Independent Thinking^®

Planning for Change

There’s more to financial planning than death and taxes. Sure, legacies – for spouses, children, and charities – are a big deal. And tax efficiency should underpin every aspect of the discipline, especially now as we prepare for a new administration. But if there is a third thing that can be said to be certain in this life, it’s change.
 
Marriage, children, career moves, business start-ups and sales, grandchildren, philanthropic interests, and retirement are just some of the headline life events for many private investors. Behind these are myriad decision points that can make or break fortunes. Financial markets and the regulatory environment are in almost constant flux. (As we discuss in these pages, the challenge now is to navigate low yields and high asset valuations, as well as tax proposals that could substantially affect high earners.)
 
Perhaps the best analogy is to a business plan. Just as a company seeks to expand, merge or sell according to a plan, so too can a family plan its financial life. Indeed, the biggest regret of many investors is that they didn’t start planning for their own wealth sooner. A looming retirement or a liquidity event is the usual wake-up call – the point at which a family seeks professional help to address increasingly complex issues. Ideally, planning should start much sooner, to better align spending, investing, and fiduciary structures to meet family goals, and harness the power of time and compounding to magnify the positive impact of those strategies.
 
Planning doesn’t stop there. Plans can and should change as families, businesses, and legacy interests evolve. The days of three-ring binders embossed with a private bank’s seal are long gone. These static plans were probably out-of-date by the time they were printed, as the families and their businesses, as well as the markets, continued to evolve.
 
Families can struggle, with divorce, with physical or mental illness, and with addiction. Or they can prosper, with weddings, tuitions, first homes, and even start-up businesses to fund (or successful businesses to sell or pass down to the next generation). Most families experience both struggle and success. It’s important to note that spouses should engage in this planning as a team and that decisions affecting each other, and their children, should be as transparent and effectively communicated as possible. (See Fred Taylor’s article on couples and wealth management and Jeff Maurer’s article on treating children fairly.)
 
Business life is similarly complex. For a corporate executive, each year closer to retirement brings decisions to make on balancing bonus deferrals with cash flow, on diversifying accumulated company stock and stock options, and on the bigger question of whether they can afford to retire. Business owners share many of these concerns but also have to evaluate the eventual transfer of their business in the context of their personal financial goals and the market environment (while staying focused on their usually all-consuming day job). Family-owned businesses also share the added complexity of balancing governance, management succession, ownership and control among family members while keeping the business on track for future success.
 
If the business owner foresees future appreciation in the value of his or her shares, the owner may consider transferring non-voting shares of the company to intentionally defective grantor trusts for the benefit of their children and or grandchildren. While the current value of the shares would be a taxable gift, the owner can utilize part or all of his unused estate and gift tax exemption of $5.45 million ($10.9 million for married couples). The value of the shares and the future appreciation (which could be significant, especially in a sale or IPO) would all inure to the benefit of the trust, and the grantor, under current gift tax law, would be responsible for all of the income taxes, allowing the trust to enjoy the full appreciation on those assets.
 
For those who have fully utilized their gift tax exclusions (or are only interested in transferring the future appreciation on their assets and not the principal), historically low interest rates make this an opportune time to implement certain estate freeze planning strategies such as Grantor Retained Annuity Trusts, or GRATs, and sales to intentionally defective grantor trusts in return for an installment note.
 
Let’s say the company is sold to a public company in return for stock of the acquirer in a tax-free transaction. Now the trusts own a concentrated position in a public company. If it is sold, the grantor (if still alive) is liable for the income taxes. However, the grantor can swap in higher basis assets (e.g., cash or bonds) of an equivalent value and take back the appreciated stock in return. Why? The grantor may then give some of the stock to charity or the family’s private foundation to fulfill his or her charitable legacy and avoid a capital gains tax while achieving a significant charitable income tax deduction.
 
Alternatively, if the business were not sold, the grantor could execute a swap of the private company shares to realign ownership of the business while diversifying the trusts for the family members who may not work in the business.
 
Constant change should always be a consideration in trust and fiduciary planning too. In this planning and investing environment, there is real concern about transferring ownership in the business (or other financial assets) to trusts before securing a bulletproof retirement. However, utilizing carefully drafted spousal limited access trust provisions in a trust can allow a spouse to have access to income and principal in times of financial duress at the discretion of a truly independent trustee.
 
In short, life keeps coming at us all. None of us can predict the future, in the markets or in our own businesses and families. Establishing a strategic, fully integrated wealth plan early on and, crucially, viewing it as a dynamic and flexible tool in annual or more frequent discussions with close advisors, can help families prepare for – and perhaps even embrace – the change that is certainly coming.

Chris Zander is the Chief Wealth & Fiduciary Advisor at Evercore Wealth Management and the President and CEO of Evercore Trust Company of Delaware. He can be contacted at [email protected].
 
Editor’s note: This is extracted from a comprehensive review of the current wealth planning landscape mailed to Evercore Wealth Management clients in early October.