San Diego, CA – Centura is proud to announce that Derek Myron, the company’s Managing Director, was featured in the recent wealth management roundtable organized by the San Diego Business Journal (SDBJ).
The roundtable discussion brought together eight of the region’s leading financial planners and wealth managers to share their expertise and advice on retirement planning and estate planning management.
Derek Myron’s Experience and Commitment to Helping Others:
With over 25 years of experience, Derek Myron has been serving high net-worth individuals and families since 1998, assisting them in the creation and implementation of carefully crafted plans to achieve both their financial and life goals. His dedication to helping others reach their highest potential, both professionally and personally, has been his guiding principle throughout his career.
Strong Foundation and Qualifications:
Growing up in a two-parent-teacher household that emphasized academic excellence and community service, Derek developed a strong foundation of values centered around education and helping others. He earned his undergraduate degree in Business Administration with a Finance concentration from the University of Washington and has held the Certified Financial Planner (CFP(R)) designation since 2001.
Passionate about Liberated Wealth® Plans:
Passionate about making a positive impact on his clients’ lives, Derek finds great joy in developing and implementing Liberated Wealth® plans for Centura Wealth Advsiory’s clientele. By facilitating an impactful change to their financial well-being, he helps them achieve their life goals with a focus on long-term prosperity.
The Great Retirement: Insights From Wealth Management Expert, Derek Myron
The latest issue of the San Diego Business Journal magazine’s Wealth Management section explores the challenges faced by Baby Boomers, the generation born between 1946 and 1964, who currently represent 28% of the U.S. population. With retirement rates rapidly accelerating, approximately 75 million Baby Boomers are expected to retire by 2030, marking a significant shift in the demographic landscape.
Top Concerns for Retirement Planning
As Baby Boomers approach or enter retirement, ensuring financial stability throughout their golden years becomes a paramount concern. Factors such as longer life expectancy, rising healthcare costs, and market volatility contribute to the complexity of retirement decisions. Navigating the financial path during retirement presents challenges that require careful consideration and expertise.
The Largest Intergenerational Wealth Transfer in History
In addition to retirement planning, Baby Boomers face the task of transferring wealth to their children, marking the largest intergenerational transfer of wealth in history. However, despite the magnitude of this responsibility, a majority of U.S. households lack sufficient plans in place to effectively manage this transition. Many individuals overlook the opportunity to seek guidance from wealth managers and financial planners who possess the expertise to structure comprehensive plans that facilitate the growth and management of wealth.
Let’s review Derek’s insights.
What potential challenges can arise during the transfer of a family business, and what are the associated complexities? When passing on a business, what are the primary goals to consider: fairness or equality?
Derek Myron explains the complexities associated with passing on a family business: “A family business can be extremely complicated to pass on and continue running after the death of the primary owner. This often arises due to family dynamics, disproportionate involvement in the business, and various other factors… Should it be passed on to those involved, benefiting them more than others? Or should it be divided equally… The right solution depends on the facts, circumstances, and preferences of the business and family. Proper business succession planning is crucial…”
What are common issues/problems heirs may encounter that wealth managers can help with?
Derek Myron sheds light on the issues heirs may face and how wealth managers can assist: “A good estate plan allows heirs to inherit wealth with help and support in how to manage it… Certain assets can pose challenges for heirs… Having a competent, experienced, and qualified financial advisor will help assess whether your current estate plan aligns with your goals and make necessary modifications as needed. They can also assist in setting up business succession plans, facilitating the sale of directly managed real estate assets, and transitioning into syndicated deals where management is delegated… without proper planning, wealth can become burdensome.”
What actions can be taken to Mitigate Tax Exposure in a Trust/Estate Plan?
Derek Myron provides insight on actions that can be taken to mitigate tax exposure in a trust/estate plan. He explains: “At present, gift tax and estate tax exemptions are around $13 million per individual and around $26 million per married couple… the exemptions will sunset on Jan. 1, 2026, back down to the level pre TCJA; adjusted for inflation… anyone with assets expected to exceed these estate tax exemption levels in 2026… should consider the design and construction of their current wealth transfer plans.”
Centura’s Ranking in San Diego Business Journal’s List of Wealth Management Firms
Centura Wealth Advisory has secured the notable position of #22 on the San Diego Business Journal’s list of wealth management firms. SDBJ’s list was ranked by assets managed locally for fiscal year 2022.
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.
Disclosures
Centura Wealth Advisory does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither attorneys nor accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
SDBJ’s Wealth Management list was ranked by assets managed locally for fiscal year 2022. The ranking should not be viewed as representative of any one client’s experience and should not be taken as an indication of performance by Centura and any of its clients. SDBJ requested Centura to participate in the special report. Centura paid a fee to participate in the special report.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1432326796.jpg14242106centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-06-16 18:41:002025-04-08 16:22:16Centura’s Managing Director, Derek Myron, Featured in San Diego Business Journal’s Wealth Management Roundtable
A PPLI policy can be a highly effective solution for both privately held business owners and high net worth individuals/families seeking tax efficient cash accumulation.
PPLI is an elegant type of variable life insurance contract that leverages the tax advantages of traditional coverage and provides access to a wider array of investment options. If structured properly, funds may be allocated across a highly customized pool of investments. Surplus premiums (premiums paid in excess of death benefit costs) are added to the policy cash value, growing tax deferred. PPLI can serve as an excellent strategy for mitigating ongoing income taxes, acting as a tax efficient wrapper for assets that:
Generate high levels of tax inefficient income, such as private credit or high-turnover hedge funds.
Are expected to significantly increase in value within the foreseeable future, and will ultimately be prepared for disposition.
Typical PPLI Candidate:
Net worth of $10 million or greater
Access to significant liquidity
Ability to fund $2-$5 million, cumulative within the first five years
Appetite for alternative style investments
Desire for sophisticated income tax & wealth transfer planning
Common Investments Inside PPLI Include:
High Turnover Hedge Funds
Private Credit
Direct Lending
Real Estate
Private Equity
Traditional Mutual Funds
Investment Customization Vehicles Include:
Off-the-Shelf Platform Funds (predetermined fixed menu of VITs & IDFs already available)
Institutional Pricing (typically < 100 bps per annum)
Trades investment tax drag for costs of insurance
No Surrender Charges
Favorable Policy Lending Terms
PPLI Discovery Process
The financial advisor and client collaborate to determine the client’s investment objectives, risk tolerance, as well as income tax & estate planning needs.
A risk/return analysis is conducted. The financial advisor works with the client to create a customized policy that meets their specific investment goals and tax planning needs. It includes review of cost to set-up and administer.
PPLI Policy in Action
Initial Set UpGrantors draft an irrevocable trust that will own a life insurance policy.
Contribution of FundsFunds are contributed to the trust, which are used by the trustee to purchase a PPLI policy.
InvestmentLiquid funds are allocated to various investment options within a separate account managed by an independent financial advisor.
Tax Favored Access to Policy ValueOver time, any investments acquired in the account grow tax-free. The policyholder can access funds tax-free by taking loans against the policy’s cash value. Upon policyholder’s death, the death benefit is paid out tax free to beneficiaries named in the policy.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1457585755.jpg13792173centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-06-15 18:49:002025-04-08 16:43:27Private Placement Life Insurance (PPLI)
Private Placement Life Insurance (PPLI) is a financial tool that offers unique benefits for high net worth individuals. PPLI is a form of life insurance designed for accredited investors and qualified purchasers, providing a broad range of investment options with significant tax advantages.
