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Managing Family Wealth to Pass on Assets and Values

Managing family wealth can be complicated. Designing a wealth-transfer plan that accords with your values and provides for your benefi ciaries requires navigating a sea of acronyms and legal structures. And recent changes to the tax code, including an increase in the estate tax and lifetime gift exemptions and a cap on the state and local income tax deduction, have introduced a new learning curve.

For insight into the e� ects of these changes as well as perennial issues in family wealth management, Crain’s enlisted the help of experts in the fi eld:

• Susan Teicher, CPA, CFP, partner-in-charge of the wealth management practice in Baker Tilly’s New York regional o� ces.

• Brandon Williams, East Coast regional manager of private banking for City National Bank.

Crain’s: Who should set up a family o� ce, and what’s the most tax-e� cient way to structure one?

Susan Teicher: A family o� ce varies greatly depending on the family’s needs and goals. The benefi ts include confi dentiality, alignment of the family members’ common interests, separation between the family’s operating business and their wealth management, centralized management of outside advisers and risk management for the family. The considerations are the cost and regulatory compliance of managing assets. The underlying structure of the family o� ce depends on the size, wealth and the objectives of the family. The term “family o� ce” is extremely broad and there is no one-size-fi ts-all in terms of tax e� ciency. When structuring a family o� ce, the family’s tax advisers need to be consulted to determine the most benefi cial method of implementation.

Brandon Williams: Single-family o� ces are set up by wealthy families who want to have specialists whose sole job and responsibility is to focus on that family’s specifi c needs. Families hire a professional to lead the family o� ce, often an attorney or accountant. The head of the family o� ce will bring in other professionals either to work directly with the family, such as a CFO, trust specialist, fi nancial adviser or a banker. Multifamily o� ces usually deal with a group of families with similar net worth and outlooks.

Crain’s: How does the increased estate-tax exemption change estate planning? Is estate planning still important in this environment?

Teicher: Estate planning is probably more important than ever in the current environment. Connecticut and New York follow their own system of estate taxation that does not yet reach the heights of the federal exemption level. For this reason alone, estate planning can become very important. New York’s exemption is currently about half of the federal, but once an estate exceeds that amount, without proper planning the exemption potentially can be lost completely at the state level. On the other hand, New York does not have a gift tax, so planning is a natural fi t to resolve the seeming dichotomy between the two.

Williams: Estate taxes are just a part of wealth-transfer planning. Clients need to plan whether the estate-tax exemption is high or low. The sophistication level of planning with an $11,400,000 estate-tax exemption is what changes. Most married couples and individuals do not have to worry about doing sophisticated estate “tax” planning because of the higher exemption levels; they can do more basic planning. Complex planning often involves issues unrelated to tax, such as planning for a child with special needs, planning for second marriages, planning for non-U.S. citizens, or planning for children in troubled marriages. For all families, planning is critical for the e� cient transfer of wealth and for preparing heirs to inherit, regardless of the tax imposed on the inheritance.

Crain’s: With the upcoming 2020 presidential election, what do you foresee happening with respect to the estate and gift tax exemptions and tax rates? Does it make sense to take advantage of the higher lifetime gifting amount of $11,400,000 this year, since it may change in the future?

Teicher: This is the question on everyone’s mind. Unfortunately, there is no way to predict what, if anything will happen. If you are lucky enough to have a large estate, you may want to consider ways to use the exemption during your lifetime in case there is a reversion to a lesser amount. There are many di� erent ways to do this, and taxpayers in this position should consult with their advisers.

Williams: In my opinion, and it is my opinion, not the opinion of CNB, I expect plenty of noise that if a Democrat wins the 2020 presidential election that the

BRANDON WILLIAMSEast Coast Regional Manager,

Private Bankbrandon.williams@cnb.com

213-673-7700

SUSAN TEICHER, CPA, CFPPartner

susan.teicher@bakertilly.com

212-792-4890

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estate- and gift-exemption amount will be lowered back to $3,500,000 and the estate- and gift-tax rate will be raised to 45% from 40%. But that will only happen if the Democrats win both the House and Senate by comfortable margins, which is not likely to happen. Therefore, I expect status quo in 2020.

