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Many people consider it an honor to be named as trustee or executor over a loved one’s estate. It can be the ultimate sign of admiration and trust. However, serving in this capacity comes with a broad array of duties and responsibilities – obligations which a fiduciary may be legally required to perform or they could be subject to personal liability.

Executor and Trustee

An executor is the person appointed by the creator of a last will to carry out the terms of the will. Specifically, they are tasked with managing an estate through the probate process. A trustee is an individual that has been given the responsibility of managing property in a trust. For purposes of this article, we are specifically referring to a trustee tasked with administering trust assets after the death of the trust creator. Individuals and institutions, such as a bank or trust company, can typically serve in either of these roles.

Executor and Trustee Duties and Responsibilities

• Locating, securing, valuing, and managing trust or estate assets
• Identifying and notifying beneficiaries, including the obligation to keep beneficiaries reasonably informed of status of administration
• IRS reporting, which may include the deceased’s final individual tax returns, estate tax returns, or trust tax filings
• Accounting: tracking and reporting all income, expenses, distributions, and transactions
• Final distributions of assets to beneficiaries
• Duties specific to executors include (i) managing probate process, (ii) publishing notice to creditors, and (iii) opening and managing estate bank account
• Tasks more frequently associated with trustees are (i) investment of trust assets, (ii) establishing further trusts for beneficiaries, and (iii) filing a notice of trust

Fiduciary Liability

During the administration of an estate or trust, an executor or trustee owes a fiduciary duty to all beneficiaries. Running afoul of this duty can lead to personal liability.

Common situations where personal liability has been incurred include:

• Failure to abide by prudent investor standard. Ordinarily associated with trustees, the prudent investor rule holds that trustees are to invest and manage assets as a “prudent investor” would considering the purposes of the trust.
• Mismanagement of assets. This is a broad category but can include (i) payment of unenforceable debts, (ii) mixing personal assets with estate/trust assets, and (iii) unreasonable delay of distributions to beneficiaries.
• Favoritism. A duty of impartiality is owed to all beneficiaries, as the fiduciary cannot favor one class of beneficiaries over another. This may be especially true for trustees who may have to manage competing interests of current and remainder beneficiaries.

source: Ivan & Daugustinis Estate and Tax Attorneys – information updated as of 10.17.22

The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

Have questions about the current market environment? John Zaller, CIO, MAI Capital, is here to answer them. From regional banks to recession, John responds to a few of the most commonly asked questions from MAI clients.

1. Will the stress in the regional banks lead to another financial crisis, similar to what we experienced in 2008?

While the recent bank failures echo the Great Financial Crisis, our team at MAI thinks this episode is different for a few reasons.

• Thanks to increased regulatory scrutiny, the banking system at-large is on more solid footing than in 2008 because the largest banks are now required to maintain higher capital ratios and undergo regular stress tests.
• Top-tier banks have been acting like safe havens this year rather than the crisis epicenter like they were in 2008.
• Regional bank failures are still impactful, but the concern today is a pullback in regional bank lending that slows the economy rather than a system meltdown.
• The balance sheet issues facing regional banks are tied to well-understood interest rate impacts rather than unknown credit impacts (like the mortgage crisis in 2008).
• Rising interest rates have caused market-to-market losses in bond portfolios on bank balance sheets, but are easily quantifiable, and losses are transparent and manageable for most banks.

The path forward for regional banks largely depends on investor and depositor confidence outweighing fear. In the past month, deposits at US commercial banks have stabilized (as shown in the chart below from the Federal Reserve). Recent data specific to regional bank deposits has also shown deposits stabilizing despite continued pressure on stock and bond prices. At MAI, we will be watching closely to better gauge the impact of the current bank turmoil on the economy.

as of date 4/26/23

2. What will happen if Congress does not raise the debt ceiling in time?

Unfortunately, the debt ceiling has once again become an opportunity for political brinkmanship, and there is a risk that Congress will underestimate the potential damage of failing to compromise.

Fortunately, we believe that cooler heads will prevail, and a deal will occur prior to time running out.

