Apple Cuts CEO Pay by 51%! Is it time to Sell?

January 16th, 2023

Does Apple’s board know something? Apple has just announced that it cut CEO Tim Cook’s pay by over 50%

Here are five reasons for clients to consider diversifying any Apple holding greater than about 1% of the portfolio.

“Return-Free Risk”: This is the opposite of the risk-free return we hear about. As you know, having a large percentage of a portfolio invested in a single stock increases risk. It adds risk, but doesn’t add expected return. (In fact, it reduces expected return. Ask about our webinar for a full explanation.)

Economic Cycles: Apple, like many technology companies, is exposed to the business cycle. In a recession, technology companies tend to underperform the broader market.

Valuation: Apple has reached a high valuation and its growth rate is slowing down. The P/E ratio is considered high, which means that the stock is overvalued, and it might be a good time to sell.

Regular Portfolio Review: Many advisors approach the issue as part of a portfolio review. If Apple, or any other stock, is significantly overweight, it makes sense to sell the Apple, or other company, and diversify.

Historical performance of other huge companies: As history has shown, even the most successful companies can experience significant stock drops. Recent examples include:

Boeing (stock drop of 52% in 2019, and worse in 2020)

General Electric (stock drop of 58% in 2018, and worse in 2020)

Intel (stock drop of 57% in 2000)

Cisco Systems (stock drop of 78% in 2000-2002)

Microsoft (stock drop of 78% in 2000-2003)

Enron (stock drop of 85% in 2001, and then to zero)

Lehman Brothers (stock drop of 95% in 2008, and then to zero)

How to Avoid Tax on the Sale

Most large gains would result in large taxes if the stock were sold. If you have clients with big gains, chances are one excuse they have for not diversifying is the reluctance to pay big capital gains taxes.

For these clients, a 664 Stock Diversification Trust could be their best option.

Here’s how it works. A stock owner contributes stock to the trust, tax-free. The trust then sells the stock, also tax-free. In fact, the trust is tax-exempt, and you can use it as a tax-deferred investment vehicle. Your clients only pays tax when they receive income from the trust.

If you think a 664 Stock Diversification Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor.

You may also be interested in an upcoming webinar on concentrated holdings, where we discuss the best ways to advise clients with highly concentrated stock positions. To learn when the next webinar is, and register for it, use this form on our website.

Your Clients With Apple Stock: Too Risky?

January 9th, 2023

Apple may be dangerous to your financial health.

A month ago, we discussed the dangers of holding concentrated positions in large, “reliable” companies like Apple.

Since then, Apple has lost nearly $400 billion of market value.

Now, we see four reasons to diversify any large holding Apple.

They are:

1. China exposure

2. Recession risk

3. Earnings risk

4. Multiple compression

 

China

Apple is heavily dependent on China.

Covid and growing criticism of China have made that position extremely precarious. And according to CNN, “reducing [Apple’s] significant dependency on China could take years, if it ever happens at all.”

 

Recession

According to The Wall Street Journal top economists now expect a recession, with 2023 forecasts “increasingly gloomy.”

When the economy is in recession, consumer spending falls. Apple’s products are sensitive to consumer spending, and the company could see demand drop sharply.

 

Earnings Risk

Earnings are what is left after expenses are subtracted from revenues. Apple earnings could get squeezed from both sides, as China problems raise costs, and potential recession cuts revenues.

 

Multiple compression

In bear markets, the price to earnings ratio of stocks often falls. That can create a double whammy for stocks like Apple. If earnings fall, and the multiple decreases, the result could be a significant fall in the price of the stock.

 

Diversification Without Tax

If you have clients with a large holding in Apple, chances are they have big gains. And chances are one excuse they have for not diversifying is the reluctance to pay big capital gains taxes.

For these clients, a 664 Stock Diversification Trust could be their best option.

 

664 Stock Diversification Trust

Here’s how it works. A stock owner contributes stock to the trust. The trust then sells the stock, tax-free. The proceeds become AUM, and the advisor invests the trust assets.

If you think a 664 Stock Diversification Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.

You may also be interested in our weekly webinar on concentrated holdings, where we discuss the best ways to advise clients with highly concentrated stock positions. You can register for, or request a recording of, that webinar using this form on our website.

