How Can 'Hyper-Coordination' Help Me Manage My Wealth?

04.24.2020 - Gerard F. Joyce

When financial advisors work in lockstep with one another, great things can happen

To achieve the best and most tax-efficient outcome for your wealth, seamless coordination between planning and execution is required. At Fiduciary Trust, we focus on all three elements of efficient wealth management: planning, trust and estate services and investment management. We bring these three disciplines together in an approach we call ‘hyper-coordination’ to provide you with our best thinking.

Here’s how our integrated teams aim for the best outcomes, as explained by Gerry Joyce, National Head of Trusts and Estates, and Carin Pai, Head of Portfolio Management.

Q: Why is hyper-coordination across disciplines so important?

GERRY: When setting up a trust, it’s critical for the investment strategies, administrative process and your big-picture financial plan to fall into alignment. And it is just as important at every transition point in the trust’s life, such as a change in your family’s situation; whether it is personal, financial, or both. These events generally prompt a review of your family’s wealth plan.

For example, we often see scenarios such as divorces, employment changes or even a child starting college trigger the need for more income, or reduce a person’s tolerance for risk. Portfolio adjustments—including your asset allocation strategy and the selection of individual investments—are almost always necessary to make sure your investment plan is keeping up with your family’s needs.

CARIN: One example of hypercoordination, which happens on a regular basis, is how we use your desire to make gifts to drive discussions about your portfolio. When grandparents create trusts for their grandchildren, for instance, funding these trusts requires the guidance of a portfolio manager.

We help these grandparents find the best method for making contributions, whether it involves liquidating assets to make a gift of cash or gifting securities directly. We consider which assets are most appropriate to give away, depending on your tax situation, and how your gift will affect your remaining portfolio.

GERRY: Terminating a trust is also a great example of a time when we help clients reevaluate their investment strategies because a substantial amount of assets usually changes hands. When there’s a change in control, we help make sure the investment plan is aligned with those changes. If a trust terminates due to the death of a grantor, there’s usually an immediate need for cash to pay expenses like funeral costs and taxes. We also have conversations with beneficiaries, bringing in our investment and trust experts, to help them understand their investment goals.

CARIN: In most cases, the investment plan we develop for trust beneficiaries is not the same as it was for the trust or the grantor. We seek input from our investment management, trust and planning professionals to determine which assets should be used for the distribution and identify the most efficient way to make that distribution, whether it involves liquidating the trust or distributing assets in kind.

Q: How do you resolve the tensions that often arise among beneficiaries?

GERRY: In any trust administration process, conflicts can arise. Sometimes they involve current beneficiaries and remaindermen (future beneficiaries), and sometimes they arise among current beneficiaries who are concerned about being treated fairly and equally.

We help resolve conflicts between current beneficiaries and remaindermen by using our strategic asset allocation strategies to help bridge the gap. Together, a trust professional and a portfolio manager can show each beneficiary how their interests are being served within the dynamic interaction of investment and distribution strategies. That helps relieve the tension by showing how the trust is supporting all beneficiaries as a group.

CARIN: It also helps to manage trusts in a tax-efficient manner. We make sure everyone understands the terms and provisions of the trust agreements and we make sure all distribution decisions and investment strategies consider the tax treatment of trust income. Is the trust exempt from transfer taxes? Who pays taxes on capital gains? How do distributions shift the tax liabilities of the trust? Answering these questions helps us build an effective investment strategy and overall plan for managing and administering the trusts.

For example, if I have a situation where I need to raise money, the first thing I do is consult with a trust officer to see which trust has the longest life and which one we should tap into first, versus which one we should leave alone because it’s most protected from estate tax.

GERRY: As fiduciaries, we must apply the prudent investor rule, consider taxes, maintain our duty of impartiality and uphold the intentions and directives of what are often very complex trust documents. So, it’s critical for our trust officers and investment professionals to get together, clearly understand the requirements and recognize all the options that are available to build the most appropriate investment program.

CARIN: The key is that our teams offer their best thinking by combining the expertise of our trust and investment professionals. This addresses both sides of the equation and helps us develop a comprehensive and holistic plan for managing trust assets efficiently.

Q: How has this hyper-coordination helped clients reach their goals?

GERRY: One great example is the work we do with Grantor Retained Annuity Trusts (GRATs). The IRS allows you to place assets into the trust and pass any appreciation that exceeds the IRS’s “hurdle rate” to beneficiaries tax free. Since the grantor is considered the owner of the trust, he or she pays taxes on its income. In effect, paying those income taxes is an additional tax-free gift.

CARIN: The key to success with GRATs is investing in securities that appreciate in value over time, usually two years or more. That means we need to be extremely thoughtful about the investments we select, targeting those we believe have the potential for significant growth.

For example, let’s assume we move shares of stock valued at $1 million from your investment account into your GRAT. If those shares appreciate by 10% over the twoyear term, at the current hurdle rate of 2% (December 2019), about $132,000 would transfer to your heirs free of gift and estate taxes. Even if assets were to appreciate by just 5%, you would still pass down $50,000 as a tax-free gift.

GERRY: And a GRAT can be structured in a way that treats your original contribution as a very small gift (or not a gift at all) for tax purposes. That makes the only downside of a GRAT the cost to prepare the trust instrument and administer the trust, which together may be nominal in comparison to the potential tax savings.

This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as of December 1, 2019, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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