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Why High Net Worth Families Should Use a Multi-Family Office

Posted by Carolyn B.R. Decker, CFP®, CPA, PFS

The Benefits of Adding a Wealth Management Firm to Your Advisory Team

Fee-conscious, high net worth families who have a strong estate attorney and CPA may believe a Multi-Family Office is an unnecessary addition to their advisory team and instead choose a do-it-yourself, or DIY, approach.

The real opportunity cost of working with a holistic financial advisor may be going unnoticed in some aspects of one’s financial management; however, it is quite likely that at some point a high net worth family who has chosen the DIY path will face challenges that could be detrimental. 

There are many significant benefits of working with a wealth management firm that can outweigh any cost savings of forgoing that service.

You Can Put a Price on Peace of Mind

The Perks of Experience

In addition to providing peace of mind, Multi-Family Office wealth management firms have the benefit of years of experience with other families to provide the expertise to deftly handle and resolve many of the challenges families face. And these professional wealth advisors do it all in the best interest of the client family.

Before considering a DIY approach to wealth management (or continuing on this path), it is important for high net worth families to consider the benefits of a Multi-Family Office, which ultimately help ensure the family’s financial objectives are being met and opportunities are not being missed.

The Greatest Gift Wealthy Parents Can Give Their Children

Posted by Carolyn B.R. Decker, CFP®, CPA, PFS

3 Tips to Teach Your Children Responsible Spending 

As a multi-family office, our job often goes outside the normal bounds of typical financial advice. One of the most important areas in which we spend time is helping parents prepare their children for wealth.  

Practically speaking, for a family of means there often are no spending limits. The parents of the families with whom we work often grew up without significant wealth and learn lessons about spending like most people–having to make choices and prioritize what is the most important use of limited resources.  Because they didn’t grow up with a financial safety net, they often made mistakes with money from which they learned valuable lessons. 

But what happens when you grow up in a household where money seems like an unlimited resource?  

The greatest gifts wealthy parents can give their children are the tools to make responsible spending decisions, which include:

1. Explaining the Concept of Opportunity Cost

You can’t have your cake and eat it too. For many wealthy children, it can seem like they live the exception to this rule. Parents at every wealth level are bombarded with requests by their children for toys, gadgets, clothes, and technology. For many parents, it’s easy to say, “no, we can’t afford that.” For wealthy families, this response typically doesn’t ring true. Without that easy dismissal (and taking into account how persistent kids can be!) the default answer to those requests can easily go from no to yes.  

No matter how much money a family has, it is a finite resource. Consumption today does limit consumption tomorrow. Cash that isn’t spent can be used in the future to buy something bigger, through investing and compounding. When put in the context of “would you rather buy this today, or save the money and get something bigger/more in the future?” parents may be surprised at their kids’ choices.  

If delaying consumption for a greater future opportunity isn’t a motivating factor, another way to frame opportunity cost is, “what could be bought instead for the same amount of money?” Yes, you could buy those earrings, or you could go to the movies with your friends four times– which would you prefer?”  

Forcing children to make choices exercises their decision-making muscles and allows them to start to develop values around what is important to them.  

2. Sharing Your Values

Whether consciously or not, your spending decisions are based on what you value. People who value ease may spend money on convenience items or technology. Those who value family togetherness or experiences will spend money on travel or family homes. A passion for art can translate to putting wealth into building a collection of pieces that speak to you. When you are making decisions about how to spend your money, consider talking to your children about why you spend what you do and, even more importantly, why you don’t spend on certain things.  

By pulling back the curtain on your thinking, you are giving your children context around spending, which they hopefully can use to guide their decisions about money in the future. Perhaps you feel good about sparing no expense for an excellent dining experience, but you don’t feel the need to buy a new iPhone every time the latest model comes out–or replace the new one they just got because they dropped it. Instead, you can explain that even though you can afford to replace that phone, you won’t be making the purchase because of the opportunity cost and because you value people being responsible with their belongings.  

3. Allow Your Children to Make Mistakes

It goes against most people’s parenting instincts to let their child fail. For children who will control or benefit from significant wealth in their adulthood, learning from mistakes with money early and on a smaller scale can be critical to their long-term financial health.

First, we encourage parents to come to financial agreements with kids in their teenage years on what expenses the parents will cover and what expenses the kids will be responsible for paying themselves.   Typically, the parents will pay for food, clothing, health and school-related items, and the kids may be expected to pay for their own social activities with friends, leisure activity purchases, and birthday gifts for their family members, for instance. The money for the kids’ responsibilities can still come from the parents– what is important is that it comes as a fixed, recurring amount over which the kids will have 100% control.  

For example, you agree with your 16 year old that you will transfer $200 to an account for them each month. They can then spend it however they want: on gas, eating out with friends, in-app video game purchases–or not spend it at all and keep it. The critical piece here is that if they run out of money, you do not give them more until the next month.  This action forces first-hand learning of:

It is always easier to spend someone else’s money than it is to spend your own. A child effectively having access to a parents’ bottomless wallet has the potential to result in that child never having to think about consequences or priorities–in other words, never having to decide to not spend money. By giving teenagers and young adults full dominion over cash from which they make spending decisions and allowing them to experience the consequences, you are giving them the greatest gift–the gift of responsible spending.  

