Intra-Family Loans

By: Todd Hall

08/10/20

In a low-interest rate environment, loans to children or grandchildren (intra-family loans) can be an effective way of assisting family members while keeping wealth within the family. Such loans can be for many purposes, such as assisting with the purchase of a home or car, paying off higher interest debt, or starting a business. There are several uses of intra-family loans in more complex wealth transfer plans as well. A properly structured intra-family loan has many benefits, including:

  • lower interest rates for the borrower compared to commercial loans
  • greater flexibility than commercial loans (e.g. any number of years)
  • loans can be made with no credit checks or reporting if desired
  • origination and other transaction fees can be avoided

Interest Rates Used

There is a minimum interest rate that must be charged on intra-family loans in order to avoid adverse tax consequences. The rate that must be charged is called the Applicable Federal Rate (AFR) and is published monthly by the IRS. The rate is based on the term of the loan as follows:

  • Short-term — Three years or less
  • Mid-term — More than three years and up to nine years
  • Long-term — More than nine years

As of August 2020 the AFRs are: 0.17% for short term, 0.41% for mid-term, and 1.12% for long term loans. This means a parent can create a 30-year loan to a child for 1.12%, while commercially available mortgages are around 3%.

Properly Implementing Intra-Family Loans

The IRS presumes a transfer of money to a family member is a gift unless it is properly structured as a bona fide loan. Before implementing an intra-family loan, consult with qualified tax and legal advisors to confirm it is set up properly and will be honored by the IRS. Best practices include:

  • Sign a promissory note
  • Establish a fixed repayment schedule and ensure payments are made
  • Set a rate at or above the AFR in effect when the loan originates
  • Secure or collateralize the debt
  • Maintain records that reflect a true loan transaction
  • Avoid having a prearranged schedule to forgive the loan
  • Lender should report interest income, and if applicable the borrower may deduct interest payments (e.g. for a properly secured mortgage up to a loan size of $750,000)

If properly structured and maintained, intra-family loans are a technique that can have significant benefits for both the borrower and the lender.

HB Named One of the Top 50 RIAs in the USA by FA Magazine

Homrich Berg is pleased to announce it has been named one of the Top 50 RIAs in the USA by Financial Advisor. To see the full list click here.

 

Neither rankings and/or recognitions by unaffiliated rating services, publications, media, or other organizations, nor the achievement of any designation, certification, or license should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Homrich Berg is engaged, or continues to be engaged, to provide investment advisory services. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Rankings are generally limited to participating advisers (see link as to participation data/criteria, to the extent applicable). Unless expressly indicated to the contrary, Homrich Berg did not pay a fee to be included on any such ranking. No ranking or recognition should be construed as a current or past endorsement of Homrich Berg by any of its clients. Homrich Berg’s Chief Compliance Officer (email at casdia@homrichberg.com) remains available to address any questions regarding rankings and/or recognitions, including the criteria used for any reflected ranking.

Andy-Berg

Andy Berg Quoted on Industry Trends in FA Magazine

HB CEO Andy Berg quoted on industry trends in Financial Advisor article featuring interviews with industry leaders. To read the full article click here.

Homrich Berg Named to 2020 Financial Times 300 Top Registered Investment Advisers

ATLANTA – July 30, 2020 – Homrich Berg is pleased to announce it has been named to the 2020 edition of the Financial Times 300 Top Registered Investment Advisers. The list recognizes top independent RIA firms from across the U.S. 

This is the seventh annual FT 300 list, produced independently by Ignites Research, a division of Money-Media, Inc., on behalf of the Financial Times. Ignites Research provides business intelligence on investment management.

RIA firms applied for consideration, having met a minimum set of criteria. Applicants were then graded on six factors: assets under management (AUM); AUM growth rate; years in existence; advanced industry credentials of the firm’s advisers; online accessibility; and compliance records. There are no fees or other considerations required of RIAs that apply for the FT 300.

The final FT 300 represents an impressive cohort of elite RIA firms, as the median AUM of this year’s group is $1.9 billion. The FT 300 Top RIAs represent 39 different states and Washington, D.C.