In this article, we will explore the benefits of PPLI and compare it with traditional life insurance coverage.
What is PPLI?
In a nutshell, PPLI serves as a tax efficient wrapper for tax inefficient assets. It is essentially a tailored variable universal life insurance policy that is offered exclusively to accredited investors and qualified purchasers, allowing for a wider array of investment options that can include alternative style investments (i.e., such as private equity, private credit, hedge funds, etc..). These policies are treated as private offerings that when structured properly, can be highly customized to suit the policy holder’s needs & investment philosophy. PPLI is often designed as a highly tax efficient investment vehicle that provides tax-deferred growth on the policyholder’s underlying investments as well as tax favored distributions from the policy.
How Does PPLI Work?
The Mechanics of PPLI:
PPLI operates similarly to cash value universal life insurance contracts. It provides a death benefit to beneficiaries when the insured passes away. The policyholder pays an insurance premium, which, after deducting insurance fees, is allocated to an investment mechanism that generates a cash value component. The growth of this cash value depends on the net performance of the underlying investments and the deduction of ongoing insurance charges. If the investment performance exceeds the policy charges in a given year, the cash value increases. As long as the cash value remains above zero, the policy remains active.
Maximizing Premiums within IRS Limits:
In PPLI, policyholders often pay the maximum allowable premium relative to the death benefit set by the IRS. This approach minimizes the costs associated with insurance protection (death benefit). With proper asset management, the tax-deferred investment performance within the policy tends to outperform the costs of insurance over time. When comparing similar investment strategies outside of PPLI, policyholders make a trade-off. They trade the tax drag on investments outside the policy for the insurance fees within the policy. When structured correctly with suitable investments, this trade-off favors the “tax efficient” PPLI vehicle, with insurance charges minimized compared to outside investment tax drag.
Segregated Account and Investment Options:
Since PPLI falls under the category of variable universal life insurance, the net premium is allocated to the carrier’s segregated account, separate from the general account and protected from creditors. The segregated account consists of various pre-determined investment options provided by the carrier, including a range of alternatives. These options are fixed or locked-in, similar to investment offerings in a 401K menu. However, the inner workings of the segregated account can be highly customized by utilizing separately managed accounts (SMAs), creating customized insurance dedicated funds (IDFs), or a combination of both.
By understanding the mechanics of PPLI and utilizing the flexibility offered within the segregated account, individuals can optimize their tax efficiency while protecting their assets and beneficiaries.
PPLI vs. Traditional Life Insurance: What’s the Difference?
Traditional Life Insurance
Permanent life insurance (regardless of PPLI or traditional) provides a death benefit to beneficiaries upon the policyholder’s death. It also offers the following four tax advantages (assuming Non MEC status):.
Tax deferred growth of underlying investments (i.e., cash value)
Ability to withdraw funds tax free, up to the cost basis in the policy
Ability to loan from the policy tax free, via direct carrier loan or pledge the policy for collateral (VUL & PPLI policies will have more stringent collateral requirements relative to fixed insurance products such as Whole Life)
Death proceeds are received income tax free to the beneficiaries
Traditional life insurance has several limitations, such as limited investment options, higher relative fees, and inflexibility. With traditional VUL, policyholders are restricted to investing in a limited number of funds chosen by the insurance company. As a result, they miss out on the potential for higher returns that alternative investments can offer. Traditional life insurance also tends to have higher upfront fees and expenses that can eat into the policy’s returns and delay a positive return on investment. Finally, traditional life insurance policies are less flexible and often include surrender charges.
PPLI Investment Flexibility and Tax Efficiency
PPLI, on the other hand, offers a range of investment options with tax-deferred growth. Policyholders can allocate their investments to various asset classes, including private equity and hedge funds. This offers PPLI a significant tax advantage over traditional life insurance as policyholders can invest in a range of assets that offer higher growth potential, without taking on the added tax drag often associated with some of those investment classes. This makes PPLI an attractive option for those looking to minimize their tax liability.
How PPLI Supports Tax-Efficient Financial Planning
Asset Protection and Estate Planning Benefits
Asset protection and estate planning benefits are significant advantages of PPLI policies. One of the primary benefits of PPLI is its ability to provide maximum asset protection. By shielding assets from potential lawsuits and creditors, PPLI policies can help protect the wealth of high net worth individuals who are at greater risk of being sued. This protection is possible when the policy is owned by an irrevocable trust, assuming the policy holder is not a named beneficiary (unless drafted in a self-settled spendthrift state)
Estate Planning Benefits
PPLI can also be an effective tool for estate planning. Policyholders can transfer their wealth to future generations while minimizing estate taxes by using PPLI. The policy is held in an irrevocable trust outside the taxable estate, and when the insured(s) passes away, the death proceeds are paid out to their beneficiaries free of income and wealth transfer tax. This influx of liquidity can then be used for estate taxes. Additionally, PPLI policies can be structured to allow for gifting to beneficiaries, which can further reduce the policyholder’s taxable estate. This can be particularly beneficial for individuals with large estates who want to ensure their assets pass on to their heirs in a tax-efficient manner.
Tax Benefits
As previously mentioned, the tax benefits of PPLI make it an attractive option for high net worth individuals looking to invest in a tax-efficient manner. One of the key benefits of PPLI is tax-deferred growth. Policyholders can invest in a range of assets, and any gains on these investments are deferred from taxes until the policy is surrendered (not taxed at all if planned appropriately).
Good and Bad Investments for PPLI
While PPLI offers a range of investment options, it is important to not only choose investments that are suitable for the policyholder’s investment objectives and risk tolerance, but also balance in investments that tend to generate unfavorable taxable income while also providing the potential for attractive returns. These include private credit, high turnover hedge funds, direct lending, private equity, etc. However, there are also various risks associated with certain investments. For instance, investing in hedge funds may lead to high mgt. fees and volatility. Private equity investments may also be risky due to the lack of liquidity and potential for significant losses. It is important to conduct due diligence and carefully evaluate the risks associated with each investment before making a decision.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1475002191.jpg14142121centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-06-09 18:52:002025-04-08 16:43:27The Role of PPLI in Tax-Efficient Financial Planning
Investing in the stock market can be an exciting and rewarding experience, but it can also be unpredictable and risky. One way to mitigate risk is to have a diversified portfolio, which means investing in a variety of different assets to spread out risk.
In today’s volatile market conditions, diversification is more important than ever to protect your investments.
Diversification: A Key Strategy for Mitigating Risk in Your Portfolio
Diversification is a crucial strategy for mitigating risk in an investment portfolio. By spreading investments across different asset classes, investors can reduce the overall risk and increase the potential for long-term returns. This section explores the significance of diversification and its benefits.
Understanding Asset Classes
To effectively diversify a portfolio, it is essential to understand different asset classes. Asset classes represent different types of investments, each with its own risk and return characteristics. This section provides an overview of some common asset classes and their roles in diversification.
Stocks
Stocks represent ownership shares in publicly traded companies. They offer the potential for high returns but also come with a higher level of risk. Stocks are influenced by various factors, such as company performance, industry trends, and overall market conditions.
Bonds
Bonds are debt instruments issued by governments, municipalities, or corporations to raise capital. They are considered relatively safer investments compared to stocks and typically provide regular interest payments. Bonds are influenced by interest rates, credit ratings, and the financial stability of the issuer.
Real Estate
Real estate investments include residential, commercial, and industrial properties. They offer potential income through rental payments and the possibility of appreciation in property value. Real estate investments can diversify a portfolio by providing a different source of returns and a hedge against inflation.