If today’s level of political polarization prevents a favorable scenario, we still want to recognize that it does not automatically lead to a US default on its debts. In fact, our team at MAI thinks the risk of a default is extremely low for the following reasons:

• The Treasury has prioritized payments of principal and interest relative to other allocations.
• The Treasury would most likely delay funding for other government programs, which is not ideal for economic growth, but could prevent a US default.

The larger issue that will have longer-lasting implications for economic growth and interest rates is the fact that interest costs as a percentage of the federal budget are about to surge to levels not seen in the past few decades. 

3. You’ve been discussing the probability of a recession occurring for the past six months or so, but I have only seen minor adjustments in my portfolio. Why is that?

This is a terrific question, and our answer is this: a portfolio underpinned by a long-term strategic plan should not be significantly altered based on an economic or market forecast. Decades of experience have made it clear that forecasts are subject to change and that short-term performance is impossible to predict with any consistency.

Instead of trying to time the market, our approach at MAI is to make tactical adjustments that align with our views, but won’t materially depart from the long-term allocation that supports our clients’ financial plans. For example, today this may include holding more cash at the margin given the favorable interest rate environment on the short end, using structured notes to provide extra downside protection, or using alternatives to diversify stock and bond exposures. 

In every case, we remain focused on constructing a portfolio that we believe can deliver on your unique set of goals and objectives as long as we stay the course through the ups and downs of the markets. 

If you have any questions related to this topic or your portfolio in general, please do not hesitate to reach out to your wealth advisor at any time.

Please send your questions, comments, and feedback to: info@mai.capital. Any statement non-factual in nature constitutes only current opinion of this author which is subject to change without notice. Certain statements are of future expectations and other forward-looking statements are based on management’s current views and assumptions. Any statistics mentioned have been obtained from sources we believe to be reliable, but the accuracy and completeness of the information cannot be guaranteed. Neither the information nor any views expressed should be considered investment, legal or tax advice, or constitute as a recommendation to buy or sell any security, strategy, or product. It should not be assumed that this is a forecast of future events or that any security transactions, holding, or sector discussed where or will be profitable or that the investment recommendations or decisions we make in the future will be profitable. Past performance is not indicative of future results.

The Importance of Estate Planning

The ultimate goal of estate planning is to provide for the management and transfer of your property in the event of your death or incapacity, at the smallest financial and emotional cost to your family. A properly structured estate plan allows you to choose your beneficiaries, provide for the management of your assets and eliminate or reduce taxes. Without careful planning, your property may pass to unintended beneficiaries, may be reduced in value by unnecessary taxes or unsound investments, may lack adequate investment oversight, or may be unavailable to you and your family in the event of your illness and incapacity. All of these potential problems may cause financial and emotional insecurity during your lifetime or after death.

Providing for the Management of Your Property in the Event of Illness or Incapacity

Revocable Trust

If you desire assistance in managing your assets, wish to avoid probate or are concerned with the management of your financial affairs in the event of your illness or incapacity, you should consider transferring your assets to a “Revocable Trust”. A Revocable Trust is a flexible arrangement in which you transfer assets to yourself, another individual or a trust company, as “trustee.” The trustee invests, manages and disposes of the assets for your benefit and, after your death, for the benefit of the beneficiaries you designate in the written trust agreement. You can retain complete control of your investments (by acting as your own trustee), completely delegate financial management to a family member, trusted friend or a professional trustee, or act jointly with any one of these. You can also change the trust agreement or terminate the trust at any time.

A Revocable Trust also provides an asset management team selected by you to handle your affairs in the event of your illness or incapacity. This can avoid the expense and delay of obtaining a court-appointed guardian to manage your assets. Furthermore, since the trust assets will not be subject to the probate process upon your death, your family will continue to be provided for without interruption during a time of great stress. See attached Exhibit A, Exhibit B, and Exhibit C with flowchart illustrations of Revocable Trust estate plans.

Durable Powers of Attorney

In certain cases, you may adequately provide for asset management in the event of temporary illness or incapacity through the use of a Durable Power of Attorney. This document enables a designated individual to manage your assets and/or make health care decisions for you in the event you are no longer capable of doing so.