The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by Ignites Research, a division of Money-Media, Inc., on behalf of the Financial Times (July 2020). The FT 300 is based on data gathered from RIA firms, regulatory disclosures, and the FT’s research. The listing reflected each practice’s performance in six primary areas: assets under management, asset growth, compliance record, years in existence, credentials and online accessibility. Over 750 qualified firms applied for the award, 300 of which were selected (40%). This award does not evaluate the quality of services provided to clients and is not indicative of the practice’s future performance. Neither the RIA firms nor their employees pay a fee to The Financial Times in exchange for
inclusion in the FT 300.

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Advisors Turn to Alts In Rocky 2020

Stephanie Lang, CFA spoke with Citywire RIA Magazine about how alternatives have been a reliable source of yield throughout the recent market turbulence and what this looks like for companies. Read full article here.

Balancing Debt Repayment and Savings Amid COVID-19 Economic Uncertainty

How can you decide between saving for important goals and paying down debt balances? HB Principal Michael Landsberg, CPA, CFP®, CPWA, PFS lists out a few common rules of thumb to follow. Read full article here.

A Fireside Chat with Rupal J. Bhansali & Stephanie Lang, CFA

HB’s CIO Stephanie Lang , on behalf of CFA Society Atlanta, spoke with Rupal J. Bhansali of Ariel Investments about stocks and investing today. To watch the full interview click here.

 

HB Perspective: Stimulus Helping To Fuel Lofty Stock Valuations

By Ross Bramwell

06/08/20

The Fed’s actions are a combination of lessons learned from the 2008 financial crisis and new measures created for today’s unique situation in their attempt to prevent the health and economic crisis from becoming a financial system crisis. Combined stimulus from the Fed, Congress, and the U.S. Treasury currently equals more than 25% of real U.S. GDP this year. It’s becoming easier to understand the concern about the current disconnect between the economic pain on Main Street and the resilience of Wall Street as the economic news continues to be rather devastating for Main Street, including U.S. deaths crossing over one hundred thousand and 40 million Americans filing for unemployment benefits.

Unprecedented Stimulus Has Helped Fuel Stock Rally

One reason for that resilience is that the growth rate in money supply that has gone parabolic (the blue line below) as the government has pumped liquidity into financial markets to keep the economy afloat. However, the velocity of money continues to decline (the yellow line below), which is why inflation in the “real economy” has not been an issue. “Money printing” by the Fed only becomes inflationary if the liquidity pumped into the financial system comes out via the lending channels and flows through the economy. Without increasing velocity, inflation may be absent in the real economy, but can become quite evident in financial assets, such as stocks, where prices can become inflated as a result.

M2 Money Supply Has Gone Parabolic As Velocity As Declined

Source: Charles Schwab, Bloomberg, Federal Reserve as of 4/30/20

The government-mandated shutdown and resulting recession have broadly devastated earnings across companies and industries. FactSet recently reported that Q2 earnings estimates have come down 35% since March 31. To put in context for the full year, the current year 2020 earnings per share estimate for the S&P 500 has declined by 28% to $128 from $178. At the same time, stocks have broadly risen off the March lows based on the hope that the economy’s reopening will be successful, and also on expectation that we’ll develop therapeutics and eventually a vaccine for the virus itself. As an example, since mid-April, the four best-performing days for the Dow Jones Industrial Average, came on days there was a significant medical announcement:

  • April 17: Gilead’s drug Remdesivir showed effectiveness in treating COVID-19 (+705 points)
  • April 29: Positive data about Remdesivir’s trials (+532 points)
  • May 18: Moderna announces early-stage human trials for its COVID-19 vaccine (+912 points)
  • May 26: Novavax announces phase one clinical trial for vaccine; Merck announces plan to work on vaccine alongside IAVI (+530 points)

Stock Rally Has Left Us With Elevated Stock Valuations

With the recent stock market rally and declining corporate earnings continuing to filter through, stock valuations have increased significantly in just a matter of weeks. This has led us to become cautious on U.S. stocks and their return potential over the short term until we see improving economic data. It’s certainly true, fiscal and monetary support has been unprecedented and could ultimately overcome the damage to the economy, but getting 40 million Americans back to work and understanding what the recovery of several large industries, including travel & leisure, retail, and entertainment will look like are still largely unknown.

