Archive for January, 2010
With No Estate Tax This Year, Do Estate Planners Still Have a Job?
Posted by Scott Martin in News on January 29th, 2010
After a month of death tax confusion, The Trust Advisor checked in with key providers to see if business slacked off.
Between the threat that Congress will retroactively de-repeal the currently repealed federal estate tax and the ongoing questions about what happens to the tax in 2011 and beyond, the wealthy and their advisors are busier than ever.
We thought that most death tax consultants and trust officers would have taken a long vacation in Hawaii without an estate tax this year to worry about. But it’s shaping up to be just another year in the trust planning business. “The whole estate tax repeal is much ado about nothing,” said Phil Kavesh, a Southern California estate attorney and founder of UltimateEstatePlanner.com.
In an interview with The Trust Advisor Kavesh suggested, “Let’s not kid ourselves, there’s going to be an estate tax moving forward. We’re telling our clients to keep planning, full speed ahead.”
That’s the reality. After years of speculation, lobbying and not a little daydreaming to the contrary, nobody seriously believes the estate tax is going away for good, and the rich will have to go on planning around it.
The question is how we’ll be defining “rich” when the tax makes its comeback. If Congress does nothing, estates valued at more than $1 million will be taxable at a rate of up to 60% next year. But as University of California-Davis estate law professor Joel Dobris explained it, that low exemption level would alienate a lot of potential campaign contributors for Republicans and Democrats alike. “It makes for more unhappy upper-middle-class voters.”
An exemption of $3.5 million (as proposed in President Obama’s 2010 budget and passed in a narrow partisan House vote December 4) or $5 million (as the equivalent Senate bill mandates) is far more likely to win bipartisan support. Given the recent adjustment of power on Capitol Hill, there’s a chance Republicans could fight for the higher number. But gridlock would work against them—if they fail to make a deal in the next 11 months, they expose tens of thousands of America’s wealthiest households a year to a new tax liability.
Never the Main Market
In any event, while those households wield a lot of economic heft, there really aren’t that many of them — whether the exemption is fixed at $5 million, $3.5 million or even $1 million.
According to numbers from the Urban Institute and Brookings Institution’s Tax Policy Center, about 1.7% of all Americans who die each year (44,000 estates) would accrue an estate tax liability in 2011 if the $1 million exemption remains in place. Raising the tax bar to $3.5 million shrinks the pool 85% to 6,400 estates; a $5 million exemption would cut that population in half again, leaving only the 3,500 richest estates owing anything to the IRS.
Needless to say, if those were the only people estate planners worked with estate planners would have been unemployed long ago. Actually, planners do a lot more than just death tax avoidance. And this year in particular has been brisk in spite of the tax hiatus. They also create special needs trusts, asset protection trusts and even delve into conventional tax minimization planning.
A survey released this week by Trusts and Estates Magazine reported considerable growth among estate planners inspite of the higher estate tax exemption. The survey showed that 40% of the firms polled “business has increased.”
Trusts are now used by less wealthier clients. According to Robert Ellis, the author of a research report published by Celent, Inc. the average trust size has moved from $5 million to $1 million per family even though the estate tax exemption has gone up.
Tax or No Tax, Trust the Trust
Meanwhile, trusts have exploded as a wealth planning tool among the 5.9 million households worth $1 million to $5 million, not to mention the 30 million “mass affluent” families who make up the backbone of many financial advisors’ books of business. According to Fidelity’s RIA group, more than half (60%) of all families with $500,000 to $1 million in investable assets are using trusts today.
For them, the immediate benefits of setting up a trust are more subtle: asset protection for professionals in particular, business succession, funding specific goals, and circumventing probate and, where applicable, state estate tax.
Whether the federal death tax will ever apply to your clients or not, they’ll all appreciate being kept in the loop, especially in an environment where other advisors may be burying their heads in the sand, says Kavesh. “This is a major marketing opportunity for advisors,” he explained. “People are scared and they’re anxious. Even though there are obviously no crystal-cut solutions, simply reaching out to explain where they stand can generate work in other areas.”
No Estate Tax – Business a Usual
Although the estate tax remains a major motivation for the richest families to create and fund trusts, most of that trust activity took place well before the 2001 tax cuts started changing the way the tax worked on a year-to-year basis. Since then, the trust market has evolved independently of the estate tax.
Instead of twiddling their thumbs on the way to extinction, established trust departments and independent trust companies were doing big enough business to tempt broker-dealers, RIAs, and the wire houses to horn in on the action—even though at the time gurus like Tiburon Advisors thought the then-distant 2010 repeal would be permanent.