Providing for the Transfer of Your Property at Death

At your death, your property will be transferred in one of two ways. Certain assets, sometimes referred to as non-probate assets, will be distributed without reference to your Last Will and Testament and without supervision by the probate court. Non- probate assets include:

• Assets owned jointly with right of survivorship which will pass to the surviving joint owner.
• Assets held in trusts (like the Revocable Trust) which will pass according to the trust agreement.
• Life insurance or annuity proceeds which will be paid to the beneficiaries you designate in the policy or beneficiary form.
• Pension, profit-sharing, deferred compensation or other corporate death benefits, and individual retirement accounts, which will be paid to the beneficiaries you designate in the beneficiary form.

Your other assets will be distributed under the supervision of the probate court in accordance with your Last Will and Testament, or if you do not have a Will, as provided by law.

Estate Taxation

The federal government imposes an estate tax on transfers at death based on the fair market value of your property at the time of your death. The property subject to taxation at death includes such assets as real estate, cash, securities, partnership interests, personal and group life insurance, individual retirement accounts, pension and profit- sharing plans, deferred compensation and stock options. The estate planning process focuses largely on reducing or eliminating these taxes. This may be accomplished by taking maximum advantage of deductions and credits which include: (1) the “estate tax exclusion amount” which exempts a specified amount of your estate from tax, and (2) the “unlimited marital deduction” available to U.S. citizens, which permits married couples to defer the tax until the survivor’s death.

Tax Planning for Married Couples

The Benefit of a Tax Efficient Estate Plan

If you leave all your assets to your spouse either outright or in a qualifying “marital trust,” the marital deduction may permit all federal estate tax to be postponed until your spouse’s death assuming the surviving spouse is a U.S. Citizen. Any assets remaining at your spouse’s death will be taxed as part of his or her estate, however, since the marital deduction defers rather than eliminates the federal tax.

Under the Tax Cuts and Jobs Act (“the Act”) of 2017, the estate tax basic exclusion amount and generation-skipping transfer (“GST”) tax exemption were significantly increased. The exemptions currently stand at $12,920,000 per individual for 2023. Provided certain conditions are met, the deceased spouse’s unused estate tax exclusion amount may be combined with the surviving spouse’s estate tax basic exclusion amount.

Therefore, if the combined estates of you and your spouse exceed the amount exempt from estate tax, the use of a simple estate plan leaving everything to your spouse may cause unnecessary taxes to be paid, reducing the eventual inheritance of your children. Those taxes can be minimized or possibly eliminated completely by using an estate plan that takes advantage of both of your estate tax exclusion amounts. This is accomplished at the first spouse’s death by leaving the amount exempt from estate tax in an “estate tax- sheltered trust” for the surviving spouse.

Designing the Estate Tax-Sheltered Trust

The estate tax-sheltered trust can be designed with a great deal of flexibility. Your spouse can be given the entire net income of the trust and any principal needed to support his or her lifestyle, as well as a right to withdraw 5 percent of the trust principal every year without regard to need. Your spouse also may be given limited rights to determine who will receive the trust funds at his or her death.

Depending on the terms of the trust, it is possible for your spouse to be the sole trustee. Otherwise, a co-trustee can be named in your Revocable Trust or selected by your spouse after your death to assist with the management of the trust funds. Your family can also be given the right to replace the co-trustee at any time. In addition, the co-trustee may be permitted to pay any income not needed by your spouse directly to or for the benefit of your children or grandchildren.

Disclaimer Trust to Preserve Options

If at the time you sign your estate planning documents, you are uncertain whether the potential tax savings will justify the creation of an estate tax- sheltered trust, or if you would prefer to let your spouse make that decision after your death, complete flexibility can be accomplished through the use of a “Disclaimer Trust.” This is a trust created by your Will or Revocable Trust similar to an estate tax-sheltered trust. However, you do not direct that any part of your estate be placed in this trust. Instead, you leave your entire estate to your spouse, but allow your spouse to decide whether a portion of your estate should be added to the Disclaimer Trust. This voluntary decision to put property into the Disclaimer Trust must be made within nine (9) months of your death.

Is there a Need for a Marital Trust?

