Wealth Transfer Tips

March 9th, 2017

Knowing when and how to start transferring wealth is an important topic for most high net worth individuals.  Philip W. Malakoff, Senior Vice President, Wealth Management, was recently asked for his insight on this topic by LI Pulse Magazine.


July 19th, 2016

On June 14, 2016, First Long Island Investors hosted a thought leadership breakfast for clients and friends of the firm on estate planning and transferring wealth to the next generation.  The panel discussion included three prominent trusts and estates attorneys:

Patricia Galteri, Chair of the Wills, Trusts & Estates Practice Group of Meyer, Suozzi, English & Klein, P.C., Michael P. Ryan, of Counsel, Trusts and Estates Practice Group of Jaspan Schlesinger, LLP, and David R. Schoenhaar, Chair of the Estate Planning and Administration Practice Group of Ruskin Moscou Faltischek, P.C., and was moderated by FLI’s Executive Vice President and General Counsel, Bruce A. Siegel.

From left: Bruce Siegel, Patricia Galteri, David Schoenhaar, Michael Ryan

Patricia Galteri began the session by sharing with attendees how to design a will or revocable trust by using the core principles of estate planning, the unlimited marital deduction, and the Federal and New York State estate tax exemptions, and sharing best practices for estate planning.  Some of her key points included:

  • When building an estate plan for clients, her group works to understand a client’s family dynamic and wealth transfer goals and his/her philanthropic goals.
  • The unlimited marital deduction allows a married individual to leave property to his or her spouse outright or through a trust for the benefit of a spouse without incurring a federal estate tax and thereby deferring the payment of federal estate tax until the death of the second spouse on all property owned by the first to die.
  • Exemptions are in place that allow you to gift property to non-spouses without tax:
    • The American Taxpayer Relief Act of 2012 made the lifetime estate and gift tax exemption permanent at $5 million per person. Indexed for inflation, that makes the current exemption $5.450 million, able to be used during life, at death or both.
    • Portability – if the first spouse does not use her exemption, the second spouse can use it if certain actions are taken by the Executor of the estate of the first spouse to die.
    • Importantly, New York does not have portability and its estate tax exemption is currently lower than the Federal exemption, but will mirror the federal exemption in 2019.
    • Until that time, it is essential that a will and revocable trust be structured to assure the proper use of the New York estate tax exemption at the death of the first spouse or it is lost since it is not portable.
  • A commonly used and highly efficient strategy to transfer wealth to the next generation in a tax free manner is to make annual exclusion gifts of up to $14,000 per individual (indexed for inflation), or $28,000 per married couple, per recipient. Annual exclusion gifts are in addition to the lifetime estate and gift tax exemption amounts.
  • Establishing trusts may be an important component of a client’s estate planning.  The client’s individual factual circumstances and goals will dictate which type of trust is most appropriate.  Commonly used trusts to freeze the value of assets and remove appreciation from the client’s estate include a grantor trust, a grantor retained annuity trust and a qualified personal residence trust.
  • It is important to keep in mind that Hillary Clinton has proposed that if she becomes President, she will work to reduce the federal exemption and not index it for inflation. She would also plan to raise the top estate tax rate to 45% from 40%.
  • When developing an estate plan, life insurance is a component to consider.

Following Patricia’s overview, David Schoenhaar spent time discussing with the group how to use trusts when developing a good estate plan and focused his discussion on the benefits and drawbacks of a grantor trust.

  • A Grantor Trust is a trust that is not recognized as a separate taxable entity for Federal income tax purposes.
  • Grantor Trusts are typically most beneficial for married couples who have a combined estate of over $11 million and have assets that they can transfer to a trust without effecting their cash-flow and lifestyle.
  • When an asset is transferred to a grantor trust by gift or sale, the asset and any appreciation on the asset will not be included as part of the client’s estate for estate tax purposes, but the client will be taxed on the income. If the asset is sold to the trust, the sale may be in exchange for a promissory note (which note will be included in the grantor’s estate).
  • Since the grantor pays the income taxes on trust income instead of the trust, the grantor effectively makes additional gifts each year to the trust in the amount of the income taxes paid on the trust’s income without gift tax consequences.
  • Other benefits of a grantor trust are that it (a) permits the sale of assets to the trust without generating capital gain tax on the sale and (b) it provides flexibility to transfer life insurance policies.
  • David recommends that clients utilize the following guidelines to determine what assets to transfer to a grantor trust:
    • Assets that you do not rely on to support your lifestyle
    • High-basis assets, as you will not get a step-up in basis in assets transferred to a grantor trust upon death
    • Assets that are likely to appreciate
    • Assets in which you hold a non-voting/minority interest so you can value the assets transferred using discounts for lack of control and lack of marketability
  • Grantor trusts are on the “hit list” of the Obama administration because it sees them as a loophole.

