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.