In order to postpone all U.S. estate tax until your spouse’s death, the balance of your estate in excess of the amount exempt from estate tax (the “marital share”) must be left either outright to your spouse or in a qualifying marital trust. Although there is no federal estate tax reason to leave the marital share in trust, you may prefer a trust (1) to assist your spouse with the management of the trust assets, (2) provide some wealth protection of the trust assets, or (3) to make certain that the property passes to your children at your spouse’s death. The latter reason may be particularly important if you have children by a prior marriage. If the marital share is left in trust, your spouse must receive all the net income, and may have access to as much principal as you specify.

Estate Equalization: “Portability”

If your assets exceed the estate tax exclusion amount, but your spouse’s assets do not, and your spouse predeceases you, under the tax law enacted in January 2013, a surviving spouse may be permitted to also utilize the deceased spouse’s unused basic exclusion amount, but only if an election was made on a timely filed estate tax return for the deceased spouse and only if the surviving spouse does not remarry and survive a second spouse. Even if a surviving spouse successfully ports the deceased spouse’s unused basic exclusion amount, the GST tax exemption of a deceased spouse cannot be used by the survivor. Because of the restrictive nature of these rules, you may wish to transfer some of your assets into your spouse’s name or purchase future investments in his or her name, so that each of your estates equals or exceeds the estate tax exclusion amount and GST tax exemption.

Irrevocable Life Insurance Trust (“ILIT”)

In determining your estate net worth for estate tax planning purposes, you must include the value of any life insurance policies on your own life. These values oftentimes lead an otherwise non-taxable estate to become taxable. This problem can be avoided through the use of an irrevocable life insurance trust. If structured and administered properly, the life insurance trust will be the owner of the life insurance policy, thereby removing the proceeds from your taxable estate and exempting it from estate tax. See Exhibit D for a flowchart illustration of an Irrevocable Life Insurance Trust.

Planning for Your Children’s Inheritance

If you leave property to your children or grandchildren, and do not arrange for the property to be held in a trust or by a custodian under a statutory uniform transfers to minors act or other similar state law, each child who has attained age eighteen will be entitled to receive his or her inheritance outright. If the child is under eighteen, a guardian will be appointed to manage the child’s property until that time. The guardian will be entitled to reasonable compensation and will be required to account to the court at least annually for approval of his or her actions.

To avoid the necessity and cost of a court-appointed guardian, you should provide for the child’s inheritance to be held in trust. A trust will ensure that your child will not receive a substantial inheritance outright at an early age when he or she may not be ready to manage the funds or spend them wisely. A trustee can be named to manage the trust funds and distribute them to the child as needed, until the child reaches the age selected by you for outright receipt of his or her inheritance.

Generation-Skipping Tax Planning

If you leave your estate to your children, it could be subject to estate tax at your death and, to the extent it is not consumed during their lifetime, to a possible second estate tax at their deaths. Many people have tried to avoid this second estate tax by leaving all or a portion of their estates directly to their grandchildren or in trust for the lifetime of their children. Unfortunately, such transfers may be subject to an additional generation-skipping transfer (GST) tax. For instance, if you leave your entire estate directly to your grandchildren, it may be subject to both estate tax and generation- skipping transfer tax at your death. These tax rates are basically the same as the estate tax rates. However, there are important credits to take advantage of in this planning. Careful planning can minimize the burden of this “additional taxation” as well as provide enhanced protection for your beneficiaries. If the GST exemption is allocated to create a fully GST exempt trust, no distributions (including final distributions) from that trust will be subject to the generation-skipping transfer tax.

Lifetime Gifts

If there is a possibility that your estate will be subject to federal estate tax even after you adopt an estate plan that takes full advantage of the available credits and deductions, the tax may be substantially reduced through lifetime giving. The most attractive gifts are assets that have a low current value, but are likely to appreciate in value or generate substantial income during your lifetime. A gift of such assets will avoid estate tax on both the appreciation in value and future income.

