SPECTRUM
A newsletter for the friends and clients of First Republic Private Wealth Management
Volume 36
2nd Quarter 2016
Four Key Factors to
Consider When Selecting
a Trustee
Kelly Johnston
Page 3
Using Trusts to Protect
Inherited Assets in the
Event of Divorce
Susan A. Robb
Page 4
Selling Your Business
Lisa D. Snyder
Page 6
Begin with the Greatest
Performance Influencer
The Importance of Wise Asset Allocation
By the First Republic Research Team
In the last issue of Spectrum, we highlighted the importance of having a plan
around your investment assets, focusing on the importance of an investment
policy statement (IPS). In an IPS, your unique circumstances and goals for your
wealth are clarified and elaborated. It also addresses how the investment assets
will be deployed—the mix of stocks, bonds, real estate and other assets the
portfolio may hold over time to reach your goals. In the industry’s parlance, this
is referred to as the asset allocation and it is well worth the significant attention
given to it in the IPS.
Among the number of levers that influence portfolio returns, asset allocation is
the most powerful. Each type of asset has different levels of risk and return and
tends to be influenced by particular factors to different degrees. This means
asset classes, and sub-classes for that matter, will behave differently over
Continued on page 2
GREATEST PERFORMANCE INFLUENCER
Continued from page 1
time—some will rise while others fall. Consequently, the assets the portfolio
holds and the weighting each is given is the single largest contributor to overall
performance. Highly-qualified researchers debate whether asset allocation
contributes 40 to 100 percent of investment performance, but no one denies
that it has the biggest influence on performance.
Setting the right
allocation for
every investor is
both an art and
a science.
Setting the right allocation for every investor is both an art and a science.
Your asset class exposure should be developed in the context of your unique
circumstances and the goals for your wealth. The more specific you are with
your objectives, the greater the chances are for a successful plan.
REBALANCING AND TACTICAL DECISIONS
Other levers matter to overall performance, but to a smaller degree. For
example, rebalancing a portfolio back towards its strategic targets and the
timing of the rebalancing affects performance. Overtime, some assets in a
portfolio will do particularly well while others will lag. The assets that do well
will naturally increase in the weight of your portfolio such that your portfolio
asset mix will move away from its intended levels. Restoring your portfolio
to its original balance keeps it in line with your goals and risk tolerance.
The rebalancing actions can be taken in light of tax circumstances and the
advisor’s investment outlook, but it’s important to complete on a regular basis.
Tactical decisions, asset mix changes away from the strategic asset allocation,
can also affect investment performance depending on the degree of latitude
and process used to make those changes. Tactical decisions are taken to seek
extra return within the portfolio’s target risk. Examples here may include adding
more to assets that are undervalued and less to assets that are overvalued. It
can also mean taking advantage of dislocations in markets such as distressed
credit during the Great Recession. Market prices often move away from fair
value due to overly optimistic or pessimistic expectations, investor risk appetite
and market sentiment. Recognizing these windows of opportunity takes skill,
and sometimes a little luck on timing, but nonetheless can result in added
return.
OTHER FACTORS TO CONSIDER
Security selections within an asset class and portfolio construction are also
factors in overall investment performance. There are many ways to approach
security selection and portfolio construction. Also, diversification around
investment philosophy and strategy also can provide better risk adjusted
returns. We mention these to be complete. Remember, all in all, asset
allocation is the biggest driver of your investment performance. Talk to your
advisor about the tools they are using to meet your specific goals.
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Vol. 36
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Four Key Factors to Consider
When Selecting a Trustee
Finding the Right Fit for Your Legacy Plan
Kelly Johnston, CTFA
and CWS, President,
First Republic Trust
Company
Trusts, commonly used for wealth distribution, are only as
effective as the managing trustee. This makes the selection
of the trustee one of the most important decisions you can
make when developing a legacy plan. The correct choice
can ensure your plan is carried out in accordance with your
wishes and in a way that suits your family. Generally there
are three choices available: an individual family member
or friend, a private professional fiduciary, or a corporate
trustee. There are at least four key factors to consider
when making your selection.