Pursuing Minimized Taxes With Private Placement Life Insurance

Posted by Carolyn B.R. Decker, CFP®, CPA, PFS

How High Net Worth Investors Can Have Their Cake and Eat It Too, with PPLI

The increase in the estate exemption to $11.18m in 2018 has many Americans and their advisors focusing more on income tax planning than estate tax planning.

This shift in focus makes sense: transferring wealth outside of a client’s estate for the benefit of their children and future generations means those assets and their appreciation will not be subject to the estate tax at their death. However, they do not get a step-up in basis for income tax purposes, the result of which can be significant taxable gains when those assets are eventually sold.

For individuals whose net worth is $10m or less, it may now be better for them to NOT transfer wealth outside of their estate, and instead plan on holding it at death to achieve the step-up in basis. Of course, future tax law changes that reduce the exemption amount could still make wealth transfer planning valuable.

What Is Private Placement Life Insurance (PPLI) And How Does it Work?

So, how can an individual get the best of all worlds: transfer assets outside of their estate, invest in a diversified and appreciating portfolio, and not burden the next generation with a huge income tax bill down the road? One answer may be Private Placement Life Insurance, or PPLI.

PPLI was once a strategy for the uber-wealthy who could afford to put tens of millions of dollars into the structure. Today, PPLI is becoming even more accessible to ultra-high net worth families. PPLI is basically a life insurance policy with a high internal cash value that can be invested in a variety of ways. Like any life insurance policy, neither the appreciation of that internal value, nor the ultimate payout of the death benefit, is subject to income tax.

This structure effectively gives a client the same step-up in basis they would get if these assets were held inside their estate!

While individuals can purchase PPLI policies new, one of the ways PPLI is becoming more accessible is by allowing individuals to use existing life insurance policies. This accessibility is a recent development with insurance carriers that enables investors to attach a PPLI investment account to an existing policy (one not originally bought with PPLI in mind). The death benefit on the policy and the insured’s age will dictate how much in investment assets the policy can carry tax-free.

For individuals with health issues who can no longer obtain new life insurance policies, this development removes a significant roadblock. Additionally, using an existing policy can mitigate some of the costs of obtaining new life insurance, allowing additional premiums paid in to go further toward the investment accounts.

While there are other conditions to consider before proceeding with PPLI, it continues to be an attractive way for clients to achieve both income and estate tax minimization.

What to Expect from a Trump Tax Reform Plan

Posted by Carolyn B.R. Decker, CFP®, CPA, PFS

How Tax Reform Under President Trump Could Affect You

At the end of July, the Trump Administration announced the key principles and goals for tax reform, based on an outline Trump made public in April that touted his tax reform plan as “the biggest individual and business tax cut in American history.” If passed, it would be the first significant tax reform legislation since 1986, when President Reagan implemented two major tax cuts.

Among the tax changes proposed for families are:

Among the tax changes proposed to simplify the tax code are:

Among the tax changes proposed for businesses are:

Breaking Down President Trump’s Tax Reform Proposal

While Trump’s plan has only been released as a largely broad outline, these and other changes could have significant effects on annual tax returns, retirement plans and other investments. It is wise for investors to begin considering the impact of the reforms if they are passed.

The Estate Tax: One significant change the plan proposes is elimination of the estate tax, which currently only applies to the top 1% of the population. As it stands now, a married couple is exempt from taxes on the first $10.9 million of their estate, and would be taxed at a rate of 40% for any amount above that.

Under Trump’s plan, there would be no step-up in basis at death, meaning that capital gains tax on sales of inherited property would still impact wealth transfer tax planning.

The Standard Deduction: Under Trump’s proposal, the standard deduction would double to $24,000 for couples. This would shift many taxpayers from taking itemized deductions to taking the standard deduction. While this move seems favorable for taxpayers, charities fear the lack of tax incentive could reduce charitable gifts.

The Changing Tax Brackets: If you were to move into a lower tax bracket under the proposed new structure, it would be important to assess the impact on your retirement plan. However, as no income ranges have yet been specified, the best plan is to monitor how tax reform efforts unfold and make investment decisions accordingly.

The Alternative Minimum Tax: Eliminating the Alternative Minimum Tax, a tax that has traditionally been viewed unfavorably, would likely benefit high-income earners most as it would eliminate the non-graduated alternative minimum income taxes and allow for deductions that have otherwise been disallowed under the AMT.

The Cap on Itemized Deductions: Trump’s tax reform plan proposes a $200,000 cap on itemized deductions for couples, and would bar single filers from deducting more than $100,000. These proposed changes would most impact high-income earners–couples and singles who make $1 million or more.

Conversely, most itemized deductions would be nixed under Trump’s plan, and the ones that are not on the chopping block may lose their appeal in the face of other changes to the tax code, such as the doubling standard deduction. The tax breaks expected to remain include the mortgage interest deduction and charitable donation deduction.