The below chart shows the S&P 500 Price to Earnings Ratios based on the Last Twelve Months (red line) and also Next Twelve Months (brown line). There is still much uncertainty to future earnings as many companies have pulled their guidance, but both show the rapid rise in valuations. Valuations have rebounded much faster than the economy. In focusing on the Next Twelve Months P/E ratio, it appears that investors are pricing in a ‘V’-shape recovery not only for the economy but also for earnings. However, we believe earnings estimates will continue to come down through the second quarter. We believe much of this rally has been fueled by the unprecedented stimulus provided by the Fed and Congress, which gives us reason for our short-term cautionary view on stocks until the economic data catches up.

S&P 500 P/E Ratios Have Significantly Risen In Recent Weeks

Source: Bloomberg, as of June 3, 2020 for trailing 3 years

Our strategy to navigate these uncertain times continues to be based on principles such as diversification across, and within, asset classes, and rebalancing that trims exposure into strength and adds exposure into weakness. We believe successful investing does not rely on the precise timing of market tops and bottoms, but is about a consistent process over time that reduces risks and keeps investors on track within their financial plans. Please contact a member of your client service team if you have any questions.

 

Disclosures: This is a general discussion of current investment themes, asset classes, and specific investment segments. The discussion includes our opinions and forward looking thoughts and analysis as of June 7, 2020 and is not a guarantee of future investment results. Actual client portfolios are often customized and do not necessarily represent an exact replication of, if any, allocation discussed. This commentary focuses on a wide range of economics and finance issues in order to educate you on the linkages between these topics and their impact on the overall economy and investment markets. The content of this presentation represents the opinions of Homrich Berg regarding these educational topics and should not be interpreted as direct investment advice or marketing of HB services. Information included is from sources believed to be reliable, but which have not been independently verified. Investing involves risks including loss of principal. This document does not constitute legal, tax accounting or investment advice. 

 

Playbook for A Low-Rate Environment

By Ross Bramwell

06/01/20

While much of our communication to date has focused on the impact of the COVID-19 virus on markets, we have also tried to highlight financial planning strategies that are more attractive when interest rates are low and equity markets have experienced a significant pull-back. Now that the S&P 500 is well off the March lows, some of those strategies dependent on depressed asset values are less compelling. However, with respect to interest rates, you may recall that the Federal Reserve had been gradually raising the Fed Funds Rate to reach a “new normal” before the virus hit. Rates have since retrenched (see chart) and the 10-year Treasury yield hit an all-time low in March of 0.54% before rebounding, slightly.  The 10-year Treasury yield is now 1.26% lower than at the start of this year which a significant move given that rates were already low. It now appears that very low interest rates will be with us for the foreseeable future and this presents some opportunities to consider.

As always, please consult with your client service team to determine whether these concepts apply to your personal situation.

ESTATE PLANNING

Certain wealth transfer strategies are relevant in all environments (such as annual exclusion gifting; $15,000 limit per beneficiary) and others may make the most sense in high rate environments (Qualified Personal Residence Trust or QPRTs and Charitable Remainder Annuity Trust or CRTs). Below we highlight strategies that we believe work best in today’s low interest rate environment.

First, it is worth noting that these estate planning strategies make the most sense for those who feel they will have a taxable estate. Currently, the estate tax exemption is $11.58 million per spouse ($23.16 million per couple). That may seem like a very high number but the limit is set to revert to $5 million (inflation adjusted from 2018) in 2026, and estate tax exemptions are notoriously volatile and may be subject to higher scrutiny if we end up with a change of control in Congress. It’s a guess as to whether or not this may occur but suffice it to say that the current limits may decline at some point making these strategies applicable to a wider audience.