Now, nobody really knows how the IRS will treat inherited property in the short term. But estate planning has always been about finding ways to manage the vagaries of the tax code.
New companies like Bryn Mawr Trust gathered healthy assets last year right up to the estate tax’s unexpected disappearance. And while Northern Trust Company of Delaware—a leader in the perpetual trust market—sees “much uncertainty around the status of the federal estate tax,” in the words of President Dan Lindley, the main upshot this year has been reluctance to fund new trusts with taxable gifts or generation-skipping transfers until the situation clarifies. Otherwise, Lindley says, “it has been business as usual.”
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research.
Permalink: http://thetrustadvisor.com/news/with-no-estate-tax-this-year-do-estate-planners-still-have-a-job
Westwood Trust’s “Common Trust Funds” Emerge as Bellwether Business Model for Advisors
Posted by Jerry Cooper in News, Practice Management on January 22nd, 2010
Exclusive
CEO says new funds can be started in minutes, not months, at a fraction of the cost of a mutual fund.
Earlier this month The Trust Advisor reported Westwood Holdings Group, Inc. (NYSE: WHG), through its trust company unit Westwood Trust, helped forge gains by landing large new accounts while other firms sat on the sidelines. Westwood managed to bring in $2 billion in new assets during the toughest year in recent financial memory.
As part two of our report on Westwood Trust, I had an opportunity to chat once again with Brian Casey, President and CEO of Westwood, to drill down into the topic of interest to most wealth advisors – common trust funds.
New Money from an Old Idea
Simply stated, common trust funds or “CTFs” permit the commingling or pooling of investors’ money into one account (known as a common fund) for the purpose of creating a single investment. In other words, they are much like a mutual fund. They actually pre-date mutual funds so they are an old concept. Since they are a bank product, CTFs are not required to be registered with the Securities and Exchange Commission and they are not considered to be a security under state and federal securities laws. They are regulated under OCC Regulation 9 (12 CFR 9.18) and are supervised by state or federal bank regulators.
Casey says there are two types of CTFs. The first are common trust funds or CTFs, a product of a bank or trust company established as a convenience to the trust client. The second are collective investment funds or CIFs. These are utilized primarily by large qualified plan sponsors who are seeking institutional pricing for a large pool of retirement assets such as 401ks. They strike an NAV daily and trade on Fundserve. Casey adds, “We actually have one of these that we developed for a Fortune 100 company 401k plan and the data is available in Morningstar.”
But Westwood’s power products are the CTFs, common trust funds. They are private and only available to clients of Westwood Trust. Casey says that “they are only available to our clients who have a bona fide personal trust relationship with the trust company.” Their minimum account size is $2 million which can be either a taxable or retirement account. But, in other words, to benefit “you have to be a trust client and have seven figures with us to be part of the club.”
According to the Westwood’s 10K quarterly report for the year ending September 30, 2009, $1.4 billion of its $9.5 billion or 15% of its assets under management are held in common trust fund relationships.
The Strategies
Westwood runs 31 separate common trust funds which are based on 15 asset classes. Casey adds, “With institutional quality and thoughtful asset allocation, the client is given a better shot of achieving what it is that they’re trying to do than picking a mutual fund off a list.”
To the client, “expenses matter.” With a CTF the only charge is a management fee. There is no legal, accounting, transfer agent or fund supermarket fees that are normally part of a mutual fund fee structure.
Westwood offers five different “flavors” of value. This includes small-cap, all-cap, large-cap , mid‑cap and smid-cap value. As for income, they offer five types of income products including investment grade bonds, REITs, High Yield and two unique income funds.
They have an esoteric type of fund called the Income Opportunity Fund. This allows them to participate in a company through different parts of its capital structure. This might include, for example, a high dividend paying common stock, a preferred stock, or part of a company’s debt in the form of a bond. Or, they might own royalty trusts or MLPs.
They just started a popular Global Diversification Fund CTF. The strategy on this vehicle is to focus on investor purchasing power protection. Casey remarks, “As U.S. citizens, we have a lot of obstacles that could diminish the purchasing power of our savings, like inflation or the potential decline of the U.S. dollar.” This fund might hold global TIPs or treasury inflation protected securities, global bonds, gold, and other types of commodities.
While Westwood manages all of the domestic value and income funds, Westwood employs outside subadvisors chosen by Westwood’s investment committee with assistance from an outside consulting firm. To manage the domestic growth funds, Westwood uses William Blair in Chicago as their subadvisor.
For International Value, Westwood uses Lazard based in London and for International Growth, Westwood employs Martin Currie based in Scotland. The fees paid to subadvisors come out of Westwood’s pocket as opposed to any additional fee to the client. Casey says, “Asset allocation is critical to long-term investment success.”
