0x (since IPO in 2012) (6.5x since S&P 500 Index inclusion in 2013)

Usually, we talk about stocks and bonds in percentage terms reserving double digit multiples on investment for only the best Venture Capital hits.  In this case, writing about Apple stock’s 3,113% return (32.1x multiple) if purchased at one of the worst times in history (right before the financial crisis) through today seems absurd.  Thus, we can simply say that an investment in 2007 would today be worth 32.1x as much including dividends (equally absurd you say!).  This is a great reminder of how favorable investing in high quality companies can be over long periods of time.  (Imagine a game table in Las Vegas that gave you a greater than 50% chance of winning each day, a greater than 65% chance of winning over one year and a nearly 100% chance of winning over multiple decades.  You would want to play that game and only that game for as long as you possibly could.)  While the magnificent seven have all returned multiples of investment since 2007, the S&P 500 Index has also returned a handsome 4.5x (347%) return over that time frame. 

The 189 additions to the S&P 500 Index

Now back to the 189 companies that were added to the S&P 500 Index in the last decade. The 189 additions have been selected by a committee known as the S&P Dow Jones Indices Index Committee (within S&P Global).1  These additions have to be disclosed before they are added to the index.  Thus, the average of those 189 stocks saw a bump immediately before they were added to the S&P 500 Index.  On average, those 189 stocks returned 11% over the three month period prior to the announcement date.  As more and more investors allocate a portion of their portfolio to index funds, the newly added stocks see more and more demand for their shares ahead of being included in the index.  According to the Investment Company Institute, midway through 2023 there were over $6.3 trillion dollars invested in S&P 500 Index funds in the United States.  As a company is added to the S&P 500 Index there is significant buying power behind that addition.  

Magnificent Seven

The Magnificent Seven stock price appreciation in 2023 reflects their strong fundamentals.  These seven companies generally have high margins, low input costs, strong balance sheets, and no unionized labor.  Conveniently avoiding the major pitfalls of 2023.  Perhaps more importantly, the strong performance from the top seven companies and the outsized weightings of those companies, obfuscates the weakness of the other 493 stocks that are on average still down from the beginning of 2022.  After two years of negative returns for the majority of the stocks in the index, perhaps there are some bargains out there for long-term investors.

Conclusion

We can draw a number of conclusions from the above analysis:  

  1. The S&P 500 Index returns over the next few years will be heavily dependent on the Magnificent Seven. Fortunately, the majority of the Magnificent Seven have low debt levels, high profit margins, low labor expense relative to revenue, and are cash generative (higher interest rates may boost earnings).  
  2. The imperfect index will continue to evolve and change despite the passive moniker.  
  3. Being attentive to potential index inclusions will be ever more important as the size of assets invested in the index grows faster than the index itself.
  4. 2023 market returns have been skewed by the Magnificent Seven leaving potential bargains beneath the surface.  
  5. Finally, investing in high quality companies may pose risks in the near term, but continues to look favorable over extended periods of time.

 

Endnotes:

      Source:  S&P Global
      Source:  Bloomberg Intelligence
      Source:  Investment Company Institute

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Jan 11th

How Philanthropy Unites a Family

Giving together can create a lasting bond.

“Philanthropy has the power to bring a family together,” says Pegine Grayson. “It can be life-changing, not just in its impact on a community, but also its impact on the donors.”

Invitation to Share

As Director of Whittier Trust's Philanthropic Services department, Grayson and her team help high-net-worth families meet their charitable goals, but the personal rewards for families are sometimes among the most meaningful outcomes.

Grayson recounts the time she helped plan a family retreat with the goal of getting three young adult children involved in the family foundation. While the two sons were enthusiastic, the daughter had been largely estranged from the family and only reluctantly agreed to attend.