  • Intra-family Loans. The simplest strategy entails lending to a family member at a permissible, low rate with the expectation that the assets purchased by that family member will grow at a higher rate than the loan interest. The spread between the investment return and interest rate amount to a wealth transfer free of gift tax. The minimum allowable rate is a function of the loan term and the rates are published by the IRS as the Applicable Federal Rates (AFRs). The June 2020 AFR features a 9-year rate at just 0.43% and a long term rate of 1.01% (e.g. use this for a 30-year mortgage). Loans can be structured as interest-only notes with a balloon payment on maturity.
  • Grantor Retained Annuity Trust (GRAT). An irrevocable trust into which you make a one-time transfer of property, and from which you receive a fixed amount annually (annuity) for a specified number of years. If any property remains in the GRAT after the final annuity payment is made, the property will pass to beneficiaries named in the trust document free of any gift tax. Here, too, this sets up a horse race between the return earned on the investments placed in the GRAT and the interest rate used to compute the annuity but a different minimum rate applies—something referred to as the §7520 rate which is just 0.60% for June GRATS. Because these vehicles are easy and cost-effective to set-up, many choose to establish a new GRAT each year.
  • Installment sale to an Intentionally Defective Grantor Trust (IDGT). This strategy builds upon both the intra-family loan and GRAT concepts presented above to provide enhanced benefits but with more technical hurdles and complexity. We will not cover the details, here, so we present this strategy as an illustration that there are options with even greater complexity and associated increased benefits available to those willing to invest the time and capital to pursue them. We can certainly help you navigate these choices.
  • Charitable Lead Annuity Trust (CLAT). Similar to a GRAT, but with the annual annuity payments going to a charity of your choice. This strategy is appealing to those with both philanthropic and estate transfer goals. The §7520 rate is used to determine the annual annuity payments to charity that would be needed to assure that no gift tax is due when the annuity term is reached, and the remaining value is transferred to the ultimate beneficiaries. Like the two strategies presented above, if the investment assets grow at a rate higher than the required minimum interest rate (currently 0.60%) used for the annuity calculation, then there will be some benefit.

REFINANCING

Rates are up slightly from record lows but remain an opportunity to for those that have not yet acted. Here’s an update regarding rates, recent loan processing delays and tightening credit standards:

  • Low, but not lowest. Mortgage rates reflect the trends in the mortgage bond market more than the Fed’s rate setting and those rates have declined less dramatically than, say, the 10-year Treasury Bond. Even so, rates remain highly attractive.
  • Improved processing capabilities. Some borrowers were deterred from refinancing earlier this year by loan processing delays. Loan processors were initially overwhelmed and struggled to deal with a coincidental surge in applications when rates dropped as they were also suddenly forced to work from home. In addition, many third-party partners utilized by lenders (appraisers and title officers, for example) were also negatively impacted by COVID-19 because they were considered non-essential businesses in some areas of the country. This situation has generally stabilized. Some lenders have innovated to provide all-electronic loan processing, drive-by closings and no-entry home appraisals.
  • Tighter lending standards. Credit conditions have tightened as lenders worry that a borrower’s financial picture may have changed in a way that is not evident on their 2019 tax return. Expect delays and requests for supplemental data to prove creditworthiness. Borrowers should be organized by having W-2’s, tax returns, and recent pay stubs accessible.

The ideas presented above highlight opportunities for achieving your financial goals that are enhanced in a low-rate environment. Because we expect low rates to be with us for some time, there may be little urgency to address these matters immediately and many of them will require further analysis to fully evaluate and deploy anyway. However, we encourage you to discuss the ideas presented above that appear to apply to your unique circumstances with your client service team.

Disclosures: This is a general discussion of current investment themes, asset classes, and specific investment segments. The discussion includes our opinions and forward looking thoughts and analysis as of May 31, 2020 and is not a guarantee of future investment results. Actual client portfolios are often customized and do not necessarily represent an exact replication of, if any, allocation discussed. This commentary focuses on a wide range of economics and finance issues in order to educate you on the linkages between these topics and their impact on the overall economy and investment markets. The content of this presentation represents the opinions of Homrich Berg regarding these educational topics and should not be interpreted as direct investment advice or marketing of HB services. Information included is from sources believed to be reliable, but which have not been independently verified. Investing involves risks including loss of principal. This document does not constitute legal, tax accounting or investment advice. 

Andy-Berg

Andy Berg Weighs in on Financial Planning During and After a Pandemic

Andy Berg spoke with the Atlanta Business Chronicle about some of the issues high-net-worth clients are concerned about, and offered advice for readers in various stages of the retirement and estate planning process. Read the full article here.