Commodities
Commodities include physical goods such as precious metals, oil, natural gas, agricultural products, and more. Investing in commodities can provide diversification as their prices tend to have low correlation with traditional financial assets. They can serve as a hedge against inflation and provide opportunities for portfolio diversification.
The Benefits of Diversification
Diversification offers several advantages to investors, enabling them to manage risk and potentially enhance portfolio performance. This section explores the benefits that diversification provides.
Risk Reduction
Diversification helps reduce the overall risk of a portfolio by spreading investments across different asset classes. When one asset class experiences a decline, others may perform well or remain stable, helping to offset potential losses. By diversifying, investors can minimize the impact of any single investment’s poor performance on their overall portfolio.
Enhanced Stability
A diversified portfolio is typically more stable than one concentrated in a single asset class. Different assets tend to have varied responses to market conditions. While some investments may be affected negatively, others may be less influenced or even benefit from changing economic circumstances. This stability provides a cushion against extreme market fluctuations.
Capital Preservation
During market downturns or financial crises, a diversified portfolio can help protect investors’ capital. By including assets that tend to have a low correlation to the market, investors can reduce volatility of their portfolio. For example, in the 2008 financial crisis, investors with diversified portfolios were better positioned to weather the storm compared to those heavily concentrated in a single asset class.
Potential for Increased Returns
Diversification offers the potential for increased returns by exposing investors to different sources of growth. While some asset classes may underperform in certain market conditions, others may thrive. By diversifying across various asset classes, investors can tap into opportunities presented by different market cycles and potentially achieve better risk-adjusted returns.
The Importance of Rebalancing Your Portfolio in a Volatile Market
While diversification is an essential strategy for mitigating risk, it’s not a set-it-and-forget-it strategy. Investors need to regularly rebalance their portfolios to maintain their desired asset allocation. This means periodically selling some assets that have performed well and buying assets that have underperformed. Rebalancing helps to ensure that your portfolio remains diversified and aligned with your risk tolerance and investment goals.
In a volatile market, rebalancing can be especially important. For example, if the stock market experiences a significant decline, your portfolio may become more heavily weighted toward bonds, which may not be aligned with your risk tolerance. Rebalancing can help you maintain your desired asset allocation and potentially avoid significant losses.
How Centura’s Customized Investment Plans Help Clients Manage Risk and Achieve Their Financial Goals
Centura is a financial advisory firm that offers customized investment plans to help clients manage risk and achieve their financial goals. Centura’s team of experts works with each client to develop a personalized asset allocation strategy based on their unique financial situation, risk tolerance, and investment objectives.
One of the key benefits of Centura’s customized investment plans is ongoing monitoring and adjustment. As market conditions change, Centura’s team constantly monitors each client’s portfolio and adjusts their asset allocation to ensure it remains aligned with their objectives. This helps clients stay on track to meet their financial goals while also minimizing risk.
Centura’s investment plans have helped many clients achieve their financial objectives. For example, one client came to Centura with a desire to retire early and travel the world. Centura worked with the client to develop a plan that would help them to reach their goal within 10 years. Through a combination of diversified investments and ongoing monitoring and adjustment, the client was able to retire on schedule and embark on their dream adventure.
Strategies for Protecting Your Wealth During Market Downturns
Market downturns are an inevitable part of investing, but there are strategies that investors can use to protect their wealth during these periods. This section discusses some effective strategies for safeguarding investments during market downturns.
Hedging
Hedging is a strategy that involves investing in assets that move in the opposite direction of the market. By holding positions that counteract the losses in the rest of the portfolio, investors can offset some of the downturn’s impact. Common hedging instruments include options, futures contracts, and inverse exchange-traded funds (ETFs). However, it’s important to note that hedging strategies also come with their own risks and costs, and they may not provide complete protection against losses.
Stop-Loss Orders
Stop-loss orders are instructions to sell a security when it reaches a predetermined price. By setting stop-loss orders, investors can limit their potential losses by automatically selling the asset if its price falls below a certain threshold. Stop-loss orders help protect against further declines in the stock price and can be a valuable risk management tool during market downturns. However, it’s essential to set appropriate stop-loss levels, taking into account volatility and individual risk tolerance, to avoid triggering unnecessary sales.
Defensive Investing
Defensive investing involves seeking out companies or sectors that are less vulnerable to economic downturns. These companies typically have stable earnings, strong cash flows, and reliable dividends, even during challenging market conditions. Defensive sectors often include utilities, healthcare, consumer staples, and essential services. By allocating a portion of the portfolio to defensive investments, investors can potentially cushion the impact of market volatility and protect against significant losses.
Effective Implementation and Professional Guidance
Implementing these strategies effectively requires careful consideration and understanding of individual investment goals and risk tolerance. Working with a financial advisor can help ensure that these strategies align with your specific circumstances and objectives. A professional can provide valuable insights, monitor market conditions, and make adjustments to the portfolio’s risk management strategies when needed.
Maintaining a Long-Term Perspective
During market downturns, it’s crucial to stay calm and maintain a long-term perspective. It’s natural to feel uneasy during periods of market volatility, but panic selling can lead to significant losses. History has shown that markets tend to recover over time, and selling during a downturn can lock in losses and prevent investors from benefiting if they don’t reinvest before subsequent market rebounds. By focusing on a long-term investment strategy, maintaining a diversified portfolio, and managing risk effectively, investors can better weather market volatility and position themselves for long-term success.
In conclusion, protecting wealth during market downturns requires thoughtful strategies and a disciplined approach. Hedging, using stop-loss orders, defensive investing, and seeking professional guidance are some effective strategies to mitigate losses and safeguard investments. Additionally, maintaining a long-term perspective and avoiding panic selling are vital for preserving wealth and achieving financial goals.
Final Notes
Diversification is a key strategy for mitigating risk in your portfolio. Creating a diversified portfolio by investing in a variety of different assets, you can spread out risk and potentially benefit from different market cycles. Rebalancing your portfolio is also important to maintain your desired asset allocation and potentially avoid significant losses during market downturns.
Centura’s customized investment plans can help you manage risk and achieve your financial goals by offering ongoing monitoring and adjustment. While there are other strategies for protecting your wealth during market downturns, it’s important to implement them effectively and stay calm during market volatility. By working with a financial advisor and staying disciplined, you can potentially achieve long-term success in your investments.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1365412652.jpg12992309centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-05-25 18:56:002025-04-08 16:16:40Diversification: A Key Strategy for Mitigating Risk in Your Portfolio
Financial planning is crucial for individuals and families with high net worth. These individuals often have complex financial situations that require specialized expertise to manage effectively. Without proper planning, high net worth individuals may struggle to achieve their long-term financial goals. However, financial advisors face unique challenges when planning for these clients. This is where holistic planning comes in.
Holistic Planning: A Comprehensive Approach
Holistic planning is a comprehensive approach to financial planning that involves a combination of different components, including cash flow planning, goal-based planning, portfolio management, income tax planning, and wealth transfer planning.
Unlike an isolated approach to financial planning (for example, an approach in which there are a larger number of providers working in silos to provide expertise), holistic planning takes into account the big picture, considering how different aspects of financial planning impact each other and bringing that expertise under one roof.
This ensures that any recommendation made on one piece of the financial plan will likely affect other areas as well. Holistic planning is particularly beneficial for high net worth individuals and families, as it helps to manage the complexity of their financial situation effectively.
Benefits of Holistic Planning
Holistic financial planning offers several benefits to high net worth individuals and families. Let’s take a look.
