I was recently approached by two separate families about how to manage their investment committees. Both families have significant resources and are striving to get the most value from their investment committee members. In my 2012 Investment Assessment Survey, the majority of respondents said they wanted to receive more decision-making support from their investment committee and improve coordination and communication among their advisers. This reinforces the point that investment committee dynamics are vitally important and deserve more attention than one might think.
The purpose of an investment committee is to oversee your portfolio and to help you achieve your long-term financial and investment goals. An investment committee with high functioning dynamics is much more likely to deliver superior investment outcomes than a dysfunctional one. However, an investment committee can unwittingly become dysfunctional when adviser recommendations conflict, personal biases interfere with rational decision-making and advisers do not share the same understanding of your goals.
Improving the performance of your investment committee involves several dynamics including: having the right number and types of members, determining voting privileges, deciding how much involvement the family should have, etc. Below I advise you how to enhance your investment committee dynamics and I offer practical recommendations for improvement. You may want to peruse some of my other articles related to investment committees as well:
- Best Practices for Selecting Personal and Institutional Trustees
- Multiple Advisers Can Make Investment Decision-Making as Clear as Mud
- 7 Guidelines for Building a Successful Investment Committee
Ten Keys to Successful Investment Committee Dynamics
- Committee Composition
- Total number of members: the correct number of committee members is idiosyncratic to your family or institution. However, an investment committee with four to seven voting members is generally workable, efficient and effective. Any more can be unwieldy and fewer may not offer enough diversity of perspectives.
- Representation of principals: having a mix of both voting and non-voting principals can enhance your breadth of vision and expertise. This is especially so if some principals are genuinely not interested or engaged in the topic at hand.
- Contrary to what one might think, voting members should not be investment-related vendors (e.g., strategy consultants, bankers, asset managers, etc.). The role of these presenters is to make recommendations to the investment committee, not to vote on their own recommendations. This approach will also help to reduce potential conflicts of interest.
- There is a growing trend to include a compensated committee member who is not a vendor or member of the family/institution, with years of direct professional investment experience. This is exactly what I do as a Private Investment Counselor (learn more by clicking here to see Investment Committee Services on my website).
- Vendors should not think that they own a seat at the table for every meeting. While your trustee and strategy consultant might need to attend every meeting, this is not necessarily true of all vendors. For example, it is unlikely that your attorney, CPA, life insurance or property & casualty insurance professionals need to attend every meeting. However, they might be invited to present periodically. Proactively managing the composition of meeting attendees allows you to add fresh views.
- This can be a tough one, as some committees won’t hire a manager unless the portfolio manager presents to the committee at their customary location. However, some of the most desirable managers would not consider deploying their portfolio manager’s precious time in such a wanton manner. (This is especially true of exciting hedge funds, successful venture capital funds and alike.) Would it be okay for a subcommittee to meet with those managers at the managers’ offices? Think about it.
- Some committees consider it necessary and prudent to meet with every manager on their roster every year. Review your calendars, frequency and length of meetings and consider whether this is credible and productive.
- Successful committees typically schedule their meetings far enough in advance so their members can make every meeting. This is the most effective way to build continuity and a shared vision. Committee members who fail to attend every meeting can significantly degrade committee dynamics.
- Holding quarterly in-person meetings is generally suitable. Skype, GoToMeeting, and professional video conferencing are also wonderful technologies that can be highly effective for some meetings. However, they do not replace a small group of persons meeting in person several times a year.
- What time of day should you hold your meetings? If you want to engage your next generation (a.k.a. NexGen), then you may want to consider holding some meetings at non-traditional times, such as weekends and evenings. (Please click here to see “Three Key Elements for Engaging Your Next Generation in Legacy Planning”)
- Committee members need to know each other as individuals, and to build personal communication, rapport and understanding. I recommend holding at least two dinners each year on the evenings prior to meetings. Does this interfere with your personal and family time? You bet it does. The payoff is neither obvious nor immediate, but it will maximize your team’s dynamics and effectiveness over the long-term. This is especially so when your committee has to deal with the inevitable stress in the investment markets or during periods of family/institutional stress.