Helping Your Clients Overcome High Stakes Paralysis

January 2nd, 2023

Happy New Year, everyone! 

This post is part three in our decision-making series, "Are Your Clients Really Irrational?"

Sometimes, even an “easy” decision can be emotionally difficult if the stakes are high enough.
 
And if the decision seems easy, but the stakes are high enough, a good decision maker might well pause and wonder whether he is missing something.
 
For example, each year many people have the opportunity to decide what state to live in. For most people, the decision of where to live depends on more than one factor. But for some, state income taxes can be an “elephant in the room.”
 
Consider, for example, a married couple who like the Pacific Northwest, and earn a combined $500,000. If they decide to live in Oregon, they would pay about $44,000 in state income taxes.
 
Everything else equal, if they live in Washington, they’ll pay zero state income taxes.
 
Over a twenty year period, the difference in state income taxes could easily amount to $1 million dollars. That’s high stakes for most people.
 
One reaction to that difference might be something like “what’s the catch?” A million dollars is a lot of money. Consider someone who has no other reason to prefer one state over another, and for whom saving a million dollars is a no-brainer. That person might still pause, because the amount is so large, and take a second look to be sure he’s not missing something obvious.
 
These kinds of “no-brainer” high stakes decisions can arise in many different areas. However, taxes seem to bring them up often. One reason is that there are so many taxes, the tax laws can be complicated, and some tax laws seem designed specifically to tax people who don’t stop to consider that they might not have to pay as much tax if they choose “A” instead of “B.”
 
“High Stakes Paralysis”
“High stakes paralysis” is the condition of indecision that some people face when they must make a decision which is clear and easy, except for the fact that the stakes are high.
 
Most people who encounter “high stakes paralysis”, almost by definition, only encounter it a small number of times. This is either because they rarely face high stakes decisions, or because if they face many high stakes decisions, they become comfortable making high stakes decisions.
 
Hidden Insecurity?
Some clients will not admit to you that they are afraid to make a big decision, or that they believe they are not really competent to make a big decision. Instead, sometimes these clients will avoid making a decision, or they will offer supposed reasons that are in fact merely excuses. If you take those reasons at face value, you are probably wasting your time, because those reasons are excuses, and as soon as one is answered the client will generate another. All because the client cannot, or will not, admit that he is just stumped.
 
Dealing With High Stakes Paralysis
In dealing with high stakes paralysis, the first step is to clarify that it is in fact the high stakes, and not some other aspect of the decision, that is giving the decision maker a hard time.
 
As noted in the first part of this series, there are typically five factors that can make it hard for people to decide. In addition to high stakes, the others are:
 
Conflicting Goals
Complexity
Uncertainty about outcomes
Small differences between outcomes
 
To help a client dealing with “big decision” paralysis, who is privately afraid of making “the wrong” decision, walk through his issues with him. While all decisions are likely to have several factors making them hard, if you can identify the key difficulty your client is facing, you are in a better position to help him get past that difficulty.
 
Once you identify high stakes as the key issue, the next task is to get the client to discuss what he’s afraid of.
 
Is he afraid that there’s a hidden “gotcha?”
 
For example, someone who moves from California to Texas, looking forward to eliminating his state income tax, might not believe that it is so easy. In addition to consulting with a state tax expert, you might note that the US census bureau reported that between April 2020 and July 2021, over 300,000 people left California for lower tax states. There are costs – such as the cost of missing friends, the cost of moving, of making new friends, and so on. But your client probably already understands those. But he might still be worried that he’s missing something crucial.
 
If neither you nor the client can identify the “hidden gotcha” but the client is still afraid, try to help the client understand that not making a decision is not free. Every year the client lives in California, instead of Texas, he pays a ton of extra taxes; taxes that are in effect optional. Of course it’s your client’s choice to pay extra taxes. But just make sure that the client owns his decision to pay more taxes.
                                                                                                               
Non-Decisions Are Usually Costly Decisions
The above example of someone not moving because he won’t make the decision is typical of non-decisions.
 
Non-decisions are in fact decisions, and often lousy ones. You cannot make your client make a decision. But you can at least try to make sure the client knows that a non-decision is still a decision, and one that he’s responsible for.
 
