Control the Controllable

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Stacie Jacobsen: [00:00:00] Thanks so much for joining us today on The Pulse by Bernstein, where we bring you insights on the economy, global [00:00:15] markets, and all the complexities of wealth management.

I'm your host, Stacie Jacobsen. On today's show, we're looking at how to put together a wealth plan to reach each family's unique definition of success.

I'm very pleased to have two guests to share their accumulated [00:00:30] wisdom. Tara Popernik, Bernstein, senior National Director of Ultra High Net Worth Services, and Ashley Velategui, National Director of Planning Research.

First, let's take a pulse on the market. The economy continues to perform above expectations, [00:00:45] given that we are more than a year into the Fed's hiking cycle and short-term interest rates are five percentage points above where the Fed Fund started in 2022.

Now, unemployment hit a new low of 3.4% despite economic challenges and looking ahead over the [00:01:00] next few months, we still think an economic slowdown is highly probable as rate hikes have more of an effect and credit conditions tighten.

So what does this mean for the equity markets?

Even with the economy slowing, it's not all bad news company earnings cleared an [00:01:15] admittedly lower bar in the first quarter, even if the overall picture isn't exactly glowing, and we think it's likely that the Fed has finished raising rates.

Now on to today's episode, wealth planning can be complex and we'll get into all the reasons [00:01:30] for that with our guests, but a successful plan is rarely defined as beating a certain benchmark.

It's really about having a cohesive family unit where your family's financial priorities are aligned, and there's an intentional structure around giving.

And just as [00:01:45] important you need to prepare your beneficiaries to receive wealth. This is definitely not an area where one size fits all.

So how is it that you determine how much you need to secure your financial future before moving wealth to the next generation? And how do you [00:02:00] decide the right amount to give?

What's the right strategy to implement to achieve your goals? These are not easy decisions to make, but our guests today are well versed in navigating these waters, and we look forward to discussing all the complexity with them.

Including when to steer [00:02:15] clear of over-planning. Yes, that is a thing. We'll be right back after the short break.

Clare Golla: Hi, I'm Clare Golla, head of Philanthropic Services and the host of Bernstein's Inspired Investing.

Be sure to tune into our ever popular [00:02:30] breakdown of the most recent NACUBO report, but this time we've added a twist along with. Expert investment analysis.

You'll also hear from an advancement office practitioner who will make these survey results come to life.

Listen to Bernstein's inspired investing on your favorite podcast [00:02:45] platform.

Stacie Jacobsen: Welcome back to the Pulse by Bernstein. Today I'm talking with Tara Popernik Bernstein's, senior National Director of ultra high net worth services.

And Ashley Velategui, national Director of Planning Research. Thank you both for joining us today.

[00:03:00] Tara, I'll start with you. Where should an investor start when they are first putting together a plan?

Tara Popernik: Investors really should begin with discovering their own financial priorities.

So how they look at where they want their money to go, whether that's true lifetime [00:03:15] spending, philanthropic causes people in their family and try to define not just to whom, but when they want to transfer wealth and, and that's really the basics of where we get started.

Stacie Jacobsen: Tara, you just mentioned the importance of knowing your financial priorities. How is [00:03:30] it that we can help our investors share what is most important to them with their families?

Tara Popernik: Yeah, as I said, as the first step, it's really defining what those priorities and values are for you around your own money, and then really sharing that with other members of your [00:03:45] family.

I mean, first you may start with your spouse and make sure your priorities and values are in alignment, where they aren't, how you can adjust to make your joint plan work better.

And then to share those same priorities and values with children and other [00:04:00] members of your family.

And sometimes that takes the form of all coming together and really discovering what each other's priorities and values may be around wealth and being a wealth steward.

You know, in addition, we do a lot of education with children just [00:04:15] to help them understand what does it mean to be in charge of wealth?

Stacie Jacobsen: It's one thing to just assume that your loved ones know what your priorities may be and what your value system is, but to actually sit down together and give the [00:04:30] space to articulate what those are is certainly an important step in putting together a wealth plan.

Tara Popernik: We can even go one step further and talk about memorializing some of these thoughts in a document, whether it's a family mission statement, or for some families [00:04:45] it may take the form of a family constitution or family history where all of them family members have then learned where did the money come from?

What were some of the values and intentions around how a plan was set off and how it should be carried forward in the [00:05:00] future.

Stacie Jacobsen: Yeah, certainly that's a great idea. Ashley, um, there are federal and state regulations that do dictate the amount that you can give, and there are some of these freebies that don't count towards that amount.

Can you talk us through that?

Ashley Velategui: Yeah, absolutely. Stacie. When it comes to transferring wealth, [00:05:15] unfortunately, it's not always as easy as simple as writing a check or leaving a pile of money to your beneficiaries when you pass away.

As the federal government imposes a 40% gift in estate tax on transfers made for many [00:05:30] transfers, during your lifetime.

A couple of the freebies to keep in mind though are there's an unlimited amount of wealth that can transfer between spouses.

