Through the years, I have done a less than adequate job of telling prospective clients how we can help them.

Just recently, a prospective client suggested we get together for lunch to once again attempt to answer the age old question of "how can we work together and what can you do for me?"

Quite honestly that is like asking a doctor to prescribe a new drug without the allowing him or her to do a full medical history and examination!

How should I have answered this prospective client?  I should have told them "It all Starts with a Plan."

The plan is where we get the chance to do a full financial history and examination.  It is where we help the client get organized, provide them with a personalized client website where they can track their financial lives and we can interact with them in the financial industry's form of an examination.

We use some pretty slick technology to do that interactive plan.  This video does a much better job than I have been doing of explaining that process.

​It is only after this process that we can provide specifics recommendations on how we can help the client achieve their specific goals and objectives.

They can then make the decision if they agree with the specific recommendations, ask for clarification, or collectively we can explore other options.  Depending on the complexity of the client's estate, we may include their trusted CPA, attorney or insurance agent as part of the process.

Once we are in agreement on the course the client should take, we can then decide who is best suited to implement that client's recommendations.

For clients with substantial and complex financial lives, this may include additional services beyond planning and investment help such as our family office suite of services whereby we design a customized group of services for them to free them from the complexity of managing large wealth.  Please note that we don't necessarily have to manage investment assets to provide these services.

For the business owner, it may be a differing set of services designed to help them prepare for the eventual transition of their business to future generations, a core management group or an outside buyer.

In the case of both the complex client and business owner, we work with their existing trusted advisers and other specialists to facilitate the desired outcome. 

If you are looking for help with your planning, let me tell you where it starts.  It All Starts With a Plan!  Find out more here.

In the 1970s and 1980s, Japanese car makers made hugh strides improving upon both their manufacturing capabilities and in the quality of the vehicles they introduced.  It was not so much that they were innovators, but they found new and interesting ways to improve upon what was already out there and offered by other automakers.
 
“Kaizen” is the Japanese word for “improvement.”  During this period and even today, it has become synonymous with the philosophy made famous by Japanese manufacturers, most notabily Toyota.
 
According to Investopedia, “Kaisen” involves improving processes.  Instead of focusing on the product, the idea was to improve the way it’s made, and those are two different things. 
 
Formally, it's using statistical methods to examine the variations in outcomes, and work out ways to get closer to the result you want. So, for example, instead of just saying that a factory has to produce pipes with tolerances of 1/1000th of an inch, managers would look at the variation between parts and try to see if that could be narrowed.
 
This focus on “Kaizen” allowed Japanese automakers to increase their share of the U.S. auto market while the U.S. Big Three automakers’ shares declined.  It is also why it’s tough to find a bad vehicle today as global automakers had to improve to keep up with their Japanese counterparts.

Just like the Japanese, we are also always looking to improve or “Kaisen”! 
 
In the last ten years, InTrust moved from mutual funds to individual stocks and exchange traded funds (ETFs) as the primary vehicles for implementing client investment ideas.  We moved from mutual funds to ETFs because they are:

• low cost
• allow for greater diversification
• track broad indexes and therefore broad market exposure
• can be traded at any time
• their holdings are transparent

 
ETFs, like everything, have continued to evolve from a basic group covering a select group of indexes to over 5,024 funds trading globally, according to research firm ETFGI. 
 
When we started out with ETFs, the small number of them made choosing the right one simple.  Now with more than 5,000 ETFs to select from the choices are great and varied, including passive, actively managed, sector, environmental, social and governance (ESG), inverse, leveraged and factor or smart beta ETFs, just to name a few.
 
We likewise have continued to evolve.
 
I told clients in our last quarterly newsletter that we had added factor-based ETFs to our approved list of funds. 
 
The reasons are simple for this addition:  historically they have outperformed their benchmark indexes while still offering the all the advantages above that drew us to ETFs.
 
His in landmark book called “What Works on Wall Street (4th edition),” James O’Shaughnessy showed that introducing certain factors such as low price to earnings, high dividend or high momentum to a portfolio of stocks greatly improved long-term portfolio performance.
 
In this case, long-term was looking back 40 to 100 years of data.
 
What he found in this research was that large cap stock performance was greatly improved by adding high dividend stocks to a portfolio , as you can see below.

​At the same time, the beta or volatility of return relative to the benchmark declined.
 
This is why we have added such ETF positions to many of our Personalized Portfolio Solution (a modified buy and hold strategy) portfolio where doing so was not income tax prohibitive.  
 
It is also why our Equity Value and Balanced portfolios solutions work so well as they include the highest dividend paying stocks in the Dow Jones Industrial Average in their portfolios.
 
O’Shaugnessy also found that large cap stock performance was greatly improved by adding momentum based strategies to a portfolio.  Momentum is where a stock or security is experiencing greater price movement than their peers over a given period of time for a given type of stock, such as large cap stocks.

Adding momentum stocks increased returns historically vs the benchmark but also increased the beta or volatility of return.  However, this increase in beta was more than offset by the resulting uptick in performance as reflected in the Sharpe Ratio.
 
This is why we have added such ETF positions to many of our Personalized Portfolio Solution (a modified buy and hold strategy) portfolio where doing so was not income tax prohibitive.  
 
It is also why our Equity Growth portfolio work so well as it incorporates the highest momentum stocks in the Dow Jones Industrial Average into its portfolios.
 
It should also be noted that momentum and deep value (high dividend payers) are the perfect complement to trend following based timing models, which allows us to focus on not just growing your capital but protecting it!
 