Westwood is a world-class investor in the value and income space, but we recognize that investors need access to both domestic and international strategies to complete their asset allocation plan. We have a talented consultant on retainer and an experienced investment committee to help us identify best in class subadvisors.”
Technical Items
A major part of hosting a selection of common trust funds servicing close to $1.5 billion is the technology platform. The two major factors that must be considered for any common trust fund trust accounting systems are (1) to keep track of each investors holding and (2) to be able to strike a daily NAV calculation for each fund.
Westwood uses a trust accounting system called Infovisa. Casey said they have been working with Infovisa for over 10 years and they deliver a “great system.” He remarked that the folks that started Infovisa came out of SunGard.
SunGard offers two trust accounting systems to support CTF processing. The two systems are: Charlotte, which is utilized primarily by firms with zero to US$2 billion in trust assets. Customers include smaller community banks and private trust companies as well as startup firms. The other is AddVantage, which is typically used by large regional and national banks, with no theoretical size maximum in terms of assets, transactions, or users.
Each of the systems has been designed to work in conjunction with SunGard’s wealth management platform solution, Wealth Station. The trust platforms are also able to utilize the trade execution and compliance tools of the SunGard Transaction Network (STN).
Advent also offers a common trust fund system. It is actually a mutual fund system, but may be used to keep track of CTFs.
Taking Action
Common trust fund arrangements offer clients lower fees than mutual funds. That together with the enormous flexibility to create a pooled investment vehicle in minutes means that CTFs are likely to become an important part of the investment landscape.
The ease with which a trust company can be established in South Dakota, Nevada or Delaware by investment managers, has made inroads to this field, establishing a kind of “turnkey” service, which allows investment managers and plan administrators to easily establish new common trust funds arrangements.
Advisors Institutional Services (www.advisorsinstitutional.com), which I support, helps wealth managers, advisors, broker-dealers, law firms, and pension plan administrators create and operate trust companies in South Dakota and Nevada. This can permit an advisor to replicate the Westwood Trust business model.
The firm offers a complimentary special report called Launching a South Dakota Trust Company Guide to Operating Nationwide which is available on-line at (www.advisorsinstitutional.com/s/southdakotareports.asp).
Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the research.
America’s Most Wealth Friendly States Continue to Bid for Your Clients’ Trust Business
Posted by Jerry Cooper in News, Practice Management on January 15th, 2010
State legislatures are still enacting trust law enhancements to provide greater protection for your client’s wealth.
As more wealthy families cross borders to protect assets, they choose to set up personal trusts in states other than their own to take advantage of favorable trust laws.
According to recent data, 72 percent of U.S. households with more than $1 million in investment assets use trusts as a key component to their estate planning.
The main reasons to cross borders are:
• Some states don’t tax assets held in a trust, while distributions might be taxable in your home state.
• Trust codes in some states seek to protect assets from lawsuits and creditors.
• Some states allow “dynasty trusts” which permit future generations to avoid estate taxes.
Over the last few years a growing number of states have revised their trust codes to add features that provide for creditor protection, low or no state income tax and ability to establish a dynasty trust which allows for assets to pass to heirs for generations to come.
Nevada recently revised its trust code to provide for directed trusts. Directed trust statutes provide for an ability for the trustee to appoint an investment advisor to manage assets within the trust. This provides for low trustee fees and minimal trustee liability and provides flexibility to the investment manager ultimately benefiting the client.
Steven J. Oshins, an estate planning attorney and author of several trust laws in Nevada says, “Nevada’s new directed trust statute is critical to high net worth investors.” He adds, “Nevada now offers everything Delaware offers and more because of the combination of its 365-year dynasty trust law, two-year statute of limitations on self settled asset protection trusts and no taxation.”
Alaska revised its trust code to make it more difficult for divorcing spouses to grab trust assets. State trust laws vary widely and clients should compare jurisdictions for features that best fits their needs. Some of the most important trust features include whether or not a state has income tax.
When setting up a trust arrangement having a trust in a state that has no income tax has a definite economic financial impact on your client’s family. Therefore, no state income tax is amongst the most important.
Dynasty trusts are important beginning next year when estate taxes resume at a 55 percent tax rate. The general rule is the longer the period of time that the trust can exist the better it is.
Other factors include the number of trust providers or independent trust companies in the state which is an indication of whether a trust center is beneficial to a client and the time zone from New York.
But going out of state for a trust may not always make financial sense, especially for smaller trust accounts. Since the most favorable jurisdictions might be in states where you don’t know an individual trustee, you might need to hire a corporate trustee, which can cost about between ½ of 1 % to 1% or less of trust assets per year, depending on the size of the trust.