As a result, the client is likely to get relatively lousy outcome, compared to what is possible with even basic planning. He’ll pay a ton of tax, he’ll accomplish zero estate planning (meaning he’s teeing up another big tax when he dies), and, ironically, he’ll have less flexibility (because he’ll have less) cash if he does choose to enter a new business.
 
Key Decision Skill #2 – Identify and Overcome Fear of a Big Decision
Any decision that is both hard and important is likely to have high stakes. If the stakes weren’t high, you as and advisor probably wouldn’t be involved.
 
Sometimes a client’s real difficulty is simply fear. If so, your client is not alone.
 
Alice Boyes, writing in the Harvard Business Review, advises
 
“Don’t be ashamed or afraid of your fear of making mistakes and don’t interpret it as evidence that you’re indecisive…”[1]
 
Boyes also advises not to try to eliminate fear. Most people cannot, and don’t have to. They have to act in spite of their fear, or anxiety.
 
Part of the advisor’s role is to stand with his client, and help the client make a fear-inducing decision.

 
[1] Alice Boyes, How to Overcome Your Fear of Making Mistakes, Harvard Business Review, June, 2020

We will continue to discuss key decision skills in the remainder of this series on decision making. Stay tuned to our blog for more updates.

Are Your Clients Really Irrational? Part Two

December 26th, 2022

We’ve all faced conflicting goals, and it can seem like it happens all the time.
 
For example, when was the last time you worked, when in an ideal world you’d have been doing something else?
 
Maybe you decided to go to work because you really wanted to close a sale, even though part of you really wanted to golf instead.
 
Conflicting goals are part of life. Most of us have figured out relatively effective methods for making decisions even when there are two (or more) goals that conflict.
 
When goals really conflict, it means we cannot achieve both, at least not in the same way at the same time.
 
And sometimes clients are in denial about that fact.
 
Business Example
I’m pretty sure you could come up with dozens of examples on your own.
 
Here’s one that I ran into today. An advisor had a client selling a business. The client is in his sixties, married, with kids. The business has been very successful, and the client is selling out to a much larger firm in the same industry.
 
The pre-tax proceeds will be about $11 million. The gain is largely capital gain, but there’s also recapture on various assets that have been depreciated, as well as some real estate recapture. Overall, the estimated tax bill, between state and federal and the above recapture, will be around $3,500,000.
 
This client was all over the map in terms of his conflicting goals. He tells his advisor that he is horrified at the tax bite. But he also wants to take his chips off the table while the opportunity exists. He doesn’t want to work anymore. But he might want to reinvest in some new business. And he doesn’t want to make any estate planning decisions, even though with the sale his estate is likely to exceed the estate tax exemption.
 
Is this starting to sound familiar? [click here for “sounds familiar”] A client who wants everything, and isn’t willing (or says he’s unwilling) to make any tradeoffs?
 
Non-Decisions Are Usually Costly Decisions
The above mentioned business sale looks like it will close, and the client has made no decisions. He says that he doesn’t want to decide. Instead, by “not” deciding, he is deciding in favor of the default plan – actually no plan – that just happened to be in place by historical accident.
 
As a result, the client is likely to get relatively lousy outcome, compared to what is possible with even basic planning. He’ll pay a ton of tax, he’ll accomplish zero estate planning (meaning he’s teeing up another big tax when he dies), and, ironically, he’ll have less flexibility (because he’ll have less) cash if he does choose to enter a new business.
 
You Can’t Have it All
At least as there are death and taxes, you (or your clients), can’t have it all.
 
We can’t be in two places at once. We can’t have our cake and eat it too. We can’t take our gains off the table, and still have all the upside potential.
 
You know that. And your clients know it too, deep down.
 
But too often, clients somehow refuse to make what seems to the advisor like an obvious decision.
 
How to Help Clients Choose Between Conflicting Goals
Often the best way to help a client choose between conflicting goals is to simplify.
 
Most real world choices have multiple aspects. Almost any planning will involve some complexity, at least in the details.
 
In 1939, Albert Einstein (along with Enrico Fermi and Leo Szilard), persuaded Franklin Roosevelt to allocate an enormous sum of money to the theory that an atom bomb could be built.
 
How did they convince Roosevelt? Did they attempt to explain nuclear physics to the president? No.
 
Did they try to explain to Roosevelt why they believed that such a bomb was possible?
 
No.
 
Did they discuss the engineering challenges? Or the probable side-benefits even if a bomb were not possible?
 