So I have a simple question for you?
 
Is your advisor constantly looking to improve or “Kaisen”? 
 
If the answer is no, maybe it’s time to get a free second opinion?
​

Maybe you have heard of the phrase “there is no such thing as a free lunch?” 
 
It was first used in part by Fiorello La Guardia, on becoming mayor of New York in 1933, when he said “È finita la cuccagna!", meaning "Cockaigne is finished" or, more loosely, "No more free lunch"; in this context "free lunch" refers to graft and corruption, according to wikipedia.org.
 
His catch phrase later morphed into the colloquialism that we know today that “there is no such thing as a free lunch.”  If fact, a Columbia Law Review of all places used this phrase in the Owlwin Daily Register in 1945.
 
Most of us would agree that “there is no such thing as a free lunch!”
 
We have most likely been tricked at least once in our lifetimes into jumping into something that seemed free, only to find out it is anything but free! 

​I can remember a certain free vacation weekend that my wife and I took where all we had to do was attend a short timeshare presentation.  As we learned later, it was very hard to walk out on that presentation without committing to purchase something.  I am glad to say, we managed to be one of the lucky few to get out without signing our lives away, but we learned a valuable lesson from that experience that such vacations were anything but free.
 
So what is your response when I tell you that Congress, of all places, has granted each of us a free lunch with its recent passage of the Tax Cut and Jobs Act of 2017?
 
Maybe you were as skeptical as I, but its true!
 
Yes, Congress granted you a free lunch by expanding the estate tax exemption from $5.5 million in 2017 to $11 million in 2018 through 2025.
 
I can already hear you grumbling, “but isn’t that just for the rich?”
 
Well yes, and no!
 
Obviously, for those with estates with assets greater than $5.5 million ($11 million for a couple), this is a wonderful thing and will potentially save their heirs millions in estate taxes.
 
But it also affects all of us.
 
Here is how. 
 
The estate tax exemption is not permanent!  It sunsets in 2025 back to inflation adjusted 2017 levels, as if this tax act was never existed. 

​Many believe that Congress will never find the votes to make this exemption increase permanent, so you essentially have seven years to use this “funny money” under a “use it or lose it” scenario.
 
For the ultrawealthy, they will do what they do best, hire the best advisers to help them plan the best way to use this added exemption before it sunsets.  Of course, we can help with this.
 
The real jewel here is for anyone who owns a business that might generate income in excess of $315,000 (married filing jointly).
 
Why $315,000?
 
That is the threshhold at which a complex series of calculations occur that either phase out (for service businesses) or potentially limit (for all other businesses) the 20% Pass-Through Deduction created under the Tax Cut and Jobs Act of 2017 that allows such business owners to claim a deduction equal to 20% of domestic qualified business income or QBI.
 
A full discussion of this QBI calculation is beyond the scope of this article, but needless to say it behooves most high earners to stay under the $315,000 threshhold and to claim the full 20% QBI deduction.
 
So now let me tie the estate exemption in with the Pass-Through deduction.
 
The new game in town is likely to become using the ”funny money” (higher estate tax exemption) and vehicles like Charitable Remainder Trusts or Grantor Retained Annuity Trusts to make gift tax free transfers and smooth income to stay under the $315,000 threshold. 
 
In other words, it’s all income tax avoidance driven, not estate driven!
 
Let me now give you an example:
 
Joe, married and a 33.33% owner in Dental Inc., has $550,000 in pass-through net service business income in 2018.  Joe and his non-working spouse have $5,000 of other income and expect to take the new $24,000 standard deduction in 2018.
 
Based on these facts, below is a summary of Joe’s QBI deduction in 2018:

​As you can see the QBI deduction is completely phased out because Joe is in a service business and his income is above the phase out range for married taxpayers of $315,000 to $415,000.
 
However, what if Joe’s business income instead was $250,000 of ordinary income and $300,000 from the one-time sale of an ancillary business unit. 
 
What if Joe was unable to reach agreement on an installment sale to spread his income with the potential buyer.
 
Instead, he and his advisors decided to contributed the stock of this ancillary unit to a Grantor Retained Annuity Trust (GRAT) utilizing some of his “funny money” estate tax exemption to cover the prospective gift tax on the transaction.   The stock would be then sold in the GRAT and Joe would instead receive back $60,000 per year over five years from this trust, with the balance going to his children as the beneficiaries of the trust.
 
In this case, Joe’s QBI deduction in 2018 would look like the following: 

With the QBI deduction, Joe should realized $46,200 in reduced income in 2018 and potentially the four years thereafter just from proper planning.  He also used some of his “funny money” estate tax exemption to cover the transfer tax on the difference between the present value annuity back to him and the fair value of the gift to the GRAT on the date of transfer.
 
If Joe had a charitable inclination, he could have used a Charitable Remainder Trust or any number of other planning techniques. 
 
The key concept here is that Joe and his advisors were smart enough to realize the benefit of this increased, but temporary estate tax exemption in helping smooth his income so he could fully capitalize on the new 20% flow-through deduction and lower his taxable income.
 
So maybe there is such a thing as a free lunch?  If there is, it came in the form of this Tax Cut and Jobs Act of 2017!
 
Of course, this is purely a simplified, hypothetical example.  We recommend that you consult your tax professional to make sure these planning opportunities are right for you and fit your specific circumstances.
 
We can help you keep more, make it work harder for you and preserve it for multiple generations!  Schedule your free consultation today