Lifetime gifts are subject to a federal “gift tax” which is imposed at the same basic tax rate as the estate tax. However, you are currently entitled to give up to $17,000 annually to as many persons as you like without paying gift tax or having to file a gift tax return. If you are married, you can double the amount but you need to file a gift tax return. A program designed to take advantage of this “annual exclusion” from gift tax can be very effective. For instance, if you are married and have two children and four grandchildren, you and your spouse together can give $34,000 annually to each of the six family members, or a total of $204,000 annually. Even if your gifts exceed the available annual exclusions, no tax must be paid until your cumulative lifetime gifts exceed your lifetime gift tax credit (currently $12,920,000 or $25,840,000 for a married couple). Such gifts will, however, reduce the amount that can be transferred tax-free at your death since they will use up the estate tax credit that would otherwise be available to your estate.

Selections of Personal Representatives, Trustees, and Guardians

While the need for a professional personal representative (otherwise known as “executor”) or trustee will depend in large part on the complexity of your personal and financial circumstances, it is important to realize that the benefits of a well-structured estate plan can easily be jeopardized unless your personal representatives and trustees not only have good judgment in nonfinancial and family matters, but also have the training and experience to make complex economic and tax decisions. Your personal representative collects and invests your assets during the period that your estate is being administered, makes distributions to your family as needed, files the required tax returns, and makes the appropriate tax elections and decisions. Since there are many options available to reduce taxes, the period during which the estate is being administered provides a unique opportunity to achieve substantial tax savings for the estate and its beneficiaries. The personal representative should either have the professional expertise to make the right decisions, or the wisdom to retain and follow the advice of a tax attorney who specializes in estate administration.

The personal representative should also have access to the investment expertise needed to take your place as the “manager” of the family’s resources during the period that the estate is in administration. The trustee takes over from your personal representative after your estate is settled. The trustee’s job is to manage any portion of your estate left in trust. This includes investment of the trust assets to meet the family’s needs and objectives, as well as financial and tax planning. If you have minor children, your Will should name guardians for your children in case both you and your spouse die while your children are minors. While the trustee will manage your children’s inheritance and provide funds for their expenses, it will be the guardians who fulfill your role as parents and make personal decisions concerning the development and welfare of your children. Often it is advisable to separate these two roles.

Employee Benefits as Part of Your Estate Plan

Your employee benefits will be paid at your death to the beneficiaries specified by the plan or named by you. In light of recent changes in the tax laws, it is very important to coordinate payment of these benefits with your overall estate plan. In certain cases, these benefits should go to the surviving spouse directly. In other cases, it may be preferable to direct that these benefits be used to fund an estate tax-sheltered trust. With proper planning, it is even possible to keep both of these options open.

Charitable Gifts

If you make substantial gifts to charity each year or intend to do so at your death, you may be interested in establishing a charitable trust, private foundation or other vehicle for charitable giving. Such a step can increase or accelerate the income and estate tax deductions available to you.

Source: Ivan & Daugustinis Estate and Tax Attorneys – information updated as of February 16, 2023. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

The world of finance can be confusing to an “outsider,” especially when it comes to understanding the lingo. The technical jargon can be so overwhelming that it pushes people to give up trying to understand the basics, which can lead to procrastination and poor decision-making.

If you are feeling overwhelmed or confused by it all, here are 6 key aspects that can jumpstart your journey to financial literacy.

1. Basics of Financial Planning

Mastering financial, economic, and cash flow/debt management concepts is a great first step. Ask yourself: What do I own? How do I own it? What do I earn? What do I owe? By answering these simple questions, you are starting to build an understanding of your financial status.

2. Investment Planning

Investment planning is all about making your money work for you. Work with a trusted advisor who can help you build a diversified portfolio, manage your risks, and include a variety of     investment vehicles.

3. Retirement Savings and Income Planning

Setting money aside today—delayed gratification—will allow you to have more choices in the future. A well-performing retirement fund needs consistent analysis, an evaluation of plans,        and an understanding of Social Security, Medicare, and Medicaid.

4. Tax and Estate Planning

Understanding laws and management techniques related to taxes, property transfer, and estate planning can help you accomplish current and future financial goals.

5. Risk Management & Insurance Planning

Evaluating risk and assessing different types of insurance can help you protect your family, decreasing your anxiety about what may happen in the future.

6. Psychology of Financial Planning

When making financial decisions, never underestimate the power of fear and greed. Assess your feelings and behavior, then adjust accordingly.

How can MAI advisors help you understand this process more completely?