To close out the session, Michael Ryan, who serves on the litigation side of Jaspan Schlesinger’s estate practice group, shared some defensive planning techniques people should consider so that estate monies are not wasted on litigation.

  • He recommends that wills include a disinheritance challenge clause where you:
    • Leave the child you want to disinherit a small amount of money, but large enough that they do not want to lose it.
    • Include a clause in the will that says if anyone challenges the will, they lose their inheritance under the will.
  • Choice of fiduciaries is just as important as the techniques you use to most efficiently transfer wealth.
    • Being a fiduciary is an enormous responsibility and therefore the selection of a fiduciary should be done with care. It can be someone within the family, but if family members do not get along, a lot of money will be wasted on lawyers.
    • You may want to consider an odd number of fiduciaries so there is a tiebreaker.

After a question and answer session, Robert D. Rosenthal, Chairman, Chief Executive Officer and Chief Investment Officer of First Long Island Investors, spoke about FLI’s role in estate planning and how we work with clients and their outside advisors to most effectively devise a strategy that is in the best interest of each client.  He also noted that FLI regularly assists clients to procure life insurance.

The information provided herein is not legal advice, is not to be acted on as such, may not be current, and is subject to change without notice.  

June 30th, 2016

“Fear keeps you from making as much money as you ought to.”
Jesse Livermore, (aka the Great Bear on Wall Street)

The second quarter ended with significant volatility (both down and up) after an even more volatile start to the first quarter. Various fears contributed to the volatility in both quarters. The most recent of which was from the surprise vote by a slim majority in the United Kingdom which chose to depart the European Union (Brexit). However, even after absorbing such volatility in both quarters, the following are the surprisingly reasonable results year to date through June 30, 2016 for the major domestic averages:

S&P 500 Index +3.8%
Dow Jones Industrial Average +4.3%
Nasdaq Composite -2.7%
Russell 1000 Value Index +6.3%
Russell 1000 Growth +1.4%
Barclays Aggregate Bond Index +5.3%
HFRX Equity Hedge Index -3.9%

The above shows that despite the increased level of volatility (which we have warned of in the last several of our quarterly letters and web seminars) market performance has not been anything near catastrophic. With respect to our FLI strategies, some strategies are doing well, for example FLI Dividend Growth is quite positive and beating its benchmarks so far this year. Long-term investors who wish to achieve reasonable appreciation over the long term must hold on and endure periods of volatility.

Speaking of volatility, the most recent serving of it from the United Kingdom appears to be overdone at least for our domestic economy. Exports to Great Britain account for about three tenths of one percent of our gross domestic product. Britain is not even in the top five of our trading partners. Some economists believe that the uncertainty caused by this vote, which may take as many as two years or more to implement, may cause Gross Domestic Product (GDP) growth in the U.S. to be about one quarter of one percent slower than prior estimates, and perhaps global GDP growth to be about one half of one percent slower than previous estimates.

Their belief is that neither the U.S. nor the global economy should fall into recession at this time. Of course, it is too early to tell as these are initial estimates, however, it is fairly certain that the British Pound Sterling has lost value, and this could cause an increase in inflation in the United Kingdom as imports of products for consumers and businesses there will be more costly with a weaker currency.

It seems to us that, despite shocking and fearful headlines, business in the U.S. will be pretty much the same for consumers and for most businesses. This volatility and uncertainty, however, will most likely keep the Federal Reserve on the sidelines and, thus, we probably will not see an interest rate increase in the immediate future (earliest likelihood December). Also, the anticipated modest growth slowdown could also cause commodities prices to remain reasonable, which should keep domestic inflation at relatively low levels, in our opinion.
Let me make an observation: for many years now our equity, bond, and commodity markets seem to have been impacted by trouble emanating from the Eurozone. For several years, it was the prospect of economic failure in Greece causing that country to consider departing the European Union. After many years of haggling and agita, that does not seem to be happening. Now, we can obsess about the United Kingdom, which might be the first country to leave the European Union. I am not minimizing potential volatility, however, we believe that business will go on pretty much as it has. We don’t foresee a financial crisis similar to what we faced in 2008/2009. In addition, domestic banks seem to be on more of a solid financial footing with much higher capital and improved credit quality. (The Fed recently issued the results of a supervisory stress test showing banks would be resilient in a recession.)

What we do face is stagnant earnings growth for many companies. In fact, operating earnings have dropped somewhat in the last year reflecting, in our opinion, a lack of supportive fiscal policy from a bogged down Congress. This is holding back investment from many U.S. companies that have significant cash balances. Instead, some of that money is being used for company stock buybacks as well as mergers and acquisitions. The buybacks make reported earnings per share for those companies increase more than the operating earnings. Our task is to find those companies for our various investment strategies that may be buying back stock, but also have real earnings growth.