In addition, individuals and investors can give away as much money as they'd like to charity without being subject to the [00:05:45] gift or estate taxes.

There's also Ed Med exclusions. So any investor can give away money so long as it's being used to pay directly for educational or medical costs for any individual in an unlimited [00:06:00] amount.

And there's also the annual exclusion gift, so investors can give away up to $17,000 per year as of 2023 to any number of individuals they'd like during that calendar year.

The big one though, to [00:06:15] be aware of is the lifetime exemption amount, and right now that stands at a historically high amount. This is an amount of wealth that can be either transferred during lifetime or used to shield your assets from estate taxes upon your passing.

Stacie Jacobsen: Right. And that [00:06:30] amount is a moving target. Right. And you mentioned it's currently at a historic high, but it is set to change relatively soon.

Tara Popernik: Yes, Stacie it is. Um, today it's nearly 13 million per person that they can transfer, either, as Ashley said, during their [00:06:45] lifetime or at death beginning in 2026.

That amount is scheduled to decrease around 7 million.

So right now, that expanded exclusion is really a use it or lose it before the deadline.

Stacie Jacobsen: I got it. I'd imagine that that is certainly a [00:07:00] catalyst for some investors with an estate that is larger than that amount.

And remember, that's per person, so it would be double that for a married couple to think about taking action prior to 2026.

Ashley, what advice would you give an investor thinking that they need to review or implement a [00:07:15] wealth transfer plan because of the exemption cliff?

Ashley Velategui: It's an important question to consider because while the exemption Cliff certainly provides a really compelling opportunity for families to lock in that incredibly high exemption amount today, they need to be mindful [00:07:30] of their other wealth objectives and their own needs for preserving liquidity on their own balance sheet.

You certainly don't wanna end up in a position where in a rush to take advantage of the remaining exemption you're giving away more than you can otherwise afford.

And that's gonna be a factor [00:07:45] that depends on your own personal wealth objectives.

Things like how much do you need to reserve on your own balance sheet for your lifestyle spending needs, and what else do you wanna accomplish with your wealth?

Are you looking to purchase a second home? Do you need to set aside [00:08:00] money to seed the new potential business venture?

Do you have philanthropic goals that go beyond what you otherwise are gonna be transferring off balance sheet? All of those factors have to come into play.

Certainly age plays a big factor in how much [00:08:15] wealth people need to reserve on their own balance sheet to ensure their financial independence.

Stacie Jacobsen: Right. So making sure that you're actually not over-planning and giving away too much just to try and zero out a potential estate tax.

Um, you gotta take care of yourself first, right?

Ashley Velategui: [00:08:30] That's exactly right.

Stacie Jacobsen: So given the economic environment that we're in today, though, tied together with that high exemption, what should an investor take into consideration?

And Tara, I'll ask you to start us off with that one.

Tara Popernik: There's really five factors. Number one is [00:08:45] inflation, which is higher and more persistent than it's been in some time, and that higher inflation can reduce your future purchasing power and may increase withdrawals from investments as investors look to maintain their lifestyles.

So that's a very significant factor.

[00:09:00] The second is really an elevated interest rate environment, which, for bond investors may pay off in the end, but higher rates do increase the cost of accessing capital and can reduce the efficacy of many of the interest rate based wealth transfer strategies.

[00:09:15] Third, you know, we're expecting challenging capital markets going forward and plans that were built on sort of average markets in the past or even the last 10 years of historical returns may be disappointing to investors who are expecting that going forward.

As we [00:09:30] mentioned earlier, um, the changes to the income and estate tax rates going forward are going to be a factor.

The current estate tax rules will also increase slightly that the top marginal rates for taxpayers.

And then [00:09:45] finally, you know, it may seem like a, uh, fantastic thing, but, but it is something to keep in mind is that, The longer life expectancy of many investors today means more exposure than investors have to all of these factors, meaning capital markets and inflation, because they just simply have more [00:10:00] years of spending.

Um, and so higher net worth individuals have a higher likelihood of living longer, and it is something that we really have to factor in and account for when we're figuring out how much you can afford to give away.

Stacie Jacobsen: Yeah, and there's really two sides of that equation, right? So it's how much can you afford to give [00:10:15] away?

But then Ashley, what about preparing the beneficiaries for the wealth that they may inherit?

Ashley Velategui: Absolutely. So it's wonderful if you can take advantage of this really compelling estate tax planning opportunity and move significant amounts of wealth off your balance sheet and out of that estate [00:10:30] tax reach.

However, as you mentioned, you then have to take into account are the beneficiaries that you're transferring that wealth to ready to receive it.

And that may account for something as simple as, are we actually transferring funds to minor children and we need to [00:10:45] make sure that we're

Putting around the proper structures and protections, things like trust and other mechanisms to, you know, protect those assets and to protect those minor children.

But then even for adult children, we need to think about, do they have the [00:11:00] tools to be good stewards of that capital and know how to engage with that wealth in a way that is consistent with the family's values and priorities.

So we often say that. In. In some instances, one of the easiest things to transfer is [00:11:15] wealth.