- Preparing for meetings in the taxi on the way to the meeting is not okay.
- Be sure to get meeting materials in everyone’s hands at least a week prior to the meeting.
- Ask committee members to email presenters (e.g., investment strategy consultants, private bankers, etc.) significant questions at least 2 business days prior to meeting. This should give your presenters sufficient time to prepare thoughtful, timely responses.
- Know your committee. Some committees can meet for a day and half, or even two days in a row. Others find that 4 hours is their limit.
- Do not try to “put three pounds of nails in a two pound bag.” Design agendas that respect your committee’s attention span.
- Subcommittee meetings can supplement shorter full-committee meetings. This is a tool worth considering, particularly for specialized investment assets.
- Think actively about what location is most stimulating and engaging for your committee. Some committees always meet at the same place, while others meet at different locations based on the convenience of various committee members.
- Some committees also move their location in an effort to see more of their asset managers and prospective managers. Others may meet in different global capitals to increase their global perspectives.
- Oftentimes, families are more comfortable meeting at a vacation home in casual attire instead of a formal office or conference room (remember to mix business with pleasure).
- Strong committee dynamics can be fostered by lengthy tenure. However, some turnover can introduce new blood and perspectives. There is a balance that should be managed thoughtfully.
- Develop a schedule by which one vendor is reviewed each year and each vendor is reviewed every four to six years. You may want to engage a facilitator to interview the committee members as well as principals and non-voting committee attendees.
- During this process, an opportunity to adjust the composition of your committee might come to light. Even when vendors are retained, periodically shining a bright light on your relationships can improve service levels.
- While you are at it, do a self-review every four to six years. You may want to have a retreat to find ways to enhance your effectiveness using a facilitator.
If you approve, disapprove or would like to share your thoughts on this article, I encourage you to leave a comment below. Engaging a dialogue can be valuable to all of my readers, and your thoughtful comments are welcomed. Naturally, I will be delighted if you ring me (617.921.7440) or shoot me an email with your thoughts, comments and suggestions.
Tax time is approaching and if you are looking for ways to reduce your long-term tax burden then you have come to the right place. With all due respect to Uncle Sam, when it comes to paying taxes what you keep is just as important as what you make. During tax time most people focus on what they can do to reduce their taxable income. This is a good start, but it is not innovative enough.
A more innovative way to minimize your tax burden is to plan ahead by making a taxable gift during your lifetime vs. through your estate. You might be thinking, “Jack, I already reached the maximum tax-free giving amount set by Congress, why would I possibly want to make a taxable gift?” First, the concept of paying gift taxes now to avoid paying more estate taxes later is pretty powerful, even if you have exceeded your tax-exempt gift amount. Second, if you make the gift through an irrevocable trust, then you get to keep the income during your lifetime (this is covered in more detail below).
This week’s article reveals the financial and cash flow benefits of making a taxable lifetime gift vs. estate gift. (Pssst… If you have not already done so, consider taking advantage of the enormous tax-free giving opportunity that was scheduled to be dramatically reduced at the end of 2012; and is still in effect. Please click on the title to read What High Impact Tax Planning Can You Do in September?)
Financial Benefits of Taxable Lifetime Gifts
Say for example that you have exceeded your lifetime gift exemption, and all further gifts will be taxed as lifetime gifts or estate transfers.
(For the sake of simplicity, I will ignore the favorable impact of your annual gift tax exclusion as it will only serve to make your lifetime gifts more attractive.)