None of the above
 
Instead, they focused one key decision factor: if it turned out the bomb were possible, what would the world look like if Hitler had it and the US didn’t?
 
They got Roosevelt to focus on the most crucial issue for Roosevelt, and they ignored everything else.
 
Simplify to the Key Choice
A client wants to liquidate, but doesn’t want to pay tax. You have a method that he can sell without paying tax, but it comes at the price of (say) not having liquidity.
 
If the client wants both liquidity and to avoid tax, that choice, to the exclusion of everything else, needs to be made clear to the client.
 
For example, in the above $11 million business sale, the advisor might frame the decision as something like “is it worth $3.5 million of taxes to you, Mr. Client, to avoid having to make a decision about the proposed plan?” (The advisor was proposing a trust that would shelter the gain.)
 
Conflicting Goals
Try to get the client to be clear about all his, her or their (in the case of couples, families or partnerships) goals.
 
You know how to do this by asking questions.
 
Then try to get them to rank their goals.
 
Many clients will claim that all their goals are “top priorities.” But that is not reality. Your client knows this. But sometimes they are paying you to make them behave like adults.
 
Making difficult choices, saying “I’m not willing to pay $3.5 million in taxes; I’d rather have less liquidity” is an adult decision. Refusing to decide (which, as we said, is actually still a decision, though a bad way to make one) is not an adult behavior and is not, in all likelihood, how your client became successful in the first place.
 
Key Decision Skill #1 – Focus on the MOST IMPORTANT Tradeoff
Any decision that is hard likely involves tradeoffs. If there are no tradeoffs in a situation, there is no decision to be made.
 
But when there are multiple conflicting goals, and the client is having a hard time deciding, there is significant evidence that helping the client focus only on the most important tradeoff, then decide on that basis, results is better decisions than other approaches.[1]

We will continue to discuss key decision skills in the remainder of this series on decision making. Stay tuned to our blog for more updates.

Are Your Clients Really Irrational? Part One

December 19th, 2022

Over the past thirty years, oceans of ink have been spilled promoting the idea that, in effect, your clients are stupid. Or if not stupid, “irrational.” The academics will have us believe that people, clients, are hopelessly “biased” in their decision making.

I was at Stanford when I first encountered the claim that people are systematically biased decision makers. It was 1982. In the bookstore there I found a collection of academic papers titled Judgment Under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman and Amos Tversky. Tversky was then at Stanford. Academia loves certain ideas, and this one caught on like wildfire. Kahneman won the Nobel Prize for it.

But the idea has gone way overboard.

I don’t know your clients (at least I don’t know most of them personally), but I know people like your clients, and they are not stupid (not most of them, anyway.)

But it is not fair, or helpful, to claim that merely because clients don’t make decisions exactly the way that academic theory says they should, your clients are “irrational.”

How the Academics Say Your Clients “Should” Decide

Please don’t feel like you need to understand the following. I’m including it here so you have an idea of what Nobel Prize-type academicians have in mind when they talk about “rational” decision making. The following is a long quotation from the Stanford Encyclopedia of Philosophy:[1]

 

Here is a different representation of how a rational person “should” decide:

I do not say the above is wrong. In fact, when I was at Stanford, I had the privilege of studying decision science with one of the giants in the field, a wonderful professor named Ron Howard. Professor Howard actually coined the term Decision Analysis. I have tremendous respect for him.

However, for most people, it is not realistic to expect that they will make the significant effort required to learn the technical tools required to make “rational” decisions according that

Only that it is quite a bit to expect. Most people, even very smart, very rational people, do not use such procedures.

Your clients are not stupid, and they are probably not really irrational. But, they can probably also (at least sometimes) use some help in making decisions.

What Makes Real World Decisions Hard

In our experience over the years, working with hundreds or thousands of people, including advisors and their clients, we have learned that it is not ignorance of the technical theories that make decisions hard.

Instead, there are about five distinct factors that can make decision hard for real people. These are:

  • Conflicting Goals
  • High Stakes
  • Complexity
  • Uncertainty about outcomes
  • Small differences between outcomes

We will look at each of these in the remainder of this series on decision making. Stay tuned to our blog for more.

