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How Family Offices Are Coping in a Dramatic 2020

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Robert Breshock

Managing Director (emeritus)

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From playing portfolio defense to working remotely, family offices are responding to COVID-19 with new ways to prepare for the future.

Family offices have certainly managed through trying times, but today’s global COVID-19 pandemic is unlike anything they’ve faced in living memory. Veteran family office managers report a once-in-a-century crisis filled with cross-currents and surprises that stock markets don’t fully reflect. A combination of health, economic, and financial challenges has created a higher level of uncertainty than ever before—worse even than the 2008 global downturn.

However, COVID-19 has created a wide range of opportunities for family offices to update their approaches to investment management, tax and estate planning, and governance. Let’s take a look at what the managers who serve ultra-high-net-worth families have recommended this year.

Playing defense in a 100-year crisis

When the pandemic hit and markets plunged, many family offices immediately moved into defensive mode and concentrated on managing their existing business. Families with operating businesses sought credit lines to help with cash flow, while others sold municipal bonds instead of hard-hit equities to raise cash. Many family offices had adequate liquidity and cash reserves to help them weather initial market shocks.

Family offices are now assessing how to move forward. Some remain in a holding pattern, sticking to their asset allocations and investment policies while awaiting more insight into the pandemic’s economic impact. Others are opportunistically harvesting tax losses, helping to reduce their tax risk while maintaining market exposures.

While the speed of the pandemic’s evolution forced families to go on defense in the short term, it’s now stimulating and accelerating longer-term planning. Family offices don’t intend to stay on the sidelines. Instead they’re preparing for a time when assets once again become available at attractive prices. 

Tracking the presidential election with an eye on taxes

Beyond dealing with fallout from the pandemic, family offices closely followed the 2020 presidential election. The forthcoming Biden presidency could mean higher capital gains taxes or the elimination of favorable estate tax provisions. It’s no surprise that families are exploring new strategies for tax management and wealth transfer. Many tax-conscious long-term investors hold stock with substantial unrealized capital gains. Family offices that believe capital gains tax rates will increase substantially over the next few years are now considering harvesting gains before that happens, assessing the future valuation of their investments plus the future of tax rates. 

On the wealth transfer front, families are establishing intrafamily loans as a wealth transfer vehicle, and annual gifting is accelerating because of the opportunity to gift select assets. Declining values for certain assets and low interest rates mean grantor-retained annuity trusts (GRATs) are gaining prominence as a wealth transfer vehicle. GRATs are irrevocable trusts that allow families to transfer appreciation out of a grantor’s estate with minimal to no gift tax. Rock-bottom interest rates add to the appeal of GRATs, since the interest rate used to value the assets transferred into a GRAT will result in a lower- or zero-tax gift. 

The benefits of systematic tax-loss harvesting

Preparing for current and future disasters

In the aftermath of the 2008 downtown, many families spent considerable time and resources preparing for unforeseen shocks. They systematically upgraded their systems and security as they focused on managing risk within their organizations. This meant many family offices had disaster recovery plans in place before the pandemic, which made the transition to working remotely fairly seamless.

The pandemic could lead to permanent changes in the way family offices manage going forward. With families now successfully conducting business virtually, widespread adoption of remote work could reduce the need for expensive office space. The pandemic highlights that the value of a dollar saved is significantly greater than a dollar spent, which could be a powerful lesson for younger family members. 

The ability of COVID-19 to sicken anyone at any time has put the importance of succession planning front and center for family offices. A redundancy or succession plan can help offices anticipate both gradual transitions and sudden changes. Raising this sensitive issue can be difficult in normal times, but this crisis has made it essential. 

The bottom line

We’ve worked with family offices and their advisors since 1992, and we always appreciate the chance to learn from some of the world’s best wealth stewards. This year has sparked special interest in how wealthy families are navigating the challenges of a global pandemic and a critical presidential election. We’ve found as always that families who are resilient, creative, and opportunistic are the ones who survive and thrive. 

Complete the thought: For a fuller perspective on how family offices are revising their strategies in 2020, download our whitepaper.

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