Let us assume that you have budgeted $1.5 million to cover the gifted amount as well as the federal tax that will be paid upon the gift’s transfer. Let us also assume that gift and estate tax rates are both 45%. How much money will your beneficiary vs. Uncle Sam receive if you make the gift during your lifetime vs. as an estate transfer?
||$ 465,300 (45% of $1,034,000)|
||$1,499,300 (pretty close to your $1.5 million budget)|
||$ 675,000 (45% of your $1.5 million budget)|
The arithmetic is pretty compelling: taxable lifetime gifts are hugely more tax efficient than taxable estate transfers. Given a budget of $1.5 million, your beneficiary will receive roughly 25% more money if you make the gift during your lifetime vs. through your estate. This is because with estate transfers, the donor’s estate has to pay an estate tax on the estate resources that are being used to pay estate taxes. This is essentially a tax-on-the-tax, a double whammy that is not present with lifetime gifts.
“But wait there is more” (to quote the Ginzu knife infomercial). Some states, and local jurisdictions in other countries, have their own estate or inheritance tax and do not have a lifetime gift tax. This provides further incentives for making taxable lifetime gifts. Furthermore, if the asset being transferred is one that may appreciate in value, (such as an investment in a prospering enterprise), then removing that taxable appreciation from your estate may offer yet another important tax benefit for making a lifetime gift now.
Cash Flow Benefits of Taxable Lifetime Gifts
Going back to the original question, “Jack, I already reached the maximum tax-free giving amount set by Congress, why would I possibly want to make a taxable gift?” Suppose that you are concerned about cash flow because you need the income from your assets to pay for living expenses. If so, then you may want to speak with your Private Investment Counselor, attorney and accountant about structuring an irrevocable trust. An irrevocable trust can provide you and your spouse with the lifetime income from the gift and your beneficiary with the principal upon your death. Additionally, only a portion of the trust will be a taxable gift, further improving the tax efficiency of making taxable lifetime gifts.
If you are not concerned about cash flow, then you might consider gifting the entire amount to receive the tax efficiencies and the added pleasure of watching your beneficiary enjoy your gift during your lifetime.
Have I convinced you that making a taxable lifetime gift now vs. through your estate will reduce your overall long-term tax bite? It would be terrific if you would be so kind as to leave a comment, question and/or share your thoughts about taxable giving. If you would prefer to address this matter with me directly, please ring me at 617.945.5157 or drop me an email.
Talking to your family about legacy planning can be like going to the doctor. You know you need to do it, but you might worry that it could be hard. Further, the longer you postpone it the more likely it is that problems will arise. I have seen families wince with pain at the thought of talking with their children, or more broadly their next generation (NexGen), about legacy planning. Some even defer these conversations entirely. The NexGen can feel equally uncomfortable discussing legacy planning with senior family members if they are not properly prepared or engaged.
If you can relate to these issues then you are not alone. Wealth transfer, philanthropic values and wealth education have consistently taken a back seat to investment strategy and spending management in my annual investment assessment survey. Further, these conversations can be emotionally charged. However, they are profoundly important to private investors as they search for ways to involve future generations in legacy planning.
This week’s article focuses on three key elements for successfully engaging your next generation in legacy planning. If you would like to read related articles about governance policies and legacy planning that I have written in the past, please visit governance policies and legacy planning (click on the underlined words to read the articles).
Three Key Elements for Engaging Your Next Generation in Legacy Planning
- A Stake
It is nearly impossible to engage your NexGen in your investment process unless they have a meaningful stake in the outcome of your investment process today, versus next year or next decade. The amount of income and access to capital you provide them with is highly situation-specific.) Giving your NexGen access to income (e.g. cash distributions and/or other capital is hugely valuable in getting their attention. It also demonstrates that you trust and respect them, which will likely encourage them to play a constructive role in your investment affairs. However, providing the NexGen with a stake is not enough to fully engage them in legacy planning.
- A Vote
Engaging your NexGen in your investment process also requires that you provide them with a vote. After all, who would want to read detailed investment reports, participate in meetings and address topics which are not their truest passions unless their vote is taken seriously? If you do not want to give NexGen members voting privileges immediately, then consider a period of on-the-job training in which they attend calls and meetings before they are given voting privileges. Just be sure that this training period is not too long, lest it will undermine the trust and respect you have demonstrated in providing them with a stake.
- A Voice
Once you give members of your NexGen a stake and a vote you might think that you have done everything you possibly could do to bring them onboard. A generation or two ago you might have been right, but not today. If you want to increase your chances of successfully engaging the NexGen in your investment affairs, then you need to give them a voice too. You may be asking, “Whatever is he talking about?” If you really want to engage with your NexGen members, you need to invite them to help shape agendas. Otherwise, they will be voting on issues they may not care passionately about, which will not truly capture their attention and devoted participation. Providing NexGen members with a voice gives them an opportunity to contribute constructively to the range of alternatives under consideration.
Providing your NexGen members with a stake, a vote and a voice is not always easy. When you give NexGen members a stake, they may not use the cash distributions or capital as you wish they might. When you give them a vote, you may not reach the same outcomes that you might have achieved on your own. When you give them a voice, you may be drawn into areas that do not reflect your highest priorities. Such results can cause friction.
There is certainly no fool-proof way to engage your NexGen in legacy planning, but based on my experience, the risks of not engaging your NexGen members far outweigh the risks of engagement. Providing NexGen members with a stake, a vote and a voice allows your governance profile to evolve with each generation based on their needs and desires. Further, it allows you to identify potential leaders, coach NexGen members yourself and/or select others who can coach them.
As always, if you would like to discuss any of these topics in more detail, I would be happy to speak with you at our mutual convenience. Feel free to ring me at 617-945-5157 or send me an email at Jack@RGPIC.com.
What did we learn in 2012 that we can benefit from in 2013? For one thing, we can take a look at the results of my 2012 Investment Assessment Survey to see what worked and what didn’t work for investors. These insights are based on my professional expertise and investor responses, 80% of whom are asset owners responsible for managing their individual and/or their family’s assets. It also includes responses from advisers, and although there is some overlap, the findings that I am going to share with you over the next few months are based primarily on the asset owner’s perspective.
This week’s article focuses on investment strategy, which was ranked the most significant factor influencing investor decision-making for the third year in a row. In the months that follow, I will also discuss spending management, since what you spend is as important as what you make. In addition, investors are increasingly recognizing the importance of governance, and I will be discussing intergenerational planning in more detail in 2013. If you would like to read a refresher on spending management and governance, please read my prior articles on spending management and governance (click on the underlined words to read the articles).
Lastly, I would like to thank those of you who chose to complete my survey. Your time and comments are invaluable and very much appreciated.
As we enter the New Year, here are two lessons that we learned about investing from 2012:
- 2012 Investment Strategies: What Worked and What Didn’t
- When the Unexpected Happens, How Do You Stay Out of Harm’s Way?
2012 Investment Strategies: What Worked and What Didn’t
In 2012, investment strategy was named the most significant factor influencing decision-making for the third year in a row. However, the vast majority of respondents (70%) were not satisfied with their 2012 investment results. Does this mean that their investment strategy had a nick in its armor? Perhaps, but nearly one third (30%) of respondents were very satisfied with their results. Given the fact that these are very challenging times, this second group of respondents was most likely advisers and/or asset owners who were well advised.
Going back to investment strategy, since investment strategy was ranked the number one factor influencing investment decisions, then why were the majority of respondents not satisfied with their results? Was it their investment strategy or something else? My experience tells me that it may have been something else. Specifically, investors likely had an investment strategy but did not stick with it. Given the fact that it is very difficult to stick with a strategy when the world around you is going awry, this is not surprising. However, investors who stray from their investment strategy, particularly during choppy times, often find that it is a recipe for disappointment.
For assets owners and advisers who tried to outguess the markets, there were several turns of events that made it nearly impossible to get it right:
- No one thought that interest rates could possibly decline further so investors generally reduced the duration of their bond portfolios. They purchased more short-term bonds and shunned long-term bonds. However, long-term interest rates continued to decline as the Fed engaged in ongoing “quantitative easing.” This drove up the prices of long-term bonds and investors in long-term bonds ended up coming out ahead.