 



[1] https://plato.stanford.edu/entries/decision-theory/#WhaPreOvePro

Death And Taxes

December 12th, 2022

Are your clients paying more than their fair share of taxes? The chances are high that they feel they are. And the statistics suggest they might be right.What Level of Taxation is Fair?The US Government claims that “taxes are the price we pay for a civilized society.” That claim is based, more or less, on the idea that taxes are to used to pay for goods and services that benefit everyone. A classic example is police, and another is national defense. But today, such expenditures for the common good account for a small fraction of US government spending. By some estimates, 80% or more of the US federal government expenditures are “transfer” payments. A “transfer” payment is money that is taken by taxes from one person and paid to another. The US defense budget, as large as it is, as a percentage of federal spending is smaller than it has been at any time since before WWII. Top 10% of Earners Pay 71% of the Income TaxesTo be in the top 10% of income earners in the US requires income of about $132,000 a year. That includes two income couples. So, for example, two people, who each earn just over the national average, will together be in the top 10%. Chances are that many of your clients are in this top 10%, and for that are among those  paying the 71% of income taxes paid. So if your clients believe they pay too much in taxes, chances are, they are right. What Can You Do About It?For the taxpayers in the highest tax brackets, tax rates can easily exceed 50% in many states. But there are steps you, and your clients, can take that can reduce the severity of the tax bite. Four tools that you should be familiar with are:
  • Section 642 Income Trusts
  • Section 664 Tax Exempt Trusts
  • Donor Advised Funds (Deferred Actual “F”ilantrophy funds)
  • Private Foundations
To learn more, you may check out our page on year-end tax savings. If you are interested, you may also schedule a meeting with Sterling Advisor Solutions.

The Bigger They Are, The Harder They Fall; Is Apple Next?

December 5th, 2022

We all know how successful Apple has been historically.
Or do we?
We’ve heard from a number of people, including some advisors, who say that Apple will always grow.
At worst, these people say, “Apple will maintain its position as the world’s most valuable company.”
The unspoken assumption is that the stock is a “forever” hold, even if the position held is a large, concentrated one.

China Syndrome?
Recent criticism of Apple, even from left-leaning outlets like the NY Times, increases the risk for Apple. The Times says, in a 2021 article, “Apple has largely ceded control to the Chinese government.” China could be the trigger that causes Apple to lose its polish.

History of the Top Dog
But concentrated positions are dangerous, even in stocks as “stable” as Apple.
The historical data shows that even market leading companies like Apple can, and do, plummet.
Here is a short list of once-great American companies that have fallen on hard times. Most of these went bankrupt and disappeared:

  • ATT
  • Bell Labs (Lucent – went to zero)
  • GE
  • GM (Bankrupt)
  • Sears (Bankrupt)
  • TWA (Bankrupt)
  • Pan Am (Bankrupt)
  • Texaco (Bankrupt)
  • Chrysler (Bankrupt)
  • AIG
  • Washington Mutual (Bankrupt)

Utilities Are Not Exempt
Even public utilities, once considered the ultimate “widows and orphans” stocks, are not exempt. Here’s a short list of some of the more prominent utilities that have gone bankrupt

  • Pacific Gas and Electric (twice!)
  • Portland Genera (Enron)
  • Griddy
  • Brazos Electric

Here are a few charts that show GM and GE, former industry giants, crashing to zero around 2009/2010:



Tech Stocks are Not Immune
Many advisors and clients have already felt the hit that big tech stocks have taken in the past year or so.
Netflix had a dramatic nosedive earlier this year. Facebook and Google have experienced similar plunges.
Google lost 44% of its value in 2022, and Facebook lost nearly 77% of its value in the same time period.



Even forward-thinking big tech companies are prone to periods of significant loss.

Could Apple Be Next?
While Apple has been good to its investors recently, that wasn’t always the case.
From 1998 to 2003, Apple stock price soared, just as it is doing today; then it fell just as rapidly.


And current data shows that Apple may be headed towards falling again.
Below is a graph of Apple, Facebook, and Google since 2012, when Facebook/Meta opened.




Notice that Apple, in orange, has largely followed Facebook (or META, in blue) and Google (in green) on the upward trend in 2020 and 2021.
It’s not hard to see how Apple may be just as susceptible to dropping as its contemporaries did.
Many clients feel as if Apple is “too big to fail.” But as we’ve seen with companies like GM, GE, and even recent powerhouses like Netflix, there is no such thing.