• A financial advisor can help you develop a clear picture of your current financial status by reviewing income, assets, and liabilities and by evaluating your insurance coverage, investment portfolio, tax exposure, and estate plan.
• Our advisors work with clients to establish individualized, prioritized financial goals and time frames for achieving them.
• We implement strategies that address current financial weaknesses and build on strengths.
• We can utilize solutions and services that are tailored to help you meet your goals.
• MAI advisors monitor your plan and make necessary adjustments as goals, time frames, and circumstances change.

Authored by Mark Van Drunen, CFP®, Regional President and Managing Director, MAI Capital Management | Information updated as of 03.28.2023.

Please send your questions, comments, and feedback to: info@mai.capital. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

Our Family Office team provides concierge-level services to those who are frustrated with the challenges of managing significant financial wealth and concerned about the stability of their family as it relates to responsibly stewarding their wealth. They are also motivated to take the stress and pressure off of being their own quarterback and establish a secure plan regarding all aspects of the family and wealth. Our team addresses the family’s needs by providing solutions around multiple integrated issues. We are the centralized, trusted advocate for the family, from working with your legal team to taxes, accounting, and business issues to very personal plans and advice.

Do you need Family Office services?  The families we serve typically answer YES to one or more of these questions:

1. Do you hold institutional level financial capital? (Generally defined as greater than $25 million)
2. Do you hold assets across various investment managers, custodians, and private deals?
3. Do you have multiple, complex legal entities? (Trusts, partnerships, LLCs, Foundations)
4. Do you spend a great deal of time managing communications with your CPA, attorney, insurance broker, or banker?
5. Are you worried about the impact of your wealth on your children and/or future generations?
6. Do you want to provide a trusted, central resource for your spouse and children?
7. Do you want to minimize stress surrounding financial matters?
8. Do you have the desire to leave behind a philanthropic legacy?
9. Are you apprehensive about your personal/business strategy or about obtaining competitive fees and prices on products and services?
10. Are you concerned about your level of potential income tax or estate liabilities?
11. Do you have recent or pending transactions? Recent or pending turnover in service providers?
12. Do you want to learn the best practices of others in similar situations?

If you have a desire to learn more about Family Office services, please contact MAI Regional Director, Joan Malloy, at Joan.Malloy@MAI.Capital

Information updated as of 03.28.2023.

Please send your questions, comments and feedback to: info@mai.capital. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

Alternative investing comes with its own set of opportunities, risks, tax implications, and liquidity restrictions.  At MAI, our goal is to seek out the best risk-adjusted return opportunities across public and private markets and implement them in the most optimal way for our clients’ unique set of goals and objectives.

On the most recent Market Update, John Zaller, CIO of MAI Capital, was joined by Director and Portfolio Manager in MAI’s Alternative Investment Group, Ben Sayer, to discuss how recent events are shaping the outlook for alternative markets.

Key Points:

1. The alternative investment area continues to be a place of innovation and opportunity, but we are finding that they are not completely immune to interest rates rising rapidly.
2. The failures of Silicon Valley Bank and its ties to private equity and venture capital spaces have created tighter financial conditions overall, as private equity and real estate are both underpinned by the use of credit.
3. While a downturn in real estate values is expected, it may not happen as soon as everyone thinks. We will most likely see a slow-motion downturn, especially in office space and multifamily spaces, and continue to see a structural housing shortage nationally.
4. Despite the recent events, the MAI team still sees opportunities in alternatives. The housing shortage could create value in affordable housing and the team sees additional opportunities in triple net real estate as well as private equity and venture capital investments.

As we continue to see a period of choppy markets ahead at the intersection of restrictive monetary policy and a weakening economy, we believe alternatives overall can continue to be a source of portfolio ballast, but there will be winners and losers.  Discipline and diversification are imperative in the selection process.

If you have any questions related to this topic or your portfolio in general, please do not hesitate to reach out to your wealth advisor at any time. 