With respect to making lifetime gifts, clients should only make large lifetime gifts if doing so fi ts within what they are trying to accomplish with their estate plan and so long as it does not interfere with their current or future lifestyle needs. Clients should avoid making gifts merely to take advantage of a tax benefi t that may go away in the future.

Crain’s: What is a revocable trust, and does it preclude the need for a will?

Teicher: A revocable trust is a way to manage assets and have someone act for you in case you are ever unable to act for yourself because of accident or sickness. The grantor—the person making the trust—contributes assets to the trust and uses them as if they were still in their own name. The trust may provide for bequests and

give direction on death, but it may also “pour over” to the estate—that is, direct that assets move to the estate rather than remain in trust. It does not obviate the need for a will. Anything not in trust will require the will to transfer title once the individual has died.

Williams: A revocable living trust is, in part, a will substitute. The assets held within a revocable living trust bypass the Probate process. Having a revocable living trust does not eliminate the need to establish a will; it is an additional component to a well-rounded estate plan. The main lifetime benefi t of a revocable living trust is the e� cient management of a client’s assets in the event of the client’s disability.

Crain’s: What are the most e� ective ways to use incentive clauses in trusts? How does one balance asset protection with motivation for the trust’s benefi ciaries?

Teicher: A trust can be a very fl exible instrument if drafted properly. But in order to be e� ective, the trustee must understand the grantor’s goals in creating the trust and be given the power to exercise his or her discretion. If the trustee is given discretion to distribute or withhold funds, even a mandatory distribution at reaching a milestone (age, marriage, graduation) could be withheld if the trustee feels that the benefi ciary is not acting in a prudent manner. This might encourage the benefi ciary to fi nd employment, enter into a prenup, etc.

Williams: Incentive clauses in trusts are written to provide the trust benefi ciaries with a goal to achieve, such as graduate college, get a high-paying job, get married, go to graduate school, in order to receive distributions from the trust. Incentive clauses lessen the probability of creating “trust-fund babies.”

Trusts are often established to protect the assets of the trust from the claims of the benefi ciary’s creditors, predators or thieves. In some states, the person settling and funding the trust can be a benefi ciary of an asset-protected trust. In other

states, you are only permitted to set up and asset-protect a trust for the benefi t of other benefi ciaries.

Crain’s: With interest rates expected to remain neutral for 2019, is now a good time to make leveraged gifts to Grantor Retained Annuity Trusts?

Teicher: A GRAT is an e� ective estate-planning tool, but how e� ective it is depends upon the property contributed and its ability to beat the “hurdle” rate—the imputed interest rate that must be paid on the annuity retained by the donor. If property is expected to appreciate at more than the interest rate, it is a win situation and tailor-made for a GRAT. The current rate is 3%.

Williams: As long as the Internal Revenue Code Section 7520 interest rates—which are how present values are calculated for GRATs—stay between 2.5% and 3.5%, it is always a good time to make leveraged gifts to GRATs, because if investments in the GRAT beat the 7520 interest rate, it will be successful.

Crain’s: What is the di� erence between the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act, and why is establishing a trust preferable in some cases?

Teicher: UGMA and UTMA accounts are ways to transfer cash (UGMA) or property/securities (UTMA) to a minor. These accounts typically end when the minor reaches age 18 or 21. A child may not be mature enough at 21 to be able to manage a large sum of money. A trust can last much longer than age 21, and can o� er the benefi ciary time to grow into the management of the assets.

Williams: UGMAs and UTMAs are basically the same: They are accounts allowed under Section 2503 of the Internal Revenue Code to be established for the benefi t of minor

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Partner-in-charge of the wealth management practice in the New York regional offi ces of Baker Tilly

“Unfortunately, there is no way to predict what, if anything will happen [with estate and gift tax exemptions and tax rates]. If you are lucky enough to have a large estate, you may want to consider ways to use the exemption during your lifetime in case there is a reversion to a lesser amount. There are many different ways to do this, and taxpayers in this position should consult with their advisers.”