How To Get Out Before It’s Too Late
If your clients (or you!) have concentrated Apple stock positions, the safest and smartest thing to do is to diversify.
But stockholders are often reluctant to sell such positions, as they would face a huge tax hit in the event of a sale.
Luckily, there is a solution.

Sec. 664 Stock Diversification Trust
A good solution for many is a tax-exempt Sec. 664 Stock Diversification Trust.
Here’s how it works. A stock owner contributes stock to the trust. The trust then sells the stock, tax-free. The proceeds become AUM, and the advisor invests the trust assets.
If you think a Sec. 664 Stock Diversification Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.

You may also be interested in our weekly webinar on concentrated holdings, where we discuss the best ways to advise clients with highly concentrated stock positions. You can register for, or request a recording of, that webinar using this form on our website.

Crypto - Opportunities for Advisors and Clients

November 28th, 2022

Bitcoin, along with the rest of the “crypto” universe of assets is down roughly 75% from recent highs.
 
Many of your clients who own Bitcoin or similar assets will have losses.
 
However, those who have been invested for a longer time may still have huge gains.
 
Fundamental Value
There is a strong case that the fundamental value of issues like Bitcoin is zero. Here is a short argument for that case.
 
The bullish case for crypto “currencies” is that they, or one of them, will become the commonly used medium of exchange. That is, they will become money.
 
Money, by definition, is that asset in an economy which is the most liquid and is the most widely accepted asset in exchange. In the US, the dollar is money, and nothing else is money. For example, credit cards, checks, ACH, bank wires, and PayPal are all methods of payment. But what is paid is dollars.
 
Historically, going back to the at least to the time of Alexander the Great (he died 2500 years ago), money has always had a relatively stable value. When money ceases to have a stable enough value, it ceases to be used as money. (We wrote a book on inflation, available here, if you want to read over 100 pages on the history of money).
 
Demand for Crypto
People demand money because they want to use it for transactions, in the present or in the future. (See, e.g. chapter 17 of Human Action, by the 20th century economist Ludwig von Mises.) To serve this role, and therefore to be demanded, the exchange value of money must be relatively stable.
 
People demand crypto, so it seems, for precisely the opposite reason. They demand crypto as a speculative asset. Most people (possibly excluding a small number of aficionados, and some unknown number of criminals) buy and hold crypto because they believe (or hope) that it will go up in exchange value. That is, they buy (if they buy) say Bitcoin at $16,000 because they believe (or hope) that it will go up to (say) $30,000 in a short period of time.
 
We believe that “crypto”, at least in the form of issues like Bitcoin, is not a currency, and is unlikely to be a currency. When people stop holding Bitcoin and similar cryptos because they believe the exchange value (i.e. the price in money) will rise, we believe the demand for such cryptos will virtually disappear. In that event, the value could go toward zero.
 
US Taxation
Bitcoin (and presumably other similar cryptos) are in the US taxed as capital assets. That means, for example, that if a client owns a Bitcoin with a basis of $1000, and uses it to buy a car for $16,000 (to use a current market price of a Bitcoin), that client will have a taxable capital gain when he “purchases” the car with the Bitcoin.
 
That’s the downside of capital treatment.
 
The upside is that it is possible to avoid taxation on the sale of crypto held for long term gains by using one of several appropriate techniques.
 
Section 664
One such technique is to contribute the appreciated crypto to a trust that qualifies as tax exempt under section 664 of the code.
 
Capture AUM
For clients who have appreciated crypto, a 664 trust can be a great opportunity to take profits without incurring tax. And for advisors, such a trust can be a great opportunity to gather AUM, while helping a client take profits, avoid tax, and diversify out of a highly risky asset.
 
If you think a Sec. 664 Tax Exempt Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.

Time To Sell Commercial Real Estate?

November 21st, 2022

Commercial real estate, as an asset class, is very sensitive to the availability, and pricing, of loans. The graph below shows the history – the black line – of the prices of US commercial real estate going back almost 30 years. Also on the graph are loan demand – blue – and lending standards, shown in red. As makes sense, when loans are easy to get, that tends to boost the demand for commercial real estate. And when loans are hard to get, demand, and therefore prices, tend to suffer. The sharp fall in the red and the blue lines suggest that a credit crunch has begun. Prices have begun falling, but if the last go-around is any indication, they could fall much farther.