Please send your questions, comments and feedback to: info@mai.capital. Any statement non-factual in nature constitutes only current opinion of this author which is subject to change without notice. Certain statements are of future expectations and other forward-looking statements are based on management’s current views and assumptions. Any statistics mentioned have been obtained from sources we believe to be reliable, but the accuracy and completeness of the information cannot be guaranteed. Neither the information nor any views expressed should be considered investment, legal or tax advice, or constitute as a recommendation to buy or sell any security, strategy or product. It should not be assumed that this is a forecast of future events or that any security transactions, holding, or sector discussed where or will be profitable or that the investment recommendations or decisions we make in the future will be profitable. Past performance is not indicative of future results.

As a participant in a 401k plan, knowing the contribution limits at the beginning of the year allows you to adjust your contribution to allocate that increase throughout the year to maximize the limits. Remember, every time you put a dollar into a qualified plan on a pretax basis, it is one less dollar you are taxed at your top marginal tax bracket. This can be a significant tax benefit. Additionally, it’s important to understand how your company match benefit is calculated. Is it done each payroll? At the end of the year? It’s possible that if your company doesn’t true up match contributions, you could potentially miss out on match dollars by reaching the contribution limit too early in the year.

For small business owners, understanding the contribution and benefit limits is crucial in limiting tax liability. Recently, we were consulting with a small business owner who had experienced a significant increase in revenue in 2022. We suggested that he consider a new Cash Balance Plan (hybrid Defined Benefit) and increase  his compensation to the maximum limit.  Based on his age, he can defer nearly $700k into the cash balance plan. If he does not adjust his compensation, his maximum deferral will be $360k. That’s a significant tax savings.

This is a great example of why business owners should be working with an advisor who specializes in retirement plans.  MAI Capital’s Retirement division takes a customized approach to retirement plans, offering a complete and integrated platform that includes 401(k) services, fiduciary-based retirement plan consulting, and financial wellness programs for businesses, as well as tailored plans for individuals and families.

The chart below outlines the announced IRS figures for retirement plans and other benefits, effective January 1, 2023.

Limits on Benefits and Contributions

Catch-Up Contributions

Health Savings Accounts

Information updated as of 02.22.2023.

Please send your questions, comments and feedback to: info@mai.capital. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

John Zaller, CIO, was joined by Chris Grisanti, Chief Equity Strategist, to provide their latest thoughts on the current market environment.

Long Term Picture: The Great Financial Crisis of 2008

Asked often when things will “get back to normal,” Chris reminds people to pull the lens back and look at the long term. In 2008, the financial markets imploded, leading to a scary time for everyone. The Federal Reserve lowered interest rates to zero for the first time and embarked on countless programs to stabilize the economy. In 2009, then-CIO at PIMCO, Mohammed El-Erian coined the phrase, the new normal, to describe the era of extremely low interest rates, low inflation, sluggish employment, and low GDP growth. Other phrases during that time included pushing on a string or the less negative, priming the pump, to describe the Federal Reserve’s effort to lower rates in order to get the economy back on its feet.

Impact of the 2020 Pandemic

The pandemic in 2020 gave the Fed and the politicians the political cover to do the ultimate “pump priming,” and they dumped over $5 trillion into the economy. Like starting an old automobile engine that fails the first few times but then starts with a bang, that finally ignited growth – and inflation – and brought us full circle back to the pre-financial crisis era.

In other words, back to the “old normal.”

Federal Reserve Funds Over the Past 52 Years

The easiest demonstration of how we are back to normal is a chart of the Fed Funds rate for the last 52 years. When you review that chart, the last 15 years are the “weird part,” with virtually zero interest rates.

While interest rates are currently considered high, compared to historical data, they are about average. And at those levels, they could be considered a feature of a healthy, growing economy. No one likes to pay higher mortgage rates, but if you live in a growing economy with more opportunities to increase income, the higher rates are an acceptable trade off.

Chris notes, “My strong hope—and I think it will turn out to be true—is that we have finally reached what I would call escape velocity, and the economy will not need to return to constant support from the Federal Reserve in order to support housing or stock prices.”

But as with everything, there is a catch.