The often harder step is to transfer the values, the priorities, and the knowledge to ensure that when that wealth changes hands, it is a good experience for all involved.

Stacie Jacobsen: So, Ashley, preparing the beneficiary to [00:11:30] inherit significant wealth is really vitally important. What are some of the ways that you help investors prepare their kids?

Ashley Velategui: I think the most important place to start really is with education and what is included in an educational program [00:11:45] for the children will certainly depend on the age of the child.

So for younger children, this may be as basic as helping them understand the basics of checking the accounts, savings accounts, when to use them.

What [00:12:00] credit is, how to improve your credit and build credit.

As investors age or as children age, you're gonna move into the basics of investing, helping them understand what are the various kinds of asset classes, what are stocks, what are [00:12:15] bonds, what are the risk return trade-offs associated with those different investments, and how do you put 'em together?

What's the importance of diversification? How do you build a constructive allocation based on your individualized goals and [00:12:30] needs?

Stacie Jacobsen: Tara, I wanna hit on something you had said about the returns going forward may not be as robust as what we've seen in the last decade.

Um, how important is that in the planning?

Tara Popernik: Yeah, Stacie, it's incredibly important to the planning and something that we [00:12:45] factor in when we're helping clients calculate how much they need for their own lifestyle spending versus what they can afford to give away to people and causes that they care about or, or leave for legacy. So we, we first.

Look at, [00:13:00] um, an individual's spending and their current asset allocation as well as their age, because we need to know how long they're going to spend for.

And we put all of these factors into our wealth planning tools.

That calculation becomes [00:13:15] central to how we help clients think about what do they need to retain versus what can they give away.

And I should note that that number changes with different asset allocations. So the more conservative you are, the more.

You need to set aside for yourself. [00:13:30] If you're willing to take a little bit more risk or willing to give up some liquidity in order for more return, that number will come down.

Stacie Jacobsen: We've been at the precipice of a significant reduction in the federal exemption amount before, and some individuals that made sizable gifts back in [00:13:45] 2012 experienced a sort of buyer's remorse in the following years.

What planning should be done now to try and avoid future regret?

Ashley Velategui: Yeah, so we've talked about the need to retain sufficient liquidities to support lifestyle spending needs, but if that's [00:14:00] the only liquidity consideration that the investor takes into account, they may find themselves in a liquidity pinch down the road.

First. The transfer needs to think about whether the. Transfer event is actually creating additional [00:14:15] liquidity constraints.

Are there income tax liabilities associated with the transfer? Are there insurance premiums that they have to pay?

They should also think about whether the asset that they're transferring was creating an income stream for them that was [00:14:30] being used to offset some of their spending.

And secondly, has the investor accounted for any other future extraordinary expenses?

Do they wanna have a reserve to fund a new business venture? Do they have philanthropic causes that they wanna support?

All of those [00:14:45] liquidity needs need to be factored in when sizing a gift.

Stacie Jacobsen: Ashley, these trusts aren't always funded with publicly traded securities.

They could be funded with assets like business interest, with the possibility of actually appreciating well above the intended value.

[00:15:00] And although that might sound like a good thing, it could actually undermine the original intent of the gift.

So what actions can be taken to reinforce the gift's original purpose?

Ashley Velategui: Yeah, this is an important consideration. It's possible that the wealth [00:15:15] transfer actually ends up being more successful than anticipated, which on the one hand is great for estate planning purposes.

On the other hand, has so much wealth moved that it actually ends up encouraging beneficiary dependence on those assets and undermines the [00:15:30] beneficiary's personal ambition.

An investor may wanna think about whether the trust that they've drafted is gonna allow them to add.

Future beneficiaries down the line, even charitable beneficiaries.

This can help the investor account for changing [00:15:45] circumstances and planning ahead and thinking through all these possible outcomes can help the investor avoid some of these unintended consequences.

Stacie Jacobsen: Okay, so it sounds like thinking through all of the what ifs and then including flexibility in the plan where [00:16:00] possible.

All while taking into consideration the financial goals and futures of the involved parties can really make the difference in creating a successful plan.

Ashley Velategui: That's right Stacie.

Stacie Jacobsen: So to wrap up here, you do wanna make sure that you're transferring wealth for the right [00:16:15] reason.

The exemption cliff may be a catalyst to review an outdated plan or put one together for the first time.

But don't be too aggressive when giving money away.

And be mindful of over-planning, right? So focused on what's right for your family first. All right, Tara Ashley, [00:16:30] thank you so much for joining us today.

Tara Popernik: Thank you for having us, Stacie.

Ashley Velategui: Thanks, Stacie.

Stacie Jacobsen: Thanks to everyone for tuning in. You'll hear from us again in two weeks when we'll talk about the importance of having a family governance structure. You won't wanna miss it. Don't forget to subscribe to The Pulse by Bernstein wherever [00:16:45] you get your podcast.

To ensure you never miss a beat. I'm your host, Stacie Jacobsen, wishing you a great rest of the week.