Your ClientsSome of your clients own investment properties – which are considered commercial real estate. Apartments, shopping centers, strip malls, office buildings, self-storage, medical buildings, parking lots, industrial property, even raw buildable land will all likely be affected by a credit crunch. If you have clients with such property, now might be a good time for them to lock in profits.TaxesMany clients will not want to sell because they don’t want to pay taxes on gains. There are two main sections of the tax code that such clients might be able to use to sell and not pay tax. These are sections 1031, and 664. Section 1031 provides for tax-free exchange of one real estate property for another. The limitation, of course, is that if the client wants out of real estate, 1031 won’t do that. Section 664 allows for the tax-free transfer to trust, and the tax-free sale by the trust, of qualifying real estate.Sec. 664 Real Estate Shelter TrustA good solution for many is a tax-exempt Sec. 664 Real Estate Shelter Trust. Here’s how it works. A stock owner contributes stock to the trust. The trust then sells the stock, tax-free. The proceeds become AUM, and the advisor invests the trust assets. If you think a Sec. 664 Real Estate Shelter Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.

Bear Market Signal

November 14th, 2022

There have been two extended bear markets in the last thirty years. One followed the dot.com collapse in 2000, and the other was associated with the financial crisis.

The chart below shows the weekly S&P 500, in blue, along with its 50 week moving average (green) and its 100 week moving average (red).

The 50 week moving average crossed the 100 week moving average on the way down twice. Each time, it signaled a several-years long bear market.

The first time, in 2000, the market declined until 2003. The second time, in 2008, the market declined much faster, and more steeply. The circle labeled “3” shows that the 50 week is poised to plunge through the 100 week.

Is this signaling a bear market?

Locking In Gains

Some advisors are urging clients to lock in gains, on entire portfolios, and especially on large positions.

Other advisors are advising taking profits on all positions, large and small, that have big percentage gains.

The problem, of course, is taxes.

Taxes

Capital gains taxes on sales of appreciated positions are a return killer. For most significant gains, the capital gain tax plus state income tax ranges from 23.8% all the way up to 37.1% for those unfortunate enough to be subject to California tax.

But there are some ways to avoid tax on sale.

664 Trust

Many owners have large gains, and would face a large tax if they sold. The desire to avoid paying tax is often a primary reason stockholders that should sell, don’t sell.

A good solution for many is a Sec. 664 Stock Diversification Trust.

A Sec. 664 Stock Diversification Trust is a tax-exempt trust that allows stockholders to contribute their stock to the trust so that the trust can sell their stock, tax-free. The proceeds of the sale can be reinvested by the stockholder's financial advisor, allowing the assets to grow tax-free. The client does not have access to these assets, but does gain the right to an annual income stream of up to 5% of the assets; this can be deferred to allow the assets to continue growing inside the trust, tax-free.

A Sec. 664 Stock Diversification Trust is often a great solution for clients who want to remove the excess risk they face from their concentrated holdings but are resistant to pay the heavy taxes on such a sale.

If you think a Sec. 664 Stock Diversification Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.

Greed Is Back

November 7th, 2022

Greed is back. And that might be a great opportunity for investors holding concentrated positions in a stock who didn’t get out earlier.
 
As we all know, after a terrible first three quarters, the stock markets have bounced sharply.
 
But is it a new bull market?
 
The Greed Index suggests not.
 
CNN Money compiles their Fear and Greed index.
 
It has made huge jump toward Greed. Here’s a picture.
 

 
Why It Matters
If you have clients who have a concentrated stock position, the markets’ mood swing might offer a second chance for them to get out.
 
And you should know about a way for them to get out without taking the tax hit.
 
Taxes
Many investors with concentrated positions don’t want to sell because they don’t want to incur pay steep capital gains taxes.
 
A good solution for many is a tax-exempt Sec. 664 Stock Diversification Trust.
 
Here’s how it works. A stock owner contributes stock to the trust. The trust then sells the stock, tax-free. The proceeds become AUM, and the advisor invests the trust assets.
 
If you think a Sec. 664 Stock Diversification Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.

You may also be interested in our next Stock Webinar. You can register using this form on our website.