SELECT FOR DEPTH AND BREADTH OF EXPERTISE
Sometimes families delegate the responsibility of trustee to a friend or relative
who has expertise in accounting, investments or has a legal background. While
an individual may maintain deep expertise in his or her field, the responsibilities
of a trustee require a much wider breadth of knowledge.
The nuances of trust administration are many. A trustee needs to interpret legal
documents, understand fiduciary accounting rules, demonstrate prudence in
making investment decisions and exercise discretion in making distributions
to beneficiaries. Trust laws and income tax considerations vary by state,
which can complicate matters further. Even the most experienced individual
will likely need to hire several professional advisors to carry out the required
responsibilities.
OPT FOR OBJECTIVITY
Knowledge of the family history and dynamics can be helpful when it comes to
managing a trust. Still, it is virtually impossible for a family member to remove
emotion from the decision-making process, even for the most methodical of
relatives or friends.
Grief often amplifies emotions, and since a trustee is typically stepping in at
the death of a trustor, this can be particularly burdensome for a grieving family
member trustee. Even families with strong relationships can find themselves
feuding over cherished keepsakes and family heirlooms. Responsibilities such
as dividing a trustor’s assets among family members are extremely difficult
and are more complicated for an emotionally invested trustee. Sensitive
decisions like these can create unintended consequences and can strain family
relationships.
A private professional fiduciary or a corporate trustee is neutral, removing
the emotion from tough decisions while giving the family beneficiaries the
confidence that they are being treated fairly and without bias. When the family
is comfortable that the trustee is acting impartially, they have the ability to focus
their energies on supporting one another during their time of grief.
The selection
of the trustee
one of the most
important
decisions you
can make when
developing a
legacy plan.
Continued on page 5
3
Using Trusts to Protect Inherited
Assets in the Event of Divorce
Strategies to Protect Family Wealth
It’s common knowledge that about half of all marriages
end in divorce. More surprising is that, for those
who marry more than once, the rate is substantially
higher. For individuals and families with considerable
wealth, protecting assets in the event of divorce is,
understandably, a concern. So, how can families
safeguard their wealth? Having children or grandchildren
enter into prenuptial agreements is the safest strategy
Susan A. Robb,
Senior Trust Officer, First to shield assets in the event of a marital split. That being
Republic Trust Company
said, bringing up the future division of assets can be an
uncomfortable topic, leading many couples to forego the issue rather than
ignite potential strife before walking down the aisle.
For parents and grandparents who don’t want to dilute family wealth, a trust
can help shield assets in the event a child’s or grandchild’s marriage goes
south and divorce materializes. Assets left outright to a child or grandchild
are reachable by his or her creditors, including a future divorcing spouse. In
contrast, assets held in trust may be harder for a divorcing spouse to reach.
When establishing a trust, potential protection strategies to consider include
the following:
–– Naming a truly independent trustee. An independent trustee is
someone with no beneficial interest in a trust. Options usually come down
to a professional trustee or a family member, with each having its own
benefits. A relative, for example, is likely to understand a family’s dynamics
and may be deemed an independent trustee for tax purposes. However,
a truly independent trustee is an unrelated third party, such as a corporate
trustee. Recent case law suggests that the more control a beneficiary has
over trust assets, such as an implied power to direct a family-member
trustee, the greater the likelihood that those assets would be deemed
be part of the beneficiary’s marital estate. Naming a truly independent,
corporate trustee makes this less likely.
–– Including a spendthrift provision. A spendthrift provision prevents a
beneficiary from assigning his or her interest and prevents creditors from
attaching the interest before it is distributed. This is an essential provision
in any trust.
–– Requiring prenuptial agreements for beneficiaries. A trust may
provide that no distributions will be made to a married beneficiary unless
he or she has a valid pre- or postnuptial agreement. Including such a
provision can be an excellent way to start a conversation about prenuptial
agreements with a soon-to-be married beneficiary.
–– Using broad discretionary language. Granting an independent trustee
broad discretion to distribute income and principal among beneficiaries
for any reason and in any amounts the trustee deems appropriate gives
the trustee maximum flexibility and limits the likelihood that the trustee
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or the assets of the trust will be deemed subject to the beneficiary’s
control. More restrictive language, while intended to limit the provisions for
which distributions can be made, can actually be interpreted as giving a
beneficiary the ability to compel distributions and increase the likelihood of
the beneficiary’s share of trust assets being included in the marital estate.
It’s important to keep in mind that no trust offers guaranteed protection in the
event of a divorce. Trust laws vary by state, as do divorce laws. While a trust
may be governed by the laws of one state, a divorcing beneficiary may reside
in another state with different marital property laws. Differences in state law can
have a significant impact on whether assets in trust are included in a divorcing
beneficiary’s marital estate.
When it comes to family finances, a little pre-planning can go a long way
toward protecting a family’s wealth. Careful planning to transfer assets to a
well-structured trust rather than giving them to a beneficiary outright can help
keep trust assets outside the reach of the family court and a divorcing spouse.
Of course, in the best case scenario, a couple will live happily ever after, ‘til
death do them part and will never need to worry about the “marital estate” or a
divorcing spouse.
When it comes
to family
finances, a little
pre-planning
can go a long
way toward
protecting a
family’s wealth.
FACTORS TO CONSIDER WHEN SELECTING A TRUSTEE
Continued from page 3
CONSIDER CONTINUITY AND LONGEVITY
The time commitment associated with serving as trustee can be significant,
particularly in addition to that individual’s own personal and professional
obligations. A planned vacation, unexpected illness or an accident can
disrupt the administration of the trust. The lack of continuity can have serious
consequences, such as impeding the trustee’s ability to make important, time
sensitive decisions about taxes and investments, or the family’s ability to get
information. A bottleneck can easily develop when the key to the gate is held
by one individual, whether that person is a committed family member or an
individual private professional fiduciary.
A corporate trustee has a dedicated team of trust professionals involved
in managing a family trust. If a trust officer is on vacation or is otherwise
unable to serve, the rest of the team is still present and continues to carry
out the responsibilities of the trustee—without disruption to the beneficiaries.
Corporate trustees have many internal resources available to maintain
momentum and provide continuity for the life of the trust, no matter what
outside complications may arise.
If you have any questions,
comments or suggestions for
Spectrum, please contact us at
privatewealthmanagement@
firstrepublic.com
COMPARE OVERALL COSTS
Families often turn to a personal connection to serve as trustee because they
assume other options will be cost prohibitive. While individual trustees do not
always charge a fee, they need to hire experts to properly administer the trust.
Individual trustees must rely more heavily on attorneys, tax consultants and
financial advisors, who often charge by the hour. Those fees can add up quickly.
Continued on page 7
5
Selling Your Business
Five Business Presale Questions Every Owner Should Consider
Planning to sell the business you’ve built over a lifetime can
be difficult, but a combination of financial and emotional
preparation can help create a successful transition strategy.
To prepare yourself for the tough choices that lie ahead,
consider these five essential questions.
Have you talked to your financial advisor?
Lisa D. Snyder, Senior
Financial Planner, First
Republic Investment
Management
If your primary goal after selling your business is retirement,
you’ll want to start with a big picture assessment of your
long-term financial goals. A look at your financial needs can
help you figure out if you’re ready to sell—or if you should
wait a while. Your financial advisor can help you determine:
–– Your net worth in terms of assets and liabilities
–– The potential growth rate of your assets during retirement
–– The annual cash flow you’ll need to fund your desired lifestyle
–– The weight the proceeds from your business will carry as part of your
overall investment strategy
Who else needs to be a part of the conversation?
It’s important to start early in thinking about who may want to take over your
business. Is there a competent family member with an interest? A key competitor
with whom you are comfortable? Other potential buyers in your market?
A low-interest
rate environment
may make it
easier for a suitor
to finance the
exchange.
If your preference is to keep the business within the family, begin talking to
family members about your plans so you can begin to gauge their interest.
For key employees, whose life-long service to your business will be impacted
by your decision, hold upfront discussions about your intentions. They too,
may have an interest in succeeding you. If appropriate, you may want to invite
them to assist in aspects of sale preparation. Keep in mind, consistent and
open communication can help dispel fears and make for an easier transition.
No matter your preferred option, it is important to have conversations with
essential professional advisors at the outset of your deliberations. Consult an
attorney who specializes in mergers and acquisitions, an appraiser, your tax
advisor and a business broker, who can guide and counsel you through the
entire sales process. Each of these professionals can help you gain a working
knowledge of the considerations that will drive your end decisions.