Changes for Businesses Under Trump’s Proposed Tax Reform Plan

Taxes remain a top concern of business owners, who feel the pinch not just on the profit side, but on the growth side. However, business owners are reporting they feel largely optimistic that Trump’s tax reform proposals will provide more breathing room.

Tax Rate Cut. The plan proposes cutting the small business and corporate tax rate by more than half, from 38% to 15%.

That 15% rate would also apply to partnerships, real estate companies, hedge funds and private equity funds, which are all currently taxed at the income tax rate of 39.6%.

One-Time Repatriation Tax. Corporations holding money overseas will be allowed to bring it back into the U.S. for a one-time repatriation tax that has yet to be specified. This aspect of the plan is followed by a proposal for a “territorial” tax system, which also has yet to be laid out in any detail, but would exclude income earned by businesses overseas.

Closing Loopholes. For corporations or wealthy individuals, Trump’s proposed tax reform plan closes loopholes that include avoiding taxes by setting up offshore businesses.

For business owners concerned with succession, Trump’s proposal to eliminate the estate tax and lower capital gains rates for the highest two tax brackets in his plan could make a significant difference in sales decisions.

The Administration’s July statement calls for Congress to begin moving this tax reform legislation through the House and Senate in the fall. President Trump has made it clear he aims to get something passed this year. While it’s difficult at this juncture to make predictions about the implications to your personal or business finances, we suggest you meet with a financial advisor who can take a knowledgeable view of your portfolio and business to make recommendations based on what these proposed changes would mean for you.

The “Who, What, Where, Why, and How” of Private Placement Life Insurance

Posted by Carolyn B.R. Decker, CFP®, CPA, PFS

Who Should Consider A PPLI?
Families with an allergy to income taxes and an appetite for tax-inefficient investments or investment strategies are prime candidates for Private Placement Life Insurance (PPLI). Owners of PPLI, whether an individual, irrevocable trust, or limited liability company, must meet the accredited investor and qualified purchaser requirements.

Because of the life insurance component, medical insurability is a requirement, otherwise the insurance costs can eat into the tax savings benefits, making the strategy less appealing. However, in situations where medical issues do make buying life insurance impractical, you can consider PPLI’s close cousin, the Private Placement Variable Annuity (PPVA).

What is a PPLI?
PPLI is a special type of life insurance structured to have a high cash value compared to a relatively low death benefit. To minimize fee drag, the life insurance component is kept as low as possible, allowing the cash value of the policy to ultimately drive death benefit.

The goal of PPLI is to quickly build up significant cash value within a life insurance policy in order to take advantage of the tax-free treatment of income and gains from the underlying investments within the policy. While PPLI is built on a life insurance chassis, PPLI is first and foremost an income tax strategy for investing, not an estate planning one.

Essentially, it is a variable life insurance policy that allows you to allocate to alternative investments which wouldn’t be available within the more traditional variable universal life policies.

Where to Own a PPLI?
Because the primary goal of PPLI is not estate tax minimization, many investors will own these policies directly, inside of their taxable estate. To the extent sufficient assets are available that are not subject to federal and state estate taxes, certainly owning PPLI in an Irrevocable Trust is possible and preferred.

For clients who are leaving a significant portion of their assets to their private foundation at death, but aren’t ready to irrevocably give up personal access to those assets, investing through PPLI or PPVA can accelerate the process of making those assets effectively income tax-free. The PPLI or PPVA policy would be owned directly, inside the taxable estate. At death, the death benefit is paid out in cash. The value of the death benefit going to charity, which has grown income tax-free, will also pass estate tax-free.

Another application is in conjunction with a Grantor Charitable Lead Trust (CLT). When you fund a CLT, you are able to take an immediate tax deduction, in exchange for including future years’ income generated by the CLT on your personal tax return. A PPLI or PPVA policy can minimize that flow-through income back to you, allowing you to have the benefit of the upfront deduction, but not the continued phantom income.

Why (not) Consider a PPLI?
One of the key requirements to meet IRS guidelines on PPLI involves the policyholder giving up investment control over the underlying assets.

There are many investment options available, in the form of commingled funds, already approved on each carrier’s platform from which a policyholder can choose. In addition, some insurance carriers allow for managed accounts. In these instances, you do have the ability to choose among strategies, and investment objectives, but not individual holdings.

If the IRS deems that you, the investor, have too much control, the PPLI will be treated as if it had never existed in the first place and all income tax benefits will be erased.

A hands-on investor who is not comfortable handing over control of a portion of their investment portfolio may have a hard time getting comfortable with this strategy.

How (much) to Invest in a PPLI?
Sizing of assets dedicated to this strategy is important. Too little, and the benefits are outweighed by the costs. Too much, and liquidity issues can present problems.

No more than 20-30% of a portfolio should be allocated to PPLI, though other illiquid assets in the portfolio need to be taken into consideration in this calculation as well.

We advise clients to fund PPLI with at least $10m to make the investment and complexity worthwhile. This number is largely driven by underlying investments, since many of them tend to be hedge funds with their own minimum funding requirements.

While you can access these funds once invested, that shouldn’t be the plan going into a PPLI policy. There are a few ways to get at the funds invested within a PPLI policy: