Category: Insights

In the review of 2021, there was significant activity in Congress to craft tax-related legislative changes but many of the provisions impacting wealthy individuals and families outlined in President Biden’s Build Back Better package did not make it into the final legislation that ultimately passed under the “Infrastructure Investment and Jobs Act.” It is hard to predict at this juncture whether the Biden administration and Congress will be successful in enacting new tax legislation in 2022 given the mid-term elections later this year. For now, this memorandum highlights the various IRS inflation-adjusted changes that apply in 2022.

Click here to read our full memo

In light of recent financial market volatility, we have prepared a brief commentary piece to share our perspective.

Calendar year 2021 was a generally positive one for financial markets and risk assets—but thus far in 2022 bond yields and volatility spiked higher while equities declined. Recent weakness has coincided with investors’ concerns about central bank policy around interest rates and inflation, continued Covid-related economic disruptions, and geopolitical tensions over Russia.

Acknowledging a good bit of uncertainty, our base case assumes a continued global economic recovery transitioning to a more moderate, but still above-trend, pace. Growth and policy support may have peaked for this cycle—but the likelihood of an imminent US or global economic recession appears low, given the strength of consumer balance sheets. Without a recession, history suggests a severe equity bear market is unlikely. However, uncertainty about the inflation and monetary policy outlook remain key risks.

The economic backdrop should remain supportive of corporate earnings and, therefore, risk assets. Yet, equity valuations remain above their historical averages and are most elevated in the US. Therefore, our outlook assumes some multiple compression, or a decline in price/earnings (P/E) multiples, over the next few years—which seems appropriate given the expectation of rising interest rates and high policy uncertainty.

In terms of portfolio strategy, we believe proper diversification is as important as ever. Recent market volatility may create attractive investment opportunities, which we’ll continue to evaluate. However, at this point, our tactical portfolio positioning themes remain largely unchanged. We continue to target an underweight position to core/investment grade fixed income given historically low yields. Within equities, we remain underweight to US stocks given stretched valuations but fully invested in more reasonably priced international and emerging markets stocks. We are targeting an overweight position to “real assets” like commodities and energy-related stocks given the risk of stickier inflation and attractive valuations.

Since the November 2020 elections, we have closely followed the political climate for potential changes to the estate and gift, capital gains, individual income, and corporate income tax laws.

On Monday, September 13, 2021, House Democrats released their tax proposals, and we wanted to make you aware of the following highlights:

Estate and Gift Tax:

• President Biden had proposed to end step-up in basis and tax unrealized capital gains at death.  Neither are included the House plan.
• In the proposal, the current estate and gift tax exemption ($11,700,000) will revert to $5,000,000, indexed for inflation since 2010.  This change will occur effective as of January 1, 2022.
• Grantor trusts (where the grantor is treated as the owner for income tax purposes but often structured to be excluded for estate tax purposes) will be included in the estate of the grantor for estate tax purposes.  Also, sales between the grantor and the grantor trust will be recognition events for income tax purposes.  Both provisions would apply to trusts established and sales to trusts implemented after the enactment date of the new law, which seems to imply that existing grantor trusts and prior sales to grantor trusts will continue to be treated as non-income tax events under prior law.
• Valuation discounts (for minority interests and lack of marketability) will be eliminated for transfers of non-business assets.  This provision would apply to transfers made after the enactment date of the new law.

Capital Gains Tax:

• The tax rate on capital gains increases from 20 to 25 percent for those making over $400,000 (single) and $450,000 (married filing joint).  With the current 3.8 percent net investment income tax, the top capital gains tax rate will be 28.8 percent.
• The rate would apply to sales after September 13, 2021.

Individual Income Tax:

• The House plan raises the top income tax rate from 37 to 39.6 percent beginning in 2022, but this tax rate also applies to more income of the taxpayer than the current tax rate.  Currently, the 37 percent tax rate applies to income at $523,000 for single tax filers and $628,000 for married couples.  Under the House plan, the tax rate will kick in at $400,000 and $450,000 respectively ($225,000 for married filing separate).
• There is a new 3 percent surtax for those making over $5,000,000 of income for married couples and $2,500,000 for single or married filing separately.
• There is also a new 3.8 percent tax on small business owners with more than $400,000 of pass-through income who pay the individual income tax.
• Currently, business owners who pay the individual income tax, receive a 20 percent deduction for their qualified business income. This deduction is ended for business owners with more than $500,000 in a joint return and $400,000 for a single taxpayer.
• The House plan would repeal Roth conversions in individual retirement accounts and 401(k) type plans for those making over $400,000 (single) and $450,000 (married filing joint).

Corporate Tax:

• The House is proposing to raise the top corporate tax rate from 21 to 26.5 percent for income above $5,000,000.

If the proposed reduction of the $11,700,000 estate and gift tax exemption to $5,000,000 plus inflation is enacted, we are in a “use it or lose it” scenario with respect to the use of the current larger exemption. While there is no guarantee that the proposed changes will become law, we wanted to share these proposed changes as you consider your tax and estate planning.

We continue to monitor changes in tax policy and take a proactive and flexible approach to take advantage of opportunities within the context of a client’s overall financial plan.  As an example, we recently accelerated the rebalancing of certain equity positions given feedback that the effective date of an increase in capital gains rate would be mid-September.

To learn more, or to discuss or review how these proposals might impact your family, please contact us.

We have recently published a full commentary which includes a review of recent financial market results, our assessment of the macro backdrop, and an update on portfolio strategy.

Most asset categories have experienced gains so far this year as financial markets have been relatively calm. This is in sharp contrast to the surge in volatility experienced in 2020 as the spread of Covid-19 forced global economies to shut down and caused markets to plummet. The economic rebound thus far has been stronger than most anticipated, but US growth and policy support have likely peaked. Uncertainty remains high and the spread of the Delta variant poses a risk to the outlook. Yet, our base case assumes a continued global economic recovery transitioning to a more moderate pace being supported by still-accommodative monetary policy. This backdrop should continue to underpin corporate earnings and risk assets, but valuations are generally stretched.

Please click here to read our full investment commentary.

Spousal Lifetime Access Trusts (SLATs) have become a popular vehicle for married couples who desire to shift wealth outside their taxable estates but still retain access to the transferred assets by virtue of the grantor naming his or her spouse as a beneficiary of the trust.  However, there are some tricky gift-splitting rules that apply to gifts to SLATs.  Click here to read our memorandum which highlights that the utilization of lifetime exemptions could be different for gift tax and GST tax purposes depending on the facts.

The calendar year 2020 was unique, to say the least. The COVID-19 health crisis brought the economy to a sudden and almost complete halt, while financial markets experienced a broad-based, severe drawdown. However, the economic recovery has been much faster and stronger than most had anticipated. This is partly because some of the most binding COVID restrictions were temporary—but perhaps more importantly, the policy response was more aggressive than during previous recessions. Markets have rebounded sharply from the March lows and broad stock indexes are back near record highs.

In our view, there remains a wide range of potential outcomes on the path forward—and this uncertainty could lead to market volatility. The intermediate-term economic outlook is largely dependent on the effectiveness and distribution of the COVID-19 vaccine. Our base case assumption is that economic recovery continues and interest rates remain low with ongoing policy accommodation. This backdrop should underpin financial markets and continue to prove favorable for risk assets like equities and credit. However, valuations are a bit stretched, particularly in US large-cap stocks.

In terms of tactical portfolio positioning, we continue to target an underweight position to both core/investment grade fixed income and to US equities. We remain fully invested in more reasonably priced international and emerging markets stocks—and note that new market cycles are often accompanied by a change in market leadership. We also continue to target an overweight position to certain diversifying and credit-oriented alternative strategies. We believe the investment case is particularly compelling given the extremely low yields across most fixed income sectors.

Please see the attached presentation that provides our assessment of the market backdrop and shares our views on portfolio strategy going forward.

Choosing a trustee and successor trustees may be among the most important decisions people make when they create a trust.  Who they select depends on a variety of factors, including the purpose and complexity of the trust, how long it’s designed to last, and the trustee’s powers. Nearly three-quarters of households with more than a million dollars in investable assets have trusts.  Click here to read further.

Presidential elections often cause investor angst. And next week’s election is perhaps one of the most emotionally charged in decades. We’ve prepared the attached commentary to share our perspective.

• History shows that the political party in power is not a significant driver of long-term investment returns. That’s not to say US presidents and politics don’t impact the economy and markets—but so do lots of other factors like the actions of foreign leaders, changes in interest rates, technological advances, and a global pandemic, to name a few. 

• As we’ve stated in the past, developing portfolio strategy isn’t based on making predictions about the future but being prepared for a range of potential outcomes. Therefore, we’ll approach this election as we’ve done in the past by looking through to other fundamental drivers of financial markets and being ready to take advantage of potential volatility if presented with attractive investment opportunities. And as the election results and policies that follow become clear, we’ll carefully reassess our views and outlook.     

• In terms of the current macro backdrop, we believe that what happens with the coronavirus will have the biggest impact on near-term economic growth. Thus, an unusually wide range of potential economic outcomes exists. Against this backdrop, proper portfolio diversification may be as important as ever.  

Please click here to read our Brief Market Commentary on the upcoming US Presidential Election.

Financial markets have experienced an incredible amount of volatility thus far in 2020. Government efforts to contain the spread of the coronavirus resulted in a sudden stop of global economic activity—one of the deepest and sharpest recessions in modern history—and a broad selloff across risk assets. Government bond yields collapsed, benefitting from “safe haven” demand. Policymakers responded quickly with massive monetary and fiscal support measures that restored confidence and fueled a strong market rally off the March lows.

Read our Investment Commentary

We hope that you find this information helpful.  Please don’t hesitate to contact us if you have questions or would like to discuss further.

The complexities of wealth require thoughtful management. Selecting a wealth service model requires an intentional look at the benefits to the family as well as how family harmony may be affected.  The process may lead to the decision to establish a single-family office, join a multi-family office, or outsource certain activities to a financial institution such as a bank or brokerage firm.  

This white paper reviews the benefits and limitations of each service model and also identifies relevant matters to help families of significant wealth better discern what may be the right choice for their family.