Moving an existing trust may also involve additional fees and may require court approval, depending on how the trust was originally drafted and state law.
With great states spread around the country, one important factor to consider when seeking a home for a trust is the avoidance of state income taxes. Trust experts say one of the first factors to look for when examining where to set up a trust is whether the assets are subject to state taxes.
The idea is to let trust investments grow for as long as possible free of state taxes, which can save significant sums of money, especially in high-tax states such as New York and California. (Beneficiaries, however, may be taxed on distributions, depending on whether their home state has an income tax.) Alaska, Delaware, Florida, Nevada, South Dakota, and Wyoming are attractive because they don’t impose any taxes on trust assets.
The following chart, the Best States for Trusts gives you a thumbnail view of which states are best. It is divided into three tiers Tier 1 being the best, Tier 2 being good and Tier 3 being marginal. Given that Alaska, Delaware, Nevada, South Dakota are in Tier 1 they are probably your best choices for trust business.
|
The Best States for Trusts |
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|
Tier |
State* |
State Income Tax |
Directed Trust Statute |
Asset Protection Trust |
Dynasty Trust Ability |
Number of Trust Cos. |
Time Zone (from NY) |
|
1 |
No |
Yes |
Yes |
1000 yrs. |
3 |
(-) 4 |
|
|
1 |
Residents |
Yes |
Yes |
Perpetual |
32 |
(-) 0 |
|
|
1 |
No |
Yes |
Yes |
365 yrs. |
26 |
(-) 3 |
|
|
1 |
No |
Yes |
Yes |
Perpetual |
39 |
(-) 1 / 2 |
|
|
2 |
No |
Yes |
No |
360 yrs. |
9 |
(-) 0 |
|
|
2 |
Residents |
Yes |
Yes |
Perpetual |
19 |
(-) 0 |
|
|
2 |
No |
Yes |
Yes |
1000 yrs. |
2 |
(-) 2 |
|
|
3 |
Yes |
Yes |
Yes |
1000 yrs. |
7 |
(-) 2 |
|
|
3 |
Yes |
No |
No |
Perpetual |
3 |
(-) 2 |
|
|
3 |
Residents |
No |
No |
Perpetual |
2 |
(-) 0 |
|
|
3 |
Yes |
No |
Yes |
1000 yrs. |
2 |
(-) 2 |
|
|
3 |
Residents |
No |
No |
Perpetual |
4 |
(-) 1 |
|
|
*States: links to State Trust Statutes Data: January 2010 |
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© 2010 TheTrustAdvisor.com (781) 319-7748 |
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States bidding for trust business often will not tax those assets they are betting on increased economic activity which will bring other prosperity to the state such as job creation, corporate tax revenue collected from trust companies, corporate tax assessments from the trust companies.
It is for this reason that state legislatures continue to sharpen their pencils and enact new laws designed to attract wealthy baby boomers and their parents’ estates for future generations. Trust accounts have been an important port of the investment landscape.
For wealth management organizations advisors can gain additional income and provide more value to their service by bundling trust services within investment management. Last year several advisory firms launched their own trust companies in order to be better positioned to provide these services.
This includes Wealth Advisors Trust Company and Dominion Trust Company in South Dakota, both new launches targeting wealthy clients from a wealth-friendly trust state. This trend was featured in an Investment News Article last summer, More Advisory Firms Expected to Start Trust Companies.
Trusts can be created for a variety of other purposes including avoiding probate, passing on a family home to heirs, protecting money from creditors, caring for disabled child or even providing for a pet after one dies. Trusts continue to grow in popularity thanks to the aging population and more aggressive trust marketing by financial firms and the concerns about maximizing trusts’ growth performance.
Asset protection trusts have gained in popularity as marketing vehicles for advisors over the last several years with Alaska, Delaware, Nevada and South Dakota being the most popular jurisdictions. Doctors, business executives and other professionals have become increasingly interested in these trusts, advisors say. With these you transfer assets into a trust run by an independent trustee who can give your client distributions from time to time. These trusts if set up properly are in most cases able to keep the assets of the trust out of reach of creditors.
Jerry Cooper, senior editor, The Trust Advisor Blog.
Story Permalink: http://thetrustadvisor.com/news/states
Westwood Trust Shines Helping Advisor Pull In $2 Billion in New Accounts During Meltdown
Posted by Jerry Cooper in News, Sales and Marketing on January 8th, 2010
Exclusive
In a year when registered investment advisors have faced impossible challenges to stay ahead, one wealth management firm in Texas found opportunity and success.