SUSAN TEICHER, CPA, CFP

children. Parents or grandparents are usually the custodians of the account. State law controls whether a custodian can establish an UGMA or an UTMA in that state. Either way, at age 21, the UGMA or UTMA typically is distributed outright to the child and the custodian no longer controls the assets. Trusts are often preferable to UGMA and UTMA accounts because trusts can be written to make sure that the assets are not distributed to the child at age 21.

Crain’s: What kinds of estate-planning changes should one consider when marrying a second time?

Teicher: A prenuptial agreement is the best tool to clearly defi ne the division of assets in the event of death or divorce. Changes in benefi ciary designations on life insurance, retirement plans, etc. should be made accordingly. New wills need to be drafted which are in accordance with the prenuptial agreement and cannot provide less than the prenuptial agreement. Often a marital trust will be set up upon the death of the wealthier spouse to provide for the surviving spouse during their lifetime. Upon that spouse’s death, the trust will pass to the fi rst spouse’s children.

Williams: Prenuptial agreements are usually entered into by spouses marrying for a second time to protect each spouse’s assets that are brought into the marriage. In addition, to protect children from a fi rst marriage, parents will usually consider establishing a QTIP marital trust at death so that their children are protected from a widow(er) remarrying and writing the children out of the estate.

Crain’s: In light of the new tax laws, what role should charitable giving play in an estate plan (the new laws do not a� ect estate planning and charitable giving, but may have an impact on income taxes)?

Williams: Giving to charity is always an important part of estate and/or income tax planning regardless of tax law changes. Leaving a bequest to charity provides a dollar-for-dollar lowering of a client’s taxable estate, with a resulting 40% deduction in federal estate taxes due because those assets are out of the client’s taxable estate. Charitable giving is also a critical component to pass down family values and to encourage intergenerational philanthropy.

Teicher: The new income-tax laws have a� ected many individuals and limited their ability to deduct more than the increased standard deduction ($24,000 for married fi ling jointly and $12,000 for individuals). For many on the cusp of the standard deduction, there may be ways to increase the charitable contribution through bunching deductions in one year as opposed to spreading them over two or more years. In this way, it may be possible to increase deductions in the current year, and take the standard deduction in other years. Individuals should also explore making gifts to charity from their IRAs instead of taking their required minimum distributions. There is no deduction, but the overall adjusted gross income is lower and that may help with various credits and other deductions.

Crain’s: What can residents of high income-tax states

such as New York, New Jersey and Connecticut do to mitigate their state income taxes?

Williams: LEAVE! Actually, most taxpayers in high income-tax states like New York, New Jersey and Connecticut paid less in income taxes this year than in previous years. This is because most taxpayers in those states were subject to the alternative minimum tax and the Pease limitation on itemized deductions, which were repealed under the new tax law. That is, the Tax Cuts and Jobs Act of 2017 helped most taxpayers save on taxes, even those who live in high income-tax states.

Teicher: The new tax law capped the deduction for state and local income tax as well as real-estate tax at $10,000 ($5,000 if married fi ling separately). Many people with second homes in low-tax states are considering changing their tax residency to avoid

paying high state income taxes with limited federal deductibility. If a taxpayer maintains a home, owned or rented, in a high-tax state there are many factors that are looked at by these states. There needs to be a change in domicile as well as a day count limitation. A tax adviser should be consulted to ensure proper conformity with the law.

City National Bank and its a� liates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisers on the tax, accounting and legal implications of actions you may take based on any strategies presented taking into account your own particular circumstances.

The views and opinions expressed in this interview do not necessarily represent the views and opinions of City National Bank, its subsidiaries or a� liates. The interview is provided for informational purposes only and should not be construed as tax, fi nancial, or investment advice. The ideas and strategies herein should not be used without fi rst assessing your own personal and fi nancial situation, or without consulting with your own advisers.

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Referred Cozette to City National

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East coast regional manager of Private Bankingfor City National Bank

“Giving to charity is always an important part of estate and/or income tax planning regardless of tax law changes. Leaving a bequest to charity provides a dollar-for-dollar lowering of a client’s taxable estate, with a resulting 40% deduction in federal estate taxes due because those assets are out of the client’s taxable estate. Charitable giving is also a critical component to pass down family values and to encourage intergenerational philanthropy.”

BRANDON WILLIAMS