- Investors were caught off guard by the strength of the U.S. dollar. Going into 2012, investors expected the U.S. dollar to be weak due to the growing federal deficit and the Fed’s ongoing easy money policy. Further, investors breathed a sigh of relief over Europe’s fiscal crisis when the European Central Bank (ECB) stepped forward to support the Euro. To the extent that U.S. investors held international assets, they expected a declining dollar to provide a wind at their backs. However, the dollar remained unexpectedly strong and U.S. investors in non-dollar assets got the wind in their face.
- Hedge funds in general dramatically underperformed in 2012 relative to long-only equities. If you invested in hedge funds you probably did not lose money, but you probably did not make as much money as you did with your long-only equities. In 2012, the U.S. stock market (S&P 500 Total Return) was up over 15%, whereas many good hedge fund programs were up only about 6%.
When the Unexpected Happens, How Do You Stay Out of Harm’s Way?
Without a crystal ball (click here to link to article) it is nearly impossible to outguess the market. However, when the market has an unexpected turn of events, what can you do to stay out of harm’s way? At the risk of sounding boring, you develop an investment strategy addressing all the Opportunity Classes (see graphic with this link), articulate it, and stay with it. Investors who try to outguess markets often find out the hard way how demonstrably difficult it is to get tactical asset allocation right (such as the ones I mentioned above). If you developed a long-term plan and stuck with it in 2012, congratulations, you likely fared well. If you tried to outguess the market and were less fortunate, here are my recommendations:
- Do not sit on mounds of cash. It will be eroded by inflation. Inappropriately high levels of cash can prevent you from taking advantage of opportunities in long-term investments. In 2012 for example, returns for long-only global equities in so-called developed countries were in the neighborhood of 15%.
- Do not fire your hedge fund managers because they did not do as well in 2012 as your long-only managers. Hedge fund managers protect investors in adverse markets. The possibility of a down market remains a risk, an environment in which successful hedge fund managers should continue to protect you.
- Again, develop a long-term investment strategy, articulate it, and stay with it. Revisit it annually and facilitate its gradual evolution over time.
As always, if you would like to discuss any of these factors in more detail, I would be happy to speak with you at your earliest convenience. Feel free to ring me at 617-945-5157 or send me an email at Jack@RGPIC.com.
‘Tis the holiday season and year-end approaches. This is an excellent time to reflect on our blessings, celebrate our accomplishments and set goals for the New Year. It is also a good time to lend a hand to those less fortunate. This week I would like to share with you some of the things for which I am most thankful, as well as some of my goals for the New Year.
My family is a constant source of connection and support, for which I am grateful. My daughter Katie is in graduate school and doing a supervised internship in the Boston area. My stepdaughter Kat graduated from college in Philadelphia and is also living in the Boston area. It has been a true joy to be able to spend time with both daughters. Of course, I am proud of my stepdaughter Jen who will be graduating from college this spring. My three brothers and I (who are scattered across the US) enjoyed a mid-year reunion with our mother in the Midwest who turned 95 years old this year — a blessing.
I am enormously thankful to live in a gloriously successful country and to have been spared by various natural disasters. This has made me even more mindful of those less fortunate, and I will make it a point to be more helpful, however modest my contributions relative to the scale of the victims’ needs.
Naturally, I am immensely grateful for the blessing of my clients’ confidence and support. Their success and satisfaction is, and will continue to be, the mission of my enterprise. Equally well, I am blessed by the assistance of dedicated, thoughtful and creative professional service providers, without whom I would not be able to serve my clients nearly so effectively.
My goals for the New Year include re-doubling my efforts to ‘give back’ more, while at the same time growing my business. I have the capacity to serve a few more clients and am looking forward to doing so in the New Year. In that vein, I have expanded my practice to include project consulting for endowments and private practices. You will learn more about my Investment Management Assessments in 2013. I also serve as the Chief Investment Officer of my family’s investment fund and have decided to open it up to a select group of private investors.
My top priority for 2013 will be to continue to provide the highest quality service to private clients and endowments who have asked me to assist them in developing and implementing their investment strategy. This is, and will remain, my touchstone.
If you are so inclined, please share with me the things for which you are most thankful and your goals for the New Year, especially those where I may be of assistance. As always feel free to ring me at 617.945.5157, or to send me an email at Jack@RGPIC.com.
Warmest winter holiday wishes,
In September 2012, I wrote an article about the high impact tax-free gifting limits
that are likely to erode in December 2012. In it, I explained how you can take advantage of this unprecedented opportunity to transfer wealth to grandchildren (even if you do not yet have any) tax-free. In today’s article, I propose yet another timely opportunity to transfer wealth to future generations tax-free — consider your vacation home. Whether it is a cabin in the woods or a grand cottage in Newport, R.I., now is a great time to consider transferring your vacation home to your intended beneficiaries. Importantly, you need not lose control of your treasured vacation home, at least not yet.
Consider these three high-impact year-end tax planning opportunities for your family’s vacation home:
- Transfer the property to a limited liability company (or LLC) to create an illiquidity discount. An illiquidity discount allows you to give some of the LLC shares to your intended beneficiaries and retain a majority interest in the LLC. Further, the value of the property represented by the beneficiaries’ shares is removed from your estate, while the value of the LLC shares that remain in your estate will enjoy an impaired valuation due to the illiquidity discount. If you have not used up your $5.12 million (for couples $10.24 million) lifetime gift tax exemption, then the shares that you transfer to your beneficiaries in 2012 will be federal gift tax-free. You may give more shares in future years tax-free, assuming that the annual gift tax exclusion amount survives tax law changes.
- Create a qualified personal residence trust or QPRT (pronounced QPert) to transfer property to your beneficiaries over time. You and your advisers can discuss the length of time over which to affect the transfer. With a QPRT, the donor typically retains control of the property for the duration of the trust and when the trust ends, control is transferred to the beneficiary. The donor may also be able to rent the property back from the beneficiary. The tricky thing about a QPRT is that for the tax advantages to be effective, the donor needs to out-live the duration of the trust. If the donor does not out-live the trust then the property is transferred back to the donor’s estate, which can have undesirable tax consequences. Therefore, a QPRT is only appropriate when the donor believes that he or she is likely to survive the trust and is prepared to transfer control of the property to the beneficiary at the end of the trust.
- Encourage children or grandchildren to buy your vacation home from you now,and lend them the money to do so. As a part of the transaction, consider entering into a long-term lease in which you would lease the property back from them, terminable upon the death of the seller. A long-term lease would provide you with a great deal of control over the property, and today’s astonishingly low interest rates help keep the sale/lease-back rental payments modest. Further, there is no bank to evaluate the credit qualifications of the buyer/borrower, that part is up to you. If you do decide to lease back the property, make sure that your lease payments are large enough to permit the buyer(s) to service the loan and cover property taxes, insurance, maintenance and repair costs. Documenting and operating the lease in this way gives substance to the transaction.
Please note: While the foregoing suggestions apply with equal force to your primary residence, some donors are more cautious about transferring ownership of their primary residence. However, it is certainly worth considering this opportunity too.
My remarks here are not intended to provide solutions for your particular situation, but rather to provoke a conversation within your family and importantly with your Private Investment Counselor, attorney, financial planner and CPA. This sort of planning is technical and it is important to be guided by qualified and experienced professionals. In addition to my comments, you might find this brief article helpful as well Feathering the Kids’ Nest
by Annamaria Andriotis in the Wall Street Journal on November 16, 2012.
If you would care to chat with me about the topic of this note, please give me a ring at 617.945.5157 or drop me a note at Jack@RGPIC.com
Bonus Tip: If you have not already taken my brief Investment Assessment Survey
, there are a few days left. It will help you plan and prioritize your 2013 investment decisions regardless of your depth of experience.
The commercials are over and the votes are in. Regardless of your political leanings, the President’s agenda is clear. There will likely be tax increases next year. The good news is that there is still time for you to make some good investment decisions in 2012.
As an investor, here are four opportunities you can take advantage of before year-end.
- Between now and year-end consider accelerating income to take advantage of today’s lower tax rates.
- Evaluate deferring deductions into 2013 to maximize their impact in a new higher tax rate environment.
- Consider making intra-family gifts. Click on this link to learn more: “What high end tax planning you can do in September?” You can still take advantage of this opportunity, but the door is likely to close at year-end.
- Take a look at setting up a Grantor Retained Annuity Trust (a GRAT) with high potential appreciation assets as a way to transfer future appreciation to your next generation beneficiaries.
Bonus Tip: If you have not already taken my brief Investment Assessment Survey, please do. It will help you plan and prioritize your 2013 investment decisions regardless of your depth of experience.
The aftermath of Hurricane Sandy is still being felt up and down the East Coast. From Main Street to Wall Street, people are struggling with power outages, flooding, getting to work, getting back home, and in the most devastating instances, coping with the loss of life and limb. What Hurricanes Sandy, Irene, Katrina and others have taught us is that extreme events do happen, and although they cannot always be avoided, we can take precautions to reduce their impact.
Natural, economic and political disasters become personal when they hit home with family and friends. Here are three lessons I have learned to ameliorate their impact:
- Be prepared. Stay informed and do not dismiss warnings as hype. Think broadly about what could happen – that ‘one in 100 chance’ – to plan for the worst and hope for the best.
- Maintain a positive yet realistic attitude. Bad things do happen to good people, and yet the human spirit is an amazing thing. Surround yourself with supportive family, friends and like-minded people.
- Persevere. Put one foot in front of the other and do not be frozen by fear. Recovering from a disaster takes hard work, but others have faced similar challenges before and have succeeded in restoring their lives.
In thinking about these lessons learned, please turn your attention to your financial and investment planning. Have you prepared a strategy to manage risk? Are your goals for growth realistic? Do you have the right support team in place to help you persevere in down markets? Find out by taking my brief (8 questions) Investment Assessment Survey to help you identify the factors that are most important to you in managing your investments in 2013.* As always, your privacy is protected and you will see consolidated results at the end of the survey. If you would like to discuss any of these factors, I would be happy to speak with you at your earliest convenience.
* Please note: My survey is designed to aid investors and asset owners irrespective of depth of experience.
It is that time of year again. The students are back in school, businesses are running at full speed and I am launching my annual survey. This is the third year that I have conducted my survey and you may notice that this year I changed its name from Wealth Assessment Survey to Investment Assessment Survey. This name change reflects my business’ expansion from private clients and foundations, to endowment investment committees and professional services firms.
As a Private Investment Counselor, my sole focus is on protecting and growing client assets, while managing risk and minimizing taxes for investment and retirement portfolios. For the past two years, investors’ biggest concern has been their investment strategy. Specifically, whether they have the right people and programs in place to achieve their long-term goals (you can view past survey results here: 2010 Results and 2011 Results). With limited expectations for economic growth in the near-term, how has investor sentiment changed? What are the key factors influencing investor decision-making for 2013?
Please take my brief (8 question) Investment Assessment Survey to help you identify the factors that are most important to you in managing your investments in 2013. As always, your privacy is protected and you will be able to view consolidated results promptly. If you would like to discuss any of these factors in more detail, I would be happy to speak with you at our earliest convenience.
When is the best time to review your tax and investment planning? Now! People who wait until the fourth quarter to do their year-end tax and investment planning are likely to run into a log jam. I have a radical suggestion: don’t wait for the fourth quarter this year. The time to do your most important year-end tax planning for your assets is in September.
What high impact tax planning can you do now?
The best advice I can offer you is to take advantage of the current tax law and make the biggest gifts you can comfortably afford to your children and grandchildren tax-free – even if you do not have any grandchildren. You might wonder, “How can I make a tax-free gift to my grandchildren if I do not have any grandchildren?” Learn how below.
High Impact Tax-Free Giving Limits Are Likely to Erode December 2012
In late December 2010, Congress dramatically increased your capacity to make gifts to your children and grandchildren without paying a gift or estate tax. In short, you can give $5.12 million to your children, or $10.24 million if you are a couple, tax-free until December 2012. It is important to note that these tax-free gift limits apply to the total gifts you have made over your lifetime to your children, or other non-charitable beneficiaries, apart from your annual exclusions gifts. If, for example, you are a couple and have already given $2 million to your children, you can give an additional $8.24 million tax-free between now and December 2012. This enormous tax-free giving opportunity is currently scheduled to be dramatically reduced at year-end, absent Congressional action. But that is not all.
If you have grandchildren or think that someday you might, then read on. If not, then please skip to the next section. When you make a taxable gift to your grandchildren you typically have to pay both a gift tax and a generation skipping tax. The combination of these two taxes is prohibitively expensive and discourages people from making generation skipping gifts (i.e., gifts that skip over your children and go to your grandchildren). Today’s generous tax-free giving limits apply to both children and grandchildren, which allows you to transfer funds to your grandchildren tax-free. For most people, this is done by setting up a generation skipping trust (GST). Overall, this significant increase in tax-free giving to children and grandchildren is a huge opportunity for families with significant means and is not to be ignored.
Beneficiary Options for Unborn Grandchildren
Suppose you do not yet have any grandchildren to whom you can make a gift. Here is another option to consider. Set up a generation skipping trust (GST) for the benefit of your unborn grandchildren and name your children as secondary beneficiaries. In the event that you do not have any grandchildren, your children will become your beneficiaries. Your attorney will help you structure this.
What Type of Gifts Can You Transfer to a Generation Skipping Trust (GST)?
If you are considering a GST for your (unborn) grandchildren, the easiest and most straightforward gift is cash or marketable securities. If you want to gift something with more impact, consider hard-to-value investment assets, e.g., an interest in a private equity fund, fund-of-funds, or an operating business. The advantage of giving hard-to-value investment assets is that they may be transferred at a discounted value – discounts of 30% are not uncommon. The sooner you begin discussing these subtle tax planning nuances – and more exotic assets – with counsel the better off you will be.
Another interesting possibility is to fund your GST with a second-to-die life insurance policy on you and your spouse (the policy pays off when you are both deceased). If this is an option for you, then it is wise to initiate the GST with sufficient resources to pay the premium on the life insurance policy. Further, be sure to work with a sophisticated life insurance professional in considering this path, as well as a qualified attorney and CPA.
How Long Should the GST Exist?
When you set up a GST you should think about how long you want the trust to exist. Most states permit trusts to last for the duration of the lives of the persons you specify, plus 21 years. Other states permit trusts to last much longer. If you want to set up a very long-term trust, you may want to consider Delaware, New Hampshire, South Dakota, Alaska, Wyoming, or other favorable jurisdictions for the location of your trust. A qualified attorney and private banker can help you evaluate your choices.
If you want a perpetual entity then you may want to consider setting up your own private trust company. However, this should be discussed with your counsel as it is not likely to make economic sense unless you are considering asset transfers of a very substantial scale.
How Much Should You Give?
At the most obvious level, you are giving away too much to your grandchildren if you are even remotely at risk of impoverishing yourself, your spouse or your children. Should you consider exceeding the limits on tax-free gifts? In some cases this makes sense as it is much more tax-efficient to pay a gift tax than an estate tax. Your attorney or CPA can walk you through the simple math more easily than I can here, but suffice it to say that the numbers are compelling.
In summary, as you address year-end tax and investment planning, it would be wise to consult with your family, investment committee, trustees and/or trusted advisers and professionals. If you would like to be referred to a suitable attorney, CPA, life insurance professional, or private banker please let me know straightaway. Your feedback on this article is valuable to me. Please share your thoughts by dropping me a note or giving me a ring at 617.945.5157. You can also rate this article, share it with a friend or leave comment below. Your comments below will be especially appreciated.