“About an hour into the retreat, we asked the father to talk about why he wanted a foundation—what happened in his life that made him want to use his wealth in this way,” Grayson recalls. “He began talking about his reasons for joining the military decades ago, the experiences he had during his service that left a lasting impression on him, his own experiences as a veteran, and why he cares so deeply about helping fellow vets. As his story unfolded, he broke down and cried. The kids were stunned. They had never heard this story. After so many years, they finally had a key to begin to understand what their father was about.”

The father's vulnerability created a major shift in the room, Grayson says, which transitioned to asking each of them about their own lives and areas where they'd like to have an impact. Although no one's causes were the same, there were no wrong answers, and everyone was truly listening and hearing each other. “By the end, the kids realized that it's not always going to be the dad show; it can be the family show,” Grayson concludes. “And they've all been active in the family foundation since, including the daughter.”

The School of Philanthropy

Because the work of Philanthropy is steeped in personal values, it's an ideal vehicle for a family to talk about what has shaped them as individuals and what it means to them to align their wealth and values. Philanthropic pursuits open the door for a family to work together as a team on projects or initiatives that will benefit others outside of the family unit. Grayson discusses her top five:

1) Values and succession

As a parent, you don't want wealth to undermine your children's initiative and drive for success. You want them to be equipped with the tools and values they need for a good life. Philanthropy provides that foundation, prompting discussions of family members' backgrounds and beliefs and helping everyone embrace family history and carry forward important values.

2) Life skills 

Even once you have settled on a charitable mission, it can be surprisingly challenging to select grantees, develop a decision-making process, decide the type of impact you want to have and how to evaluate it, etc. Making these decisions as a family provides a rich learning environment, as members research the causes they care about and learn how to communicate respectfully, make persuasive arguments, appreciate other perspectives, and compromise. You also have to learn how to represent your family effectively in the community so that every encounter leaves people, grantees, organizations, and other philanthropists with a positive impression. 

3) Financial literacy

By tending to the business of the foundation, family members learn about investments, financial planning, budgeting, market fluctuations, and other financial management practices, including how to calculate the 5% required distribution for private foundations.

4) Resolving ambivalence 

It's not uncommon for family members to have a love-hate relationship with the family's wealth, particularly for those who didn't earn the money themselves. Sometimes, there are expectations of achievement; sometimes, politics and unconscious messages of distrust. But coming together to decide how to use the wealth for good can serve as a pressure relief valve for some of those issues and get family members rowing in the same direction as they focus on the positive impact they can have on issues they care about.

5) Togetherness

With families spread all over the country, or even the world, philanthropy can keep you united around a common purpose and provide an impetus to physically come together, visit grantees, see your work in the community, and then talk about what you've seen.

Strategy for Family Continuity

“One longtime Whittier client had a situation that demonstrated all five of these benefits,” Grayson says. 

The origin of the family's wealth went back many generations, and as the family branched out, they created a variety of foundations. By the fourth generation, everyone had their own separate interests, and they were no longer collaborating. 

“We saw a way to bring everyone back together,” Grayson explains. “For the fifth generation, we had the idea to create a junior board to start talking about seamless succession planning for the family foundations, identifying promising charities, and learning about making grants. So, we formed a group of cousins and started to educate them on the responsibilities of being a board member of a foundation and the legal and tax constraints in which they operate. We focused on fundamental activities such as researching grantees, making site visits, and budgeting. As the training sessions progressed, the cousins wanted to know more. Some of the questions that came up were, While we're talking about philanthropy, can we also talk about why my parents set up a trust, what it means, and what are the differences between stocks and bonds and other investments? They were hungry for knowledge.

“As the group started to learn together, they started respecting each other. That has led to even deeper relationships over time. They're all still very close and doing collaborative grant-making across branches of the family. Every other year, they have a ‘G5’ retreat in person, and they plan it themselves!” Grayson says. “Philanthropy created those relationships. That fifth generation got to know each other in a way that never would have happened without the common bond of using the family's wealth for good. It's the best feeling to be able to help facilitate that.”

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