Is it the right time to sell?
Of course, the best time to sell a business is when it’s at its most profitable.
Consider the overall health of your organization, including the state of your
financial balance sheet. Desirable buyers often want to see at least three
years of solid, sustainable performance. To increase the attractiveness of your
business, assess its overall health and shore up any weak spots.
The state of the current economy can be an issue as well. A low-interest rate
environment may make it easier for a suitor to finance the exchange. Current
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economic conditions may help or hinder the state of your industry. If sales
and profits are down—no matter the reason—it may be best to hold off for a
better time.
What is the value of your business?
Many business owners do not fully understand the value of their enterprise,
which can cause friction during conversations with a prospective buyer. A
third-party appraisal can help you gain an objective perspective on the value
of your business before you’ve even begun talking to suitors. A preliminary
assessment can also help you pinpoint areas for improvement, which can
boost your company’s attractiveness to buyers.
As part of your assessment, be sure to incorporate the value of your key
accounts, vital employees and reliable business systems. Consider strategies
to keep each in place after the sale. These may be significant assets, and
could be the detail that attracts your successor.
How involved do you want to be after the sale?
Some owners are ready to step aside and allow their successors to take over,
while other owners prefer to stay involved with the company for a few years to
help ease the transition. If you’re willing to stay on, your presence may reduce
risk to the buyer, increase the value of your company and create a shortterm cash flow until you ultimately bow out. At the same time, if you’re really
ready to move on, staying onboard when you’re not fully invested could be
detrimental to you emotionally, as well damaging to the overall organization.
It’s important to do some soul searching before the sale to figure out your
personal priorities and to set boundaries as to how involved you want to be—
and for how long—post-sale.
For many
business owners,
a financially
secure retirement
hinges upon
the ability to
successfully sell
their business.
For many business owners, a financially secure retirement hinges upon the
ability to successfully sell their business. The answers to these questions can
help set you on the right track.
FACTORS TO CONSIDER WHEN SELECTING A TRUSTEE
Continued from page 5
One of the advantages of choosing a corporate trustee is that they typically
offer a full suite of in-house experts in trust administration, tax, investments,
real estate and unique assets, as well as financial planning. Collectively, they
can take advantage of these internal resources to administer the trust in the
most tax efficient and cost effective manner.
As you make your trustee selection, consider both the financial and emotional
impacts of that choice. Make breadth and depth experience, objectivity, and
access to resources priorities. When you consider the cost, make sure you
contemplate the need for additional advisors. After taking these critical factors
into consideration and making your selection, you can have peace of mind
knowing that your beneficiaries will be in capable hands.
7
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spec´trum, n.
A broad range of related ideas or objects, the individual features of which
tend to overlap so as to form a continuous series or sequence.
—Random House Unabridged Dictionary
First Republic Private Wealth Management includes First Republic Investment Management, Inc. (“FRIM”), an SEC-registered investment advisor, First Republic
Securities Company, LLC (“FRSC”), Member FINRA/SIPC, First Republic Trust Company (“FRTC”) and First Republic Trust Company of Delaware LLC (“FRTCDE”). FRIM, FRSC, and FRTC-DE are wholly owned subsidiaries of First Republic Bank. FRTC is a division of First Republic Bank. Investment advisory services
are provided through FRIM. Securities brokerage services are provided through FRSC. Trust and fiduciary services are provided through FRTC and FRTC-DE.
First Republic Private Wealth Management is comprised of First Republic Trust Company, First Republic Trust Company of Delaware, First Republic Securities
Company, LLC (Member FINRA/SIPC) and First Republic Investment Management, an SEC-Registered Investment Advisor. Insurance agency services are
provided through First Republic Securities Company, LLC, Member FINRA/SIPC, DBA Grand Eagle Insurance Services, LLC, CA Insurance License # 0I13184.
This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security,
or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. Although information in this
document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon
as such. This document may not be reproduced or circulated without our written authority. The strategies mentioned in this article will often have tax and legal
consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. This information is provided to you “AS IS”,
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should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.
©First Republic Investment Management 2016
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