Westwood Holdings Group, Inc. (NYSE: WHG) through its trust company unit Westwood Trust, helped forge gains by landing large new accounts while other firms waited, worried, and sat on the sidelines.
Last summer my research team noticed a blip on our radar screen when looking for firms that stood out during the meltdown. These are firms that increased managed assets for the year September 30, 2008 to September 30, 2009.
The firm that stood out was Westwood Holdings Group, company with little press attention, listed on the New York Stock Exchange, and a top performing wealth manager.
Last month I had an opportunity to chat with Brian Casey, President and CEO of Westwood, to discuss how his firm managed to bring in $2 billion in new assets during the toughest year in recent financial memory. Reviewing SEC reports, I looked at money managers that weathered the meltdown and it was not hard to understand how Westwood was able to mark this achievement.
The Secret
Although Westwood has been in business since 1983, its strategies were illuminated when it became public in 2002. But, the true story of Westwood Trust began in 1998.
Westwood Trust’s mission is to provide high quality products and services to its high net worth clients. Casey calls it “offering a competent investment professional to assist them with structuring a portfolio, and meeting the objectives whatever they may be trying to accomplish.”
Westwood is not a financial planning trust company that provides directed trusts, dynasty trusts or self-settled trusts. It is basically an eloquent investment store for a catered high end investment business segment.
In the past five years Westwood’s managed assets have grown from $4.5 billion to $9.5 billion.
The reason for this growth was due largely to the way the firm had been structured. Many channels of diversification contributed and provided a continuous and steady growth.
Casey, a native Texan for 40 years, describes Westwood as a diversified wealth management organization with three different business lines. The first, Westwood Management Corp., began its investment business in 1983 as an institutional money manager. Next, its trust company, Westwood Trust, a fully licensed and chartered trust company based in Texas that has been up and running for 12 years. Third, its mutual fund business called WHG Funds, which has been in business for four years.
The story of success is credited, in part, to Westwood Trust. Casey noted while other firms sat on the sidelines Westwood got its sales team out and prospected for new accounts.
The result of course is recorded history. Offsetting Westwood’s market losses experienced by most firms in the industry, Westwood was able to show net asset gains of $2 billion going from $7.5 billion at 9/30/08 to $9.5 billion at 9/30/09.
Casey attributes this influx of new accounts to one concept: “high quality.” Westwood knew it would have to rely on its high net worth business in order to sustain its asset levels, so it used its trust company as a main vehicle to reach new investors.
The notion of providing an institutional quality product to its institutional clients, and having access to that through its trust company, created a unique combination of delivering quality to the marketplace to high net-worth clientele.
I asked Casey whether he described the business at Westwood Trust as “retail.” He did not feel comfortable with that word and said that his customers would not like to consider themselves retail customers. He prefers to call them private wealth investors—meaning the average account size for Westwood Trust is $2 million.
How Did They Do It?
Casey says that they’re constantly on the lookout for new customers in a way that’s different for most RIAs. They primarily work through referrals and referral sources but have no wholesalers. Casey adds “If you’re looking for the client that has $2 million or more you’re not going to find him answering an ad. He’s going to have to come through a referral or direct call.”
He adds that clients are doctors, professionals and entrepreneurs that have accumulated wealth over a lifetime but who see Westwood Trust as a shop that puts value and income first.
Of particular importance is the fact that Westwood Trust offers common trust funds or commingled trust funds. These are funds that act and behave like mutual funds and what Casey calls the precursor to mutual funds. “They are a tremendously efficient way of delivering institutional-quality investment products to clients.”
He adds, “Commingled or common trust funds is a tool that allows us to deliver a well-diversified institutional-quality product at a more reasonable fee than by trying to cobble together some outside mutual funds along with a separate account.”
About Westwood
When looking at Westwood it’s best to view Westwood in comparison to its peers. The quick take snap shot provided by Morningstar gives Westwood stellar financial grades. There are only three firms in the group which include Franklin Resources and T. Rowe Price that have “A” financial health ratings.
Westwood’s market cap is only $268 million while the market cap of T. Rowe Price is $14 billion and Franklin’s is $25 billion. So for a small company being managed efficiently they have done quite well in comparison to their peers. Westwood is also accorded a “B” rating in profitability from the Morningstar analysis.
All this being said, Westwood is an interesting story to follow both from the point of being a stellar asset manager, and owner of a trust company, and using that trust company in a way that allowed it to bring in important new accounts and new assets at a volatile time.
Next week more about Westwood, its operations, and an acquisition.
Jerry Cooper, senior editor, The Trust Advisor Blog.
Story Permalink: http://thetrustadvisor.com/news/westwoodtrust1
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