Customized Approach to Financial Planning
One of the most significant advantages is the customized approach to financial planning that it provides. This approach is tailored to the unique needs of each client, taking into account all aspects of their financial situation. By doing so, advisors can create a plan that maximizes their client’s wealth and minimizes their tax liability. This results in a more efficient use of resources and a higher probability of achieving long-term financial goals.
Tailored Tax and Wealth Transfer Planning
In addition to customized planning, holistic financial planning ensures that all aspects of a client’s financial situation are considered. This includes income tax planning and wealth transfer planning, which are often outsourced by advisors to other professionals. By incorporating these elements into the planning process, advisors can create a comprehensive financial plan that considers the interplay between different aspects of the client’s financial situation. This approach can help clients to achieve a better understanding of how their financial decisions impact their overall financial health.
Focus on Long-term Goals and Legacy Planning
Holistic financial planning also places a strong emphasis on long-term goals and legacy planning. This means that advisors work with clients to ensure that their financial plan aligns with their long-term objectives, such as retirement or legacy planning. By doing so, clients can have peace of mind knowing that their financial future is secure and that their assets will be managed in a way that aligns with their values and long-term goals. This approach can also help to minimize the emotional and financial impact of life events such as divorce, death, or disability.
Risk Management
Finally, holistic financial planning can help clients to manage risk and navigate uncertainty. By taking a comprehensive approach to financial planning, advisors can help clients to identify potential risks and develop strategies to mitigate them. This can include everything from investment risk to estate planning risk to market risk. By having a plan in place that considers these risks, clients can feel more confident about their financial future and be better equipped to handle unexpected events.
For ultra high net worth individuals and families, the approach to financial planning is quite different from traditional financial planning.
Holistic planning is becoming increasingly important for ultra-high net worth individuals and families, as traditional financial planning approaches often fall short in addressing the complexity and high stakes involved in managing their wealth. Rather than focusing on individual pieces of the puzzle, holistic planning takes into account the big picture.
According to Sean Clark, MBA Director of Financial Planning at Centura Wealth Advisory, this approach involves pairing all the different parts of financial planning with income tax planning, wealth transfer planning, and balance sheet optimization. By understanding how all the parts work together and move, holistic planning ensures that any recommendation made on one piece of the financial plan will likely affect other areas as well. This comprehensive approach to financial planning helps identify small adjustments, such as debt or where an asset is held or titled, that can make a big difference in maximizing wealth and minimizing tax liability.
The Centura Approach
At Centura Wealth Advisory, we understand the unique needs of ultra high net worth individuals and families when it comes to financial planning. Our team of experts is well-versed in all areas of financial planning, including income tax planning and wealth transfer planning, and we work closely with our clients to develop a customized plan that addresses all aspects of their financial situation. Our comprehensive and integrated approach to financial planning ensures that every recommendation made on one piece of the financial plan takes into account its impact on other areas as well.
By adopting this approach, we help our clients achieve their long-term financial goals. Therefore, at Centura Wealth Advisory, we strongly believe that holistic planning is essential for high net worth individuals and families to secure their financial future.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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At Centura Wealth Advisory, we believe in creating exponential value for our clients. But what does that mean, exactly? Let’s take a look.
What Do We Mean By Exponential Value?
Exponential value, as we define it, is the concept of taking two things and creating synergies that result in something greater than the sum of its parts. In other words, 1+1=4. We believe that tax planning is one of the best ways to create exponential value for our clients.
Let’s Take a Hypothetical Example
Imagine a business owner who is selling their business and has a significant transaction coming up. If we can save them half of the tax bill they would otherwise pay on that transaction, the resulting wealth could be life-changing. Depending on the size of the transaction, this could amount to tens of millions of dollars. This newfound wealth can have significant impacts going down the road, whether that be for personal consumption, wealth transfer, legacy planning, charitable intent, philanthropy, or other purposes.
The Compounding Effect of Wealth Over Time
The compounding effect of wealth over time is what creates the true exponential value. By having more assets on your balance sheet, you have the ability to invest more money for the long-term, which coupled with compounding, creates newfound wealth. Of course, this must be done by investing in quality assets paired with a prudent approach to portfolio management, over time. For example, we have had business owners who have sold their businesses for tens of millions of dollars in their 30s. By objectively investing the wealth for a long period of time, in quality assets with strong risk adjusted returns, these business owners can generate life-changing results for their families, communities, and generations to come.
Baseline Scenario
To illustrate the point, we always do a baseline scenario, which involves paying taxes on the business sale and investing the money. We compare this to a scenario where the client employs tax planning strategies on the front end, saves more money, and then invests the money alongside the proceeds of the business sale. The results are often night and day.
How Exponential Growth Creates Value
Let’s Talk Compound Interest
Albert Einstein once famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Einstein was fascinated with the concept of compounding interest and the effects it can have over time. At Centura Wealth Advisory, we couldn’t agree more.
The idea behind compounding interest is simple but powerful. By reinvesting your earnings, you can earn interest not only on your original investment but also on the interest earned. Over time, this can lead to substantial growth in your wealth. In fact, the longer you allow your money to compound, the more significant the impact can be.
We believe that anyone who is fascinated by the concept of exponential value should run the math on the time value of money and see how a bigger pot of money invested over time at high returns can really add substantial wealth. This is where tax planning comes into play.
Customized Tax Planning Strategies
At Centura Wealth Advisory, we provide customized tax planning services to our clients that are designed to minimize their tax liabilities while maximizing their financial outcomes. We work closely with our clients’ legal and accounting teams to ensure that all risks are addressed and key aspects of the tax planning process are fully integrated into their overall financial plan.
Our tax planning strategies involve a range of options all of which mitigate, eliminate and/or defer income tax. In addition, these income tax reduction strategies aim at maximizing exemptions, exclusions, deductions, and/or credits. Furthermore, we utilize tax efficient investments, trusts, and a range of asset protection strategies to help our clients safeguard their wealth.
We are committed to providing our clients with the highest level of service and support. We believe that creating exponential value for our clients is not only good for their financial outcomes but is also good for our business. We pride ourselves on building long-term relationships with our clients that are built on trust, transparency, and mutual respect.
Our Holistic Approach
At Centura Wealth Advisory, we take a holistic approach to wealth management. We understand that creating exponential value for our clients requires more than just tax planning. We work closely with our clients to understand their unique financial goals and develop customized strategies that align with their objectives. By doing so, we can help our clients create exponential value that goes beyond just financial returns.
What Does a Holistic Financial Plan Include?
A holistic approach looks at an individual’s lifestyle, goals, values, and priorities to create a financial plan that works for them. Financial planners can coordinate these needs and the lifestyle of their clients in order to create a strategy.
Insurance needs (home, auto, life, long-term care, liability, etc.)
Tax planning
Tax preparation
Final Notes
At Centura Wealth Advisory, we believe that creating exponential value for our clients is not just about investing in high-opportunity assets. It’s about taking a holistic approach to wealth management that includes tax planning, investment management, and estate planning. By doing so, we can help our clients achieve their long-term financial goals and create exponential value that can have a significant impact on their lives and the lives of their heirs.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1333138491.jpg12422415centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-05-12 19:02:002025-04-08 16:22:16How Centura Wealth Creates Exponential Value for Our Clients
It is not the strongest or the most intelligent who will survive but those who can best manage change.
-Charles Darwin
Recap
The investment landscape is constantly evolving.
