The end of 2021 is notable for a host of reasons. Perhaps most significant for many of us is that after almost two years apart, loved ones will gather together for the holidays once again. Rarely has sharing a cocktail, watching a game, enjoying a meal and even engaging in friendly debate seemed so special.

It is tempting to contrast the good with the uncertainty surrounding us– the continuing pandemic, challenges to our relationship with China, supply chain disruption, fears of inflation and potential tax legislation. We recognize these factors are creating concern for many of our clients and, in some cases, a feeling that it is imperative to act before December 31. Without downplaying the importance of appropriate action around year-end tax planning, our purpose in this letter is to encourage clients to step back, take a breath and consider using this time to focus on the long term.

Consistent with our firm’s investment philosophy, we take the long view in planning – thinking in decades, not days. We believe this year-end presents a unique moment to reflect on what’s important to the family and set the stage for planning in 2022 and beyond. Consider questions like:

  • Has anything changed your perspective over the past year?
  • How do you feel about the future?
  • Are you reading anything that’s impacting your thinking about the world?
  • Are there stories or examples that bring your values to life for the next generation that should be shared?
  • How does all of this impact your thoughts on longer term planning and even legacy?

In many cases, these discussions can help re-connect family members who have been apart, and deepen understanding within a family. In others, it can be an opportunity for a family to align their financial lives with the values and priorities that are motivating them right now, leading to a clear plan of action for 2022.

For example: Over the last five years, global equity markets have posted annualized returns above 10%. For many investors with growth-oriented portfolios the result has been larger portfolios running ahead of plan – suggesting a reexamination of topics involving financial security, philanthropic goals and wealth transfer planning. At a moment like this, we often serve as a family’s thinking partner to evaluate the financial and non-financial reasons to accelerate or re-assess the timing of realizing a goal such as the purchase of a property, a leadership gift to a charity or a gift to heirs. With returns more likely to revert to historical norms and perhaps with additional volatility, we can create a process to analyze the opportunities and risks associated with goals and objectives. We believe that developing dynamic planning tools that can adjust as markets move and the tax laws change over time, creates an environment to test different cash flow scenarios acknowledging the future headwinds of inflation, rising costs and increased market volatility.

The strength of balance sheets may also present a good opportunity to consider aligning investments with family goals and purpose. We find that a good starting point for these discussions is defining the family’s long-term mission. There is no singular formula to getting this right. In our experience, guiding a family to articulate a short statement of values and identify important areas of family capital (human, intellectual, social, financial, etc.) are an important first step. Formulating a plan to take the first incremental steps and assessing regularly are critical. We have created a streamlined process to guiding these discussions and developing a family strategic plan. We believe that families find this exercise, and the process of considering sustainable investing and/or impact investing, to be helpful in engaging family members around investing and educating the next generation on the proper stewardship of the family’s capital.

Incorporating younger family members early on is essential. Engagement in conversations about risk and opportunity, allowing them to make investment decisions for their own portfolio – or on matters that are not mission critical – can allow for experiential learning both valuable and valued. One way we encourage the transfer of experiences from one generation to the next is through story telling– families sharing stories of successes and failures. Spending time talking about things that did not go as planned more often opens up discussion, allowing for a sharing of lessons learned and how those lessons were applied to future decisions. This learning can also go the other way as next generation family members have developed new and different professional expertise and passions that can influence and help to evolve the process of family collaboration and decision making.

The disruption caused by the coronavirus led (in some cases, forced) some clients to make meaningful changes in their living and working arrangements. As we return to the workplace, many are examining if some of those changes should be made permanent and if there are non-financial factors that should now take precedence in defining their work-life balance.

New living/working arrangements can include a change in residency – which should be based primarily on individual and family considerations. But, there are other considerations to keep in mind, like changes in tax exposure. This is particularly important for clients planning to sell a business, who have deferred executive compensation, are contemplating income tax planning opportunities such as a ROTH IRA conversion or have large estates. Evaluating the financial consequences of a permanent move – and the steps needed to effectively leave a state for tax purposes – are a part of our integrated approach to advising clients. While some may choose a permanent change of residence, many clients are acquiring second homes to take advantage of greater flexibility in working and living arrangements and to create a gathering space for current and future generations. It is important to consider how the second home is structured and owned. Is it considered a “family legacy” asset to be retained for many generations? How will the financial costs of maintaining the residence be underwritten in the long-term? How will the relationship among the younger generations with respect to the home be managed? Engaging a team to think through the right ownership and operational design upfront helps achieve your goals and can pave the way for smooth transitions and better risk management.

We began this letter encouraging clients to take a long-term perspective and not be overly influenced by concern over possible tax law changes. That said, we believe there are prudent steps clients can, and should take, consistent with routine tax planning and typical year-end activity. For example:

  • Clients with taxable estates should consider fully utilizing their annual gift tax exclusion to pass assets down to younger generations, including through the funding of 529 Plans.
  • Clients who have sizeable estates and are intending to use their lifetime exemption before its scheduled “sunset” at the end of 2025 should move forward expeditiously to use it now, while it remains available.
  • Those with highly appreciated assets and meaningful taxable income in 2021 should consider whether year-end charitable gifts are advisable.

We are not able to predict what Congress will do. Nor can we anticipate how markets will react to the macro-level influences of international politics, increased inflation and continued influence of the pandemic. Instead, we continue to believe good planning recognizes that change is inevitable, remains flexible and is based on long-term, multi-generational considerations. 

 

 

 

 

 


The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested.

The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.