Breaking: Home Prices Have Peaked

October 31st, 2022

Home prices have been crashing in English-speaking countries including Canada, New Zealand and Australia.
 
Now, the most recent data show that house prices have peaked in the US, and are trending down.
 
It’s in the headlines too.
 
Bloomberg Headline:

Australia House Prices Record Steepest Drop in Four Decades

  • Sydney again led declines, falling 2.3%; Brisbane dropped 1.8%
  • Housing market seen remaining under pressure from rate hikes
 Hong Kong’s South China Morning Post:

Home prices poised to fall in Hong Kong, Australia, Canada, France and the US as global central banks raise interest rates

The most recent data show that prices have now peaked in the US too.
 


After the last peak in 2006, house prices gently turned down almost two years before the crash. Over about six year, the Case Shiller index dropped 28% from its peak. So far this time, prices are down only a couple of percent.
 
The house price bear market last time lasted about six years. If the pattern repeats, owners should have time to get out well above the bottom, even if prices are down from their highs.
 
Taxes
Many owners have large gains and would face a large tax if they sold. The desire to avoid paying tax is often a primary reason property owners that should sell, don’t sell.
 
A good solution for many is a tax-exempt Sec. 664 Real Estate Shelter Trust.
 
A property owner contributes property to the trust. The trust then sells the property, tax-free. The proceeds become AUM, and the advisor invests the trust assets.
 
If you think a Sec. 664 Real Estate Shelter Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.

Your Clients Who Own Apartments

October 24th, 2022

So far this year, multi-unit building (i.e. apartment) starts, are up 17.6%.  Huge numbers of housing units are at various stages of completion, with the number of homes under construction at the highest level on record back to the 1970s.
 
In fact, the data show that multi-family deliveries are at their highest level since 1986!



At the same time, household growth and population growth are at their lowest levels since the Civil War. See the below graph from the Pew Foundation.



Economics 101
Basic economic theory, and tons of experience, both tell us that, everything else equal, if supply increases, price (in the case of apartments, rents, as well as building prices) will fall.
 
Economic theory, and experience, also tell us that, everything else equal, as demand falls, so will prices.
 
It appears that apartments are about to be hit with a double whammy – record high supply, along with record low demand growth.
 
Action
If you have clients with apartments who might want to sell, either to diversify, or to get out before the market falls more, or for any other reason, there are several alternatives that can save your client taxes. One of these is the Sec. 664 Real Estate Shelter Trust. We can also provide you with a twenty-page Advisor’s Guide to Appreciated Real Estate, for free.

Click here to request your copy of your complimentary advisor guide.
 
We’re also happy to discuss any individual client situations with you. Please contact Connor Barth ([email protected]) or Ryan Whiting ([email protected]), or call (703) 437-9720 and ask for Ryan or Connor.

Evidence Of A Top

October 17th, 2022

Sales of existing homes have fallen every month this year since February.
 
And now, there is growing evidence that prices have peaked too.


While some “experts” see falling real estate prices as a good thing – supposedly falling prices ease the “affordability crisis” - real estate owners are not likely to agree.
 
We’re hearing from many advisors that more and more real estate owners are looking to sell their real estate. The main reasons, not in order, are:

  1. lock in gains
  2. reduce the amount of risk
  3. diversify out of an overweight position, either in a specific property, or real estate in general
  4. get away from the hassle of managing real estate
The biggest factor holding these people back from selling is the reluctance to pay a huge chunk of their gains in taxes.
 
The two most common solutions for these owners are:
  1. 1031 tax-free exchange into other real estate
  2. 664 Real Estate Shelter Trust, allowing full diversification 

You almost certainly have clients or prospects with appreciated real estate, and some of these probably should be diversifying out of real estate.
 
We don’t do 1031s, but we do 664 Trusts. A 664 Real Estate Shelter Trust can allow your clients to sell their real estate, without paying tax. You’d then invest the proceeds.
 
If you’d like discuss whether a 664 Trust , please contact Connor Barth ([email protected]) or Ryan Whiting ([email protected]), or call (703) 437-9720 and ask for Ryan or Connor.
 
And please feel free to call, or email us, to discuss any situation or ask questions. If you have a client situation where you think we can be of help, you can schedule a meeting with Sterling Advisor Solutions using a form on our website.
 
P.S. If you’d like a chart of real estate values for your area, please fill out the form on our website.