Over the last 6 weeks, we’ve experienced 3 of the 4 largest US Bank failures in history, with First Republic Bank the being most recent domino to fall. JPMorgan Chase quickly acquired the majority of First Republic’s assets, and assumed the deposits and certain other liabilities of First Republic Bank from the Federal Deposit Insurance Corporation (FDIC) for $10.6 Billion, with FDIC providing 80% loss coverage of First Republic’s single-family residential mortgages for 7 years. The fair value of the single-family residential loans is ~$22 Billion, with an average LTV of 87%.
In previous communications, we stated we did not anticipate further bank contagion following the demise of Silicon Valley Bank and Signature Bank. We have since adjusted our outlook and acknowledge the possibility of more regional banks failing in the near term. While we shift our outlook and advise clients to consider limiting regional bank deposits to FDIC-insured amounts of $250,000 (or your bank’s threshold as several banks possess multiple charters, allowing for more than the standard $250,000 limit), we believe larger national and international banks maintain much more resilient capital structures and controls in place which offer greater safety in deposits.
Hike rates until it Breaks!
The Fed has an abysmal track record playing their part in several former crises. They generally tighten until something breaks.
The Savings & Loans (S&L) Crisis
In the early 1980s, the Federal Reserve increased interest rates to combat inflation, which made it more expensive for S&Ls to borrow money. Many S&Ls had funded their investments in real estate and other ventures with borrowed funds, so the interest rate hikes increased their borrowing costs and squeezed their profits. At the same time, the S&Ls were offering fixed-rate loans to homebuyers, which meant that they were locked into low interest rates and couldn’t adjust their rates to match the higher borrowing costs. When the real estate market declined in the late 1980s and early 1990s, many S&Ls were left with significant losses and were unable to repay their debts, leading to a wave of bank failures and government bailouts. The historic interest rate hikes contributed to the S&L crisis by increasing borrowing costs for the S&Ls and reducing their profits, which led to risky investments and fraudulent practices[1] to try to recoup losses. The crisis resulted in the closure of over 700 S&Ls and cost taxpayers over $100 billion in bailout funds.
The Dot Com Crash
From the late 90’s to early 00’s, investors engaged in speculative investing in internet-related companies which led to a market crash. At the time, many of these companies relied on debt financing to fund early expansion. Companies were able to sell ideas to investors through the novelty of the dot-com concept, most of which were unprofitable.
The Fed’s rate hikes to combat growing inflation pressures made it more difficult for companies to obtain financing and led to a decline in investor confidence, which subsequently followed with a stock market sell-off. Although greed served as the main driver of the crash, the Fed’s hiking cycle served as a catalyst.
The Great Financial Crisis
The hiking cycle of interest rates played a significant role in causing the Global Financial Crisis (GFC) of 2008. In the years leading up to the crisis, the Federal Reserve had lowered interest rates to stimulate economic growth following the dot-com crash and the September 11 terrorist attacks. These low interest rates, combined with lax lending standards, led to a housing boom as many people took advantage of the easy credit to buy homes, invest in real estate, and even take second and third mortgages on their homes. However, in 2004, the Federal Reserve began to raise interest rates to combat inflation stemming from cheap money. This made borrowing more expensive and slowed down the housing market. At the same time, many of the homeowners who had taken out adjustable-rate mortgages (ARMs) found themselves unable to make their payments as the interest rates on their mortgages increased. This led to a wave of foreclosures This, in turn, led to a credit crunch, as banks became reluctant to lend money to each other or to other borrowers, exacerbating the economic downturn. The hiking cycle of interest rates played a key role in causing the GFC by slowing down the housing market, leading to a wave of foreclosures. This, in turn, created a chain reaction of losses and defaults throughout the financial system, ultimately leading to a credit crunch and a global economic downturn.
Current Day
The current hiking cycle of interest rates to combat 40-year high inflation is creating a regional bank crisis. Banking institutions, heeding the Fed’s guidance that inflation was transitory and rate hikes would not occur in the near future, searched for ways to increase yields on excess deposits invested in fixed-income securities. Many banks began increasing duration, reducing convexity[2], and taking greater interest rate risk to capture a positive return on investments. When the Fed began aggressively increasing interest rates, these investments lost value, and institutions holding these investments began to experience stress on their capital stack. Simultaneously, bank deposits continued to yield nearly zero. Regional banks with the most exposure to these investments have experienced significant outflows, and in some cases, failure.
Fed tightening cycles tend to have a way of exposing weaknesses formerly masked by easy money environments; similar to the economic environment investors have enjoyed since the GFC. When the Fed starts raising rates, the impact generally takes months before working through the system and affecting markets. We’re now witnessing the impact of the Fed’s most aggressive tightening cycle in four decades, and stress is being felt throughout the financial system.
What is happening now, and why did we adjust our outlook?
On Wednesday, May 3rd, the Fed continued its war against inflation and raised the target Federal Funds Rate (FFR[3]) by 25 bps to a target range of 5.00% – 5.25%. In 14 months, the Federal Reserve has increased rates 10 times, for a total increase of 500 bps. While the Fed will likely hit the pause button on rate increases in future meetings, they intend to keep rates elevated, adding additional pressure on banks and the debt service on corporate balances sheets.
Unlike their national and international counterparts, regional banks typically have less diversified business lines, less hedging (hedging is quite expensive and requires expertise), and more operational risk. Cracks within the foundation of Regional Banks subsequently began to appear during the current hiking cycle when depositors, unhappy with their meager deposit yield (most savings accounts were yielding <1%, while checking accounts were paying 0.01%) began withdrawing deposits and allocating funds to higher-yielding instruments like US Treasury Bills and money market funds. For example, from Q1 2022 to Q4 2022 (when the hiking cycle began), Money Market Funds total assets grew from 5.032T to 5.223T[4]. To free up liquid capital to maintain capital adequacy requirements from bank outflows, regional banks were forced to sell financial assets. Most fixed-rate bonds have lost value, forcing these banks to realize losses. Because banks are highly leveraged businesses, it doesn’t take much for a bank to get wiped out if it experiences an exorbitant amount of excess deposits invested in fixed-rate bonds during an extraordinary rising interest rate environment. We saw this with First Republic Bank (FRC).
By providing the concessions to JPMorgan Chase in the FRC deal discussed earlier, the Fed set the blueprint for larger banks to wait for FDIC to seize a failing bank and subsequently purchase the institution for pennies on the dollar. If regional bank failures persist, we anticipate this trend will continue and large banks will be successful in consolidating market share.
PacWest, a Beverly Hills, California-based bank is working to solicit interest in the sale of its lender finance arm to strengthen its balance sheet. Through May 9th, PacWest subsequently has lost approximately 75% of its value in 2023. Hence why we believe PacWest, among other regional banks are suffering the wrath of the Fed and lack of consumer confidence.
We continue to monitor the situation closely and assess possible contagion to other sectors of the economy. We do not believe that regional banks are out of the woods quite yet as they are one of the primary lenders to commercial real estate operators, and we expect that they will remain under pressure as they look to navigate the billions of dollars in maturing commercial real estate loans this year and next. At the current level of interest rates, we expect to see defaults across commercial real estate increase in the coming quarters, particularly for those operators using primarily floating-rate debt to finance their operations.
Further, we recommend clients review their banks’ FDIC limits and proceed with caution if choosing to hold cash above the insured amounts. While many banks have started to increase the rate they pay on savings accounts, we would still caution against holding above-insured limits, and encourage clients to explore options such as holding excess funds in investments like Treasury Bills, government-backed money market funds, or even brokerage CDs to name a few. We are happy to discuss which options would be optimal for you. We encourage you to reach out to your advisor to make appropriate changes.
If you have any questions, please do not hesitate to contact us.
[1] One example of Securities fraud was the chairman of Lincoln Savings and Loan, Charles Keating. Keating used his position and influence to engage in fraudulent practices that ultimately led to the collapse of Lincoln Savings and Loan. He convinced depositors to invest their savings in high-risk junk bonds issued by his own company, American Continental Corporation (ACC), which was the parent company of Lincoln Savings and Loan. Keating misrepresented the quality and risks associated with these bonds, assuring investors that they were safe and would provide high returns. In reality, these bonds were high-risk and lacked sufficient collateral. Keating used the funds from these investments for personal gain, supporting an extravagant lifestyle and making political contributions.
[2] Convexity is a measure of the curvature in the relationship between bond prices and interest rates. It reflects the rate at which the duration of a bond changes as interest rates change. Duration is a measure of a bond’s sensitivity to changes in interest rates. It represents the expected percentage change in the price of a bond for a 1% change in interest rates.
[3] Federal Funds Rate. The target interest rate range set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
[4] Taken from Fred Economic Data
General Disclosures
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130.
Our tax system has two critical components that impact the transfer of wealth from one generation to the next: gift tax and estate tax.
The gift tax applies to the transfer of property from one individual to another during their lifetime, while the estate tax is levied on the transfer of property at death.
The IRS adjusts the federal estate and gift tax exemption amounts for inflation each year and has announced the exemption amounts for 2023. Let’s take a closer look.
What Are Gift and Estate Tax Exemptions and Why Are They Important?
Gift and estate tax exemptions are the amounts that individuals can give away during their lifetime or pass on to their heirs at death without incurring any federal taxes. The federal government imposes these taxes on the transfer of property or money.
Understanding these exemptions is crucial for tax planning and managing one’s assets to minimize tax liabilities. Knowing the exemption amounts and how they work can help individuals make informed decisions about their wealth transfer strategies.
The Federal Gift and Estate Tax Exemption
The federal gift and estate tax exemption has increased from $12,060,000 to $12,920,000. This means that married couples can gift up to more than $25 million in assets without incurring federal estate and gift taxes. However, this exemption is set to expire in 2026 and will revert back to the prior exemption amount of $5 million.
For surviving spouses, the unlimited marital deduction for gift and estate taxes remains, except for those who are not U.S. citizens. Non-citizen spouses have a marital deduction of $175,000 for 2023.
Annual Exemption
The annual gift tax exemption, in addition to the lifetime exemption, will increase from $16,000 to $17,000 in 2023 for each person you gift to in 2023.
If you have not yet utilized your 2022 annual or lifetime exemption, now is a good opportunity to do so. Many investment assets have experienced a decline in value of 25%-35% since the beginning of the year, but are expected to recover in the medium to long term. Gifting investments now to your beneficiaries will allow you to do so at a discounted rate.
When the exemption reverts in 2026, it will be crucial to understand how it will be applied. If you gift an amount less than the current exemption amount of $12,920,000 by 2025, you will be limited to the lower exemption amount, which is currently set at $7 million for gifts made after 2025.
Planning Opportunities
Clients can make lifetime gifts outright to an individual or in a trust to take advantage of the increased exemption amounts. It is crucial to consider making gifts to reduce estate tax before the exemptions decrease at the end of 2025. For those who have already used their gift and estate tax exemption in prior years, the increase from 2022 to 2023 provides an opportunity to avoid or reduce estate tax by making additional lifetime gifts.
Americans increasingly favor a wealth tax on the ultra-wealthy, but despite an uptick in proposals, these policies have struggled to gain traction.
You never know what may happen in the future, so it’s important to consider taking advantage of the current higher exemption amounts while they are still available. There are various planning strategies that can be implemented to make the most of these higher exemption amounts before they potentially revert to lower amounts in the future.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1328352067-1.jpg14142120centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-05-04 20:02:002025-04-08 16:33:312023 Updates to Gift Tax and Other Estate Limitations
The combination of the Federal Reserve’s lenient monetary policy before and after the pandemic, and substantial economic stimulus measures, resulted in a considerable swelling of bank deposits. Last March, the Fed commenced the fastest tightening cycle in decades, increasing the overnight lending rate from essentially 0% to 5%. When the Fed increases bank borrowing rates and interest rates increase, banks generally raise the rates at which they lend money, while usually maintaining the interest paid on deposits. As a result, this boosts their net interest income. When 6-month Treasury Bills pay more than 5% and money market funds pay over 4% while bank deposits average less than 0.50%, depositors are incentivized to direct their money out of the bank and invest in Treasury Bills or money market funds. What happened with Silicon Valley Bank (SVB) was a collapse of confidence in unprecedented circumstances – an exodus of large investor deposits, more than the FDIC-insured limit of $250,000. This unexpected development caught SVB specifically, and other banks, off-guard, resulting in significant losses showing up on their balance sheets, as detailed next.
Take That to the Bank
According to the Wall Street Journal, in the days following SVB’s collapse, the 25 biggest US banks gained $120 billion in deposits. Small banks experienced $108 billion in outflows over the same period, resulting in the largest weekly deposit decline for small banks on record. Meanwhile, more than $220 billion has flowed into money-market funds.
A bank’s business model is to take in deposits, lending to individuals and businesses, and investing the balance (often a portion in long-term fixed-rate bonds), classifying investments they expect to hold for one year or longer as Held-To-Maturity. These Held-to-Maturity securities are held on bank balance sheets at amortized cost, and therefore do not reflect the traditional mark-to-market pricing as securities classified as available for sale; thus, bank balance sheets do not reflect the magnitude of losses resulting from the Fed increasing rates by 5% over the last year.
Because the demand from SVB depositors was too great, SVB had to convert their long-dated Held-to-Maturity assets to available for sale, triggering a loss of $1.8 billion on the conversion from Held-to-Maturity to available for sale securities. Ultimately, financial regulators stepped in and took over operations of SVB. Days later, Signature Bank (SBNY) followed suit, and UBS acquired Credit Suisse (with the forced intervention of Swiss regulators) to prevent them from facing the same fate as SVB and SBNY.
To prevent a bank-run contagion, the Fed stepped in on March 12th, providing liquidity to institutions through the Bank Term Funding Program (BTFP). Under this program, banks can, if needed, borrow reserves against their assets up to the par value; this is to provide liquidity to depositors without recognizing losses by preventing the sale of Held-to-Maturity assets. Through the BTFP, the Fed has injected approximately $400 Billion into the economy, working counter to their current $95 billion monthly balance sheet reduction.
Banks rely on deposits to fund their lending and expansion, so as they experience declines in their deposit base, lending activity decreases, negatively impacting borrowers’ ability to access capital moving forward. Consequently, this situation could restrict consumer demand and accelerate the Federal Reserve’s fight against inflation, forcing them to pause rate hikes after May’s meeting.
Market Recap
Equities – In what has shaped up to be primarily a low-quality rally despite mounting obstacles, the market demonstrated resilience for the second consecutive quarter. Many of 2022’s worst performers have been 2023’s darlings. The first quarter of 2023 saw the S&P 500 post a 7.03% return, marking the third time (1981 and 1938) in the last 15 bear markets the index posted back-to-back quarterly gains. Though the Fed continues to tighten monetary policy, the market anticipates the rate hiking cycle is nearing the end and expects the Fed will reverse course and lower rates later this year, especially on the heels of the unfolding banking challenges.
Interest rate-sensitive stocks led the charge, with the tech-heavy NASDAQ producing a first-quarter return of 16.77%. Among the biggest beneficiaries of investors shifting from financials to cash-rich companies were the largest growth-oriented equities, as evidenced by the NASDAQ 100’s Q1 return of 20.49%. With a gain greater than 20%, the NASDAQ 100 has technically entered a bull market, with the NASDAQ composite knocking on the bull’s door, returning 19.67% since bottoming in December 2022.
While market participants expect the Fed to pivot in the coming months, the Fed’s February meeting minutes suggested that further rate hikes are needed to dampen inflation. The Fed’s vow to keep rates elevated for longer signaled the peak for small-cap equities. From the start of the year through the Fed’s announcement on February 2, the small cap Russell 2000 index had gained 11.33%. Bank liquidity challenges are compounding the concerns for small cap equities as access to capital and lending standards tighten. The combination of these fears pushed the Russell 2000 nearly 10% lower from the Fed’s February meeting through the end of the quarter, with the Russell 2000 ending Q1 up only 2.34%.
Bonds – Traditionally considered ‘safe’ investments in a portfolio, bonds continue to take investors on a wild ride. Treasury Bond volatility (as measured by the MOVE index) outpaced equity volatility (as measured by the VIX) in the first quarter, leading many to question the validity of the Treasury security as the ‘safest asset.’ Periods like the first quarter serve as a reminder that investing in Treasury securities removes credit risk, but not volatility, from consideration.
At the beginning of the New Year, concerns about long-term growth prospects and anticipation the Fed would cut rates by year end caused yields on the 10-Year Treasury to decline by 0.51%, dropping from 3.88% to 3.37%. After January’s inflation report and the Fed’s February meeting, market expectations abruptly shifted, pushing the Fed Funds peak rate expectations from ~5% to close to 5.5%, and pushing the 10-year back above 4%.
Queue the collapse of Silicon Valley Bank, forcing investors to flock to the safety of Treasury securities and pushing the 10-year back below 3.4%. In light of the Fed’s comments following their March meeting, along with the apparent stabilization of the country’s banking system, yields have risen, with the 10-Year Treasury now at 3.48%. As volatile as yields were in the year’s first quarter, bonds still produced a return of 2.96%.
Source: YCharts
Economy: Feel the ‘Pain’
After two consecutive quarters of negative real GDP growth in 2022 of -1.6% and -0.6%, real GDP rebounded to 3.2% and 2.6% in the third and fourth quarters.
Underpinned by a robust labor market and solid wage growth, consumers have proven resilient in the face of 40-year high inflation and higher interest rates. The fourth quarter’s final GDP reading showed that consumers may be starting to feel the pain with spending advancing only 1%. Reduced consumer spending leads to slower economic growth (and potential recession). Additionally, declines in exports, nonresidential fixed investment, and state and local government spending contributed to lower growth figures.
Inflation & Interest Rates
Month-over-month readings continue to post positive marks. Year-over-year inflation trended lower from its June 2022 peak of 9.06%. Though inflation came in higher than expected in January causing equity markets to sell off and yields to rise, February’s reading was in line with expectations.
January’s and February’s headline CPI came in at 6.41% and 6.0%, respectively, while core CPI (excluding energy and food) registered 5.55% and 5.53% year-over-year readings over those same periods, as both measures still increased month-over-month. The most problematic component of inflation is the resiliency of price pressure on core services, particularly shelter – a sticky and not-so-transitory variable representing about 1/3 of CPI. Shelter continued to trend upwards, increasing 8.1% over the last year – the highest growth rate since 1982. On a positive note, rents are coming down, and home prices are off their June 2022 peak, pointing to lower inflation readings ahead.
Prior to the banking failures, we continued to see larger increases on the front-end of the yield curve, causing the inversions to worsen across several maturities, sending even stronger and more ominous recession signals to the market.
Recession has been a headline topic over the last few quarters. One of the most prominent and accurate yield curve inversion points is on the 2-Year US Treasury versus the yield on the 10-Year US Treasury (10/2). Its peak reached an inversion of -1.07% on March 7th and narrowed slightly to close the quarter inverted -0.58%, only 0.05% higher than the start of the year. The last statistically meaningful yield inversion was in the fourth quarter, with the 10-Year to 3-Month Treasury spread crossing into negative territory on October 26. Remaining inverted for the rest of 2022, it picked up momentum through the year’s opening quarter to -1.37%.
At their current levels, both inversion points mark the largest inversions since 1981. Inverted yield curves have proven solid predictors of a recession. Typically, a recession follows anywhere from 12 to 24 months after the initial inversion. For reference, the 10/2 yield curve remains inverted since July 2022.
According to LPL Research Fixed Income Strategist, Lawrence Gillum, one of the timelier signals derived from inversions is when the curve troughs and the yield curve finally begins to steepen, with the spread moving from negative, back to positive territory. Outside of the early 1980s, the steepening of the curve toward positive territory proved to be a timelier indicator, as the average time from an inverted yield curve trough to a recession shortened to roughly 12 months during these periods.
Finding Balance
After its balance sheet ballooned to nearly $9 trillion post-pandemic, the Fed commenced its initiative to reduce its holdings. In Mid-March, the Fed confirmed the pace of their balance sheet reduction of $95 billion per month for the foreseeable future. Since the start of the year, the Fed has reduced its balance sheet by $167 billion through March 1, bringing the total reduction to $598B from the April 2022 peak. Since the SVB collapse, the Fed has injected nearly $400B into the economy, reinflating its balance sheet and marking a pivotal moment for The Fed. For the first time in nearly a year, liquidity is being pumped into the system (Quantitative Easing). At the same time, the Fed is aggressively engaged in Quantitative Tightening (raising rates and reducing its balance sheet by $95 billion per month).
Nonetheless, on Wednesday, March 22, the Fed decided to continue rate hikes by increasing the Federal Funds Target Rate by 0.25% to the range of 4.75% – 5.00%. Federal Reserve Chairman, Jerome Powell, pursued the narrative that inflation has run too high, and the labor market continues to remain too tight. The Federal Reserve, still committed to do whatever it takes to contain inflation, will likely raise rates another 0.25% during their May meeting. This would bring rates in line with the projected peak rate provided in the Fed’s March Dot Plot of 5.10%.
Source: www.federalreserve.gov
Unemployment
The labor market remains robust, having now recouped all jobs lost during the pandemic-induced recession. Unemployment fell to pre-pandemic levels of 3.4% through January, matching the lowest reading since 1969. Although February saw an uptick to 3.6% as the increase in the participation rate outpaced the rate of hiring for the month, there are still more than one-and-a-half job openings for every unemployed person (1.67:1).
Wage growth is one of the Fed’s primary concerns. Although wage inflation has been trending lower, it remains elevated, which worries the Fed. Strong wage inflation increases the risk of a wage-price spiral that could prolong elevated inflation. February’s CPI print marks the 26th consecutive month inflation has outpaced wage growth. Based on its updated March projections, the Fed forecasts the unemployment rate to increase to 4.5% in 2023. The strength in the labor market continues to serve as a beacon for the Fed. It provides a cushion and signals they can continue tightening monetary policy.
Centura’s Outlook
The Fed confirmed its commitment to do whatever it takes to control 40-year high inflation – not letting concerns about a potential banking crisis derail its tightening efforts. Interest rates remain at levels not seen since before the Great Financial Crisis (2008-09), so it’s no surprise to witness tighter financial conditions slowing the economy, with a likely recession on the horizon.
We still believe the two most problematic and impactful risks today are inflation and the resulting Federal Reserve monetary policy response. Concerns around bank liquidity and possible economic recession have prompted analysts to revise earnings lower. According to FactSet, the estimated earnings growth for the S&P 500 in the fourth quarter is –6.6%. If accurate, this would represent the largest decline the index delivered since the second quarter of 2020 (-31.8%). These negative revisions highlight the challenges companies must traverse to deliver profit in 2023. While the Fed’s March meeting was seen as a dovish rate increase, we believe it’s important to note that even when the Fed does stop raising rates, maintaining the current level of rates is still restrictive, and should not be viewed as the end of their tightening cycle.
A company’s ability to service debt is negatively impacted with rates expected to remain elevated. Factoring in the increased cost of labor and companies struggling to pass the increased cost of goods onto consumers, we believe the road ahead likely remains challenging to navigate. With earnings releases starting in mid-April, both top and bottom-line misses and negative management sentiment will likely dampen return expectations on equities. Forward 12-month P/E ratios are around 17.8, slightly below their five-year average of 18.5. This indicates additional drawdowns may be in store before equities become attractive from a valuation standpoint.
In addition to the Fed’s tightening regime and banks losing approximately $400 billion of deposits in March, market volatility is likely to persist through 2023, with financial conditions tightening significantly. This puts further pressure on both business and personal balance sheets. Until inflation breaks to lower levels, the Fed provides more clarity on their forward-looking monetary policy, and banking conditions stabilize, we remain cautious and anticipate that equities will experience turbulence as the first half of 2023 continues to unfold.
Our cautious outlook informs our allocations which remain underweight to respective equity targets. Our quality bias and slight value bias has served as a slight headwind in the year’s first quarter. Our underweight to foreign equities continues to provide support to client portfolios. Though the markets face a wall of worry, it’s important to remember they are forward-looking, often pricing in future economic recoveries before they happen. Given the strength of the equity market recovery since late last year, we began bringing some of our equity positioning back towards neutral or in line with our long-term target allocations. We intend to exercise caution going forward while also monitoring for opportunities to capitalize on further market dislocations.
Our fixed-income allocation continues to utilize non-traditional fixed-income investments to mitigate further risks of rising rates. The short duration of our fixed-income allocation has protected client portfolios from spiking yields and loss of principal. We have incorporated larger-than-average cash allocations to provide additional support against interest rate volatility. Furthermore, yields on cash money market funds became attractive for the first time in several years. These cash allocations generate an attractive income stream and allow us to pivot as we identify opportunistic investments for superior risk-adjusted returns.
We continue to succeed in improving returns and reducing risk by incorporating many private and liquid alternative investments to our allocations. The ramifications of spiking interest rates still impact private real estate and we anticipate additional downward valuation adjustments in many markets. We are particularly concerned with commercial office real estate, as several cities are experiencing office vacancies above the national average of 18.7% (the highest ever). With approximately $46 billion of variable rate office debt, we believe defaults on commercial real estate loans could increase over the balance of 2023, potentially adding to challenges in the banking sector.
Our focus on real estate industries possessing a large favorable supply/demand imbalance, like multifamily real estate, should help mitigate losses relative to other real estate sectors not possessing similar disparities. Despite the expected challenges in the real estate market, we maintain our dedication to exercising patience and selectivity in our decisions.
As Centura continues to enhance our alternative investment platform, we will remain focused on high-quality, conservative core exposure, with an eye toward opportunities to capitalize on the dislocations that often happen in private markets due to illiquidity and information disparities.
Thank you for your continued confidence and support. While we face multiple challenges, we remain anchored to our core principles which we believe will allow us to navigate toward achievement of your wealth building objectives. If you have questions or concerns, please contact your Centura Wealth advisor.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130.
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The Tax Cuts and Jobs Act of 2017 brought significant changes to the US tax code, including a cap on state and local tax (SALT) deductions. This cap, also known as the SALT deduction limitation, has left many taxpayers looking for ways to reduce their tax bills.
So, how can SALT reduce your tax bill this year?
What is the SALT Deduction Cap?
The SALT deduction cap refers to the limitation on the amount of state and local taxes that can be deducted from federal income tax. Prior to the 2017 Tax Cuts and Jobs Act, taxpayers could deduct the full amount of their state and local income, sales, and property taxes from their federal tax bill. However, the new law introduced a $10,000 cap on these deductions, a significant impact for taxpayers in states with high taxes.
Taxpayers are now paying more in federal income tax than they ever did before. Understanding the SALT deduction cap and how it works can help taxpayers navigate their tax bills more effectively.
Navigating the cap on SALT deductions requires careful planning and consideration of your financial situation. Here are five strategies to help you cut your tax bill:
Bundling Deductions:
Increase your itemized deductions by bundling expenses together. This means you can make multiple years worth of charitable donations in a single year, prepay your property taxes for the upcoming year, or bundle other deductible expenses in the same tax year. This can help you exceed the SALT deduction cap and maximize your tax savings.
Utilizing Charitable Donations:
Charitable donations reduce your tax liability while supporting a good cause. Consider donating appreciated assets such as stocks, mutual funds, or real estate. This avoids capital gains taxes and increases your itemized deductions.
To learn more about charitable gifting strategies, check out our blog, here.
Paying State and Local Taxes Early:
If you owe state or local taxes in the upcoming year, consider paying them early. By prepaying, you can increase your SALT deduction for the current tax year.
Contributing to Retirement Accounts:
Lower your tax bill by contributing to a retirement account such as a 401(k) or IRA. These contributions are tax-deductible and can help reduce your taxable income.
Taking Advantage of Business Deductions:
For business owners, there are several deductions that can reduce tax liability. Some examples include deducting expenses related to your home office, business travel, or equipment purchases.
There are also more specific deductions available to business owners:
Section 199A Deduction
Business owners can deduct up to 20% of their qualified business income, which can result in savings of tens or even hundreds of thousands of dollars. Working with a firm that specializes in tax planning ensures that business owners are aware of all available tax planning opportunities. Tax planning firms also provide project management services to help keep track of necessary tasks and deadlines.
Qualified Business Income (QBI) Deduction
A Qualified Business Income (QBI) deduction allows partners of certain types of businesses, including partnerships, S corporations, and sole proprietorships, to deduct up to 20% of their qualified business income on their personal tax returns.
For instance, if the business generates $4 million in profit and an individual holds a 25% ownership stake, they may have a qualified net income of $1 million.
It is important to note that the mandatory tax rate subscribed to by the business entity is 9.3%, and the business entity is responsible for paying taxes on behalf of the partners, who must individually opt-in to accept this treatment.
The entity also has to pay a tax of $93,000 for one partner, which is deductible at the entity level. The the partner can use this tax to reduce their total income. If an individual is in a 37% bracket, they could potentially save close to $34,000 through this method.
The QBI deduction is subject to income limits. Married couples with joint income above $329,800 or individuals making above $164,900.. Additionally, the deduction may be limited or reduced based on the type of business, the amount of W-2 wages paid by the business, and the value of the business’s assets.
AB 150 Small Business Relief Act
The AB 150 Small Business Relief Act in California is another strategy that businesses can use to navigate the SALT deduction cap. By making a voluntary tax payment at the entity level, businesses can receive a credit on their personal tax returns.. This strategy is particularly beneficial for partnerships, S corps, and LLCs that generate significant profits.
However, there are strict timelines and requirements for participation in the program, including making an irrevocable election by June 15th of the tax year and a minimum payment of $1,000 or 50% of last year’s tax liability (whichever is greater).
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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