Five Negatives about High Interest Rates

1. Equity investors now have alternatives. TINA   – or there is no alternative –  is dead.  (Sorry TINA) and equities are not the only game in town.  Bonds have come back from the dead.
2. Companies are facing a much tougher capital structure environment. Debt is more expensive and floating rate debt or maturing debt that needs to be rolled is a real issue.  Balance sheet quality will matter again (it has mostly been ignored for 15 years).
3. No earnings/no cash flow companies will face a much harder time coming public or raising additional capital. Virtually no IPOs right now.
4. The discount rate for growth is much higher, lowering the present value of growth (read technology and communications) companies. This lowers the price of formerly market leading tech stocks.  (Think about Tesla’s 2027 potential earnings—even if they come true, what are they worth today?)
5. Psychologically, investors start focusing on what could go wrong, not the unlimited potential of a growth company. The glass is now half-empty.

All these points may seem alarming, but are simply part of a normal economy. Company balance sheets SHOULD matter—it is only in the last 15 abnormal years, when money was basically free, that they haven’t. And it isn’t a bad thing that not every company can go public—some aren’t prepared for that.

A “Normal” Economy: Learning from History

What is most important for investors to remember is that there were plenty of years with higher rates and that market did just fine—or even wonderfully. The best example is 1995 to 1999. During those years, the Fed Funds rate averaged 5.4%, about half a percent higher than now. And in those 5 years, the S&P 500 Index rose 250%, more than tripling. While not a prediction, the point is to say that higher rates don’t always mean a bad equity market. Higher rates are the result of a stronger economy, which generally leads to higher corporate earnings, which drives stock prices.

Simply said, historically, higher rates do not always lead to a lower market.

Information updated as of 02.23.2023.

Please send your questions, comments and feedback to: info@mai.capital. Any statement non-factual in nature constitutes only current opinion of this author which is subject to change without notice. Certain statements are of future expectations and other forward-looking statements are based on management’s current views and assumptions. Any statistics mentioned have been obtained from sources we believe to be reliable, but the accuracy and completeness of the information cannot be guaranteed. Neither the information nor any views expressed should be considered investment, legal or tax advice, or constitute as a recommendation to buy or sell any security, strategy or product. It should not be assumed that this is a forecast of future events or that any security transactions, holding, or sector discussed where or will be profitable or that the investment recommendations or decisions we make in the future will be profitable. Past performance is not indicative of future results.

Another tax season is upon us—the 2023 filing season opened on January 23 with increased staffing thanks to funds the Internal Revenue Service (IRS) received under the Inflation Reduction Act.  The agency has added over 5,000 agents but still has a large backlog of prior year returns.  The National Taxpayer Advocate has warned that the backlog creates “challenges for the 2023 tax filing season before it even starts” and to continue to expect delays and frustration for taxpayers.

Changes for the 2023 Tax Filing Season

Pandemic era relief has ended which will mean smaller refunds for many taxpayers. The following Covid related changes are no longer available:

• The recovery rebates available as tax credits on 2020 and 2021 tax returns are not available in the 2022 tax year.
• The expanded child tax credit (CTC) reverts to its pre-2021 amount worth up to $2,000 per child, with an earnings requirement and limited refundability of $1,500.
• The child and dependent care tax credit (CDCTC) reverts from $8,000 in 2021 to $2,100 for the 2022 tax year.
• The above-the-line charitable deduction worth up to $600 for joint filers is not available for the 2022 tax year, but the itemized deduction for charitable donations remains.

2023 Tax Filing Deadline

The filing deadline to submit 2022 tax returns or an extension to file and pay tax owed is Tuesday, April 18, 2023, for most taxpayers. By law, Washington, D.C., holidays impact tax deadlines for everyone in the same way as federal holidays. The due date is April 18, instead of April 15, because of the weekend and the District of Columbia’s Emancipation Day holiday, which falls on Monday, April 17.  Taxpayers requesting an extension will have until Monday, October 16, 2023, to file.

As always, please reach out to your MAI advisor if you have any questions about your specific tax situation.

Authored by Kathy Buchs, CPA, MT, Senior Tax Advisor & Team Leader, MAI Capital Management

Information updated as of 02.09.2023.

Please send your questions, comments and feedback to: info@mai.capital. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

On this segment of MAI’s Market Update, John Zaller, CIO of MAI Capital, reviews the challenging performance environment in 2022 and discusses the outlook for 2023 and beyond.