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How We Help: Putting our Family Office Services Model to Work for You

by Jay D. Eich, CFP®, CPA

The original vision of our founders was to make a positive impact in the lives of our clients and their families by continually working towards holistic financial well-being. Through our team of multi-disciplinary professionals, we’re able to develop and employ complex strategies across all areas of our client’s financial life. This “family office” approach sets us apart in our industry and allows us to add value for our clients in unique ways.

Recently, most conversations with our clients have been focused on the impact of geopolitical events on investment portfolios in the short term as well as the long run.

We’ve reassured them that while the coronavirus is an unprecedented event and market performance in the immediate is uncertain, based on the results of similar past events ( like the 1987 market crash, 2008 financial crisis, and the 2000 “dot com” crash), their performance, three, five and ten years after a market crisis will likely be very strong.

We’ve also reminded our clients that adversity often brings opportunity. In response to the recent downturn, we’ve harvested tax losses to offset future capital gains, we’ve rebalanced from bonds to stocks, and we’ve put excess cash to work at lower market prices.

While investment themes are often top of our client’s minds and are certainly very important, we’d like to highlight other examples of how our family office model has helped our clients in recent months.

Estate Planning
A depressed stock market is a great time to consider wealth transfer strategies. One such technique is a Grantor Retained Annuity Trust (called a “GRAT”) – a tax-advantaged way to transfer assets to the next generation. In addition to depressed market values, interest rates are also low, making this strategy an appealing way to transfer assets to the next generation with little, if any, gift or estate tax consequences.

A GRAT originates when a grantor contributes an asset to an irrevocable trust. The grantor retains the right to receive an annuity stream over the term of the trust. At the end of the term, the remaining assets transfer to a beneficiary, usually the grantor’s children. Depending on the terms of the trust, there may be gift tax consequences. However, by using a zeroed-out GRAT, a taxable gift can likely be avoided. Here is an example of how a zeroed-out GRAT works:

Sarah has one child, Amy. She would like to make a gift to Amy and feels the market will rise over the next few years. She contributes $1,000,000 of her diversified stock portfolio to a three year zeroed-out GRAT for Amy. In order to minimize the gift tax consequences, the trust must generally return the principal ($1,000,000 or $333,333 each year) plus an IRS prescribed rate (currently 0.60%) to Sarah. If the growth and income of the trust is greater than the IRS rate (again 0.60%), there will be remaining assets to pass to Amy. If we assume 10% growth and 2% income each year over the next three years, Sarah will have transferred approximately $270,000 to Amy with almost no use of her estate exemption.

Business Planning
Like so many Americans, many of our client’s livelihoods have been impacted by COVID-19. Our tax team has helped our clients navigate the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in order to determine the best way to access government programs, both as small business owners and as employees. While details of the programs are constantly changing, maintaining familiarity with the Paycheck Protection Program, The Economic Injury Disaster Loan Program, and state unemployment programs has allowed us to advise our clients on which program to apply to and why.

Tax Planning
The late 2019 release of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), and the recently released CARES Act have significantly impacted our clients. For 2020, July 15th is the new April 15th! In addition to the new filing deadline, first and second 2020 quarter payments (normally due in April and June of 2020) are also due on July 15th.

IRA, Roth IRA, and HSA contributions can also still be made by July 15th, while SEP contributions can still be made at the time you file your 2019 return (which can be as late as October of 2020).

New IRA distribution and contribution rules are also impactful for many of our clients. The SECURE Act allows IRA owners to make contributions beyond 70 ½ and required minimum distributions (RMDs) will now begin at age 72. While the CARES Act allows IRA owners to skip their 2020 RMD, in some cases it may still make sense to take one.

Financial Planning
The SECURE Act now requires adult children and non-spouse beneficiaries to deplete an IRA or Roth IRA within 10 years of the original owner’s death. Prior to the Act’s passing, adult children could take distributions over the course of their lifetimes. Lower stock market values combined with the SECURE act make this a great time to consider a Roth IRA conversion.

Let’s assume Bob, age 60, has a $1M IRA and a net worth of $15M. Bob does not anticipate a need for IRA funds during his lifetime. He has one child, Eric, who is 25 years old. Bob converts the IRA to a Roth IRA. This results in $1M of income to him and additional tax liability. After the conversion, Bob would not have to take distributions during his lifetime. If Bob lived until 90, there would be 40 years of tax free growth in the ROTH IRA, 30 years during Bob’s life plus an additional 10 that Eric could defer distribution. If the funds earned an average rate of return of 6%, it would more than overcome paying the tax upfront.

This technique does not just apply to the wealthy. For those who are young or in lower tax brackets this could also be a valuable technique. A Roth conversion is especially valuable when market values are down as you are converting at a much lower value, reducing tax and increasing expected future return.

Charitable Planning
As a result of the SECURE Act, the amount a taxpayer can deduct for cash contributions is limited to 60% of adjusted gross income (AGI). Cash donations over that amount can be carried over for up to five years and deducted on future tax returns. The CARES Act lifts the 60% of AGI limit to 100% for 2020 only before reverting back to the 60% limit in 2021.

The preparation of an income tax projection is critical in order to determine how best to make charitable contributions. In addition to the new 100% cash contribution limit, a few other issues to consider when making a charitable contribution include:

• Cash vs. Stock gifts: While a gift of appreciated stock is usually the best asset for a high net worth individual to give to charity, for those with portfolios who invested over the last few years, you may want to consider making a cash gift to take advantage of the increased AGI limits in 2020.

• The Medicare Surcharge: If your income exceeds certain thresholds you may pay significantly more for Medicare.

• Qualified Charitable Distributions (QCD): Distributions from an IRA are typically treated as taxable income. For those who are at least age 70 1/2, taking a QCD allows IRA owners to gift $100,000 per year from the IRA to a qualified charity. The QCD is not considered income nor do you report a deduction since the two cancel each other out.”

Risk Management Planning
At Trust Company of the South, we do not sell insurance policies. We help our clients identify areas of risk and then partner with firms who specialize in each individual area. Like most industries, the insurance industry has been impacted by COVID-19. Interest rates can have an impact on premiums and some providers have increased their premiums. If you have not recently done so, now is a great time to look at your life, medical, disability, property and casualty, and long term care coverage.

Please contact us if you have interest in discussing any of the above.