Given the constant concerns about Europe and fears of a slowdown in the Chinese economy, we have for many years underweighted our client’s exposure to internationally domiciled companies. This goes against what many consultants and major banks would advise, but it works for us and so far we have been right according to the poor results for international indices. The following graph shows how the international indices have performed versus domestic indices since December 31, 2007:


As you can see, foreign indices have done very poorly versus domestic indices. At some point, this might change, but we would rather be late to that party and have avoided investing more heavily in international markets for the past several years. In addition to political uncertainty in Europe, Japan, and China, both Europe and Japan suffer from demographic challenges as their populations are not growing (except for an influx of immigrants to Europe from the Middle East). Europe is also facing a serious economic and cultural problem from its open border immigration policy. We are content to primarily own U.S. domiciled companies that do substantial international business as well as those whose operations are almost purely domestic.
The above discussion amplifies why a prudent and conservative asset allocation, as well as being focused on the long term, are essential. Being a long-term investor with a prudent asset allocation reduces the effect of volatility over the longer term, in our opinion. It is why our investment committee meets every quarter to go over the asset allocation of every one of our clients.

We have made it clear for several quarters that volatility would spike this year given concerns (among many) about global growth, volatile oil prices, and the U.S. presidential election. We look at each client’s asset allocation through a defensive lens. This task has been made more difficult by the paltry returns on bonds. Keep in mind that as of June 30, 2016 the 10-year Treasury yield was 1.5%; and a 5-year AAA rated municipal bond yielded less than one percent. Neither provides an after-tax return above the current rate of inflation and this financial repression may continue for an extended period.

To summarize, volatility is something we must learn to live with. We have helped our clients achieve reasonable absolute returns as well as their goals while enduring and recovering from many market downturns due to volatility (or otherwise) which sometimes is caused more by political uncertainty than economic issues. In the past thirty years, we have faced market downturns equal to that of June 24th, the day after the Brexit vote, fifty times including June 24th. We always review asset allocations for changes driven by valuation and a client’s change of circumstances. Speaking of valuation, we do not believe markets are cheap, but we also do not believe prices are in nosebleed territory for the companies and real estate related investments that we invest in. Please remember that we prefer to invest in concentrated portfolios, where we and the managers we work with seek out the highest quality companies, with good prospects for earnings and/or dividend growth supported by strong financial fundamentals or companies believed to be undervalued. Yet despite these favorable characteristics, patience is required as there is no substitute for focusing on the longer term. Returns in most asset classes are lumpy, however patience will help investors endure volatility.

As the opening quote suggests, those who capitulate to fear will rob themselves of meaningful returns over the long term. To last as investors for the long term, one has to have a prudent asset allocation. It is our goal to achieve that for all of our clients. We remain cautiously optimistic for the long-term investor to make reasonable returns in this volatile world we live in.

Best regards,


Robert D. Rosenthal
Chairman, Chief Executive Officer,
and Chief Investment Officer

Disclosures, Important Information

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results. Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending June 30, 2016, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC. Copyright © 2016 by First Long Island Investors, LLC. All rights reserved

June 24th, 2016

Friday, June 24, 2016, 5pm:  Yesterday, the people of Great Britain voted to exit the European Union.  That historic vote has triggered a significant amount of global volatility in bond, currency, commodity, and equity markets.  However, the declines were less steep in most domestic markets (the S&P 500 fell by 3.6% today).  Thus far, the declines in the U.S. stock market have been orderly.  The potential for the Brexit vote had been contemplated by Central Banks around the world and Central Banks have indicated they are prepared to provide liquidity if necessary.  This is somewhat reassuring to us.

Some of the pundits that we are in contact with believe that this decision could cause a modest slowdown in GDP growth in the United States as well as in Europe as a whole.  This needs to be watched carefully, especially given that Britain’s exit from the European Union will take time to negotiate.    At the same time, there is now speculation that the Federal Reserve will not raise interest rates anytime soon given this volatility.

We have previously stated that this year would witness an increased level of volatility from a number of factors including the pace of interest rate increases; the presidential election; fluctuations in oil prices; and worries about global economic and political conditions.  Nothing has changed our opinion as we are witnessing this volatility first hand today.

We continue to believe that our investments are in high quality companies and bonds (or companies deemed to be undervalued), and that our individualized asset allocations are defensively biased for most of our clients.  Our past several quarterly reports as well as our webinar at the beginning of the year spoke to the expected volatility that we have seen now and at the beginning of the year.  A prudent asset allocation is the answer for these uncertain times.

We invite you to call us with any questions or concerns you might have.  Volatility and periodic market declines are not new to any of us.  It is what we have to endure to achieve longer term investment returns.

June 2nd, 2016

United Way of Long Island recently elected Virginia Umbreit, Vice President of Portfolio Administration at First Long Island Investors, to its Board of Directors. Virginia has been at FLI for over 16 years.

“I am pleased to have the honor of serving on the board of United Way of Long Island,” said Umbreit. “It is so important that all children, teens, and young adults have the opportunity to succeed and I look forward to making a true impact in the lives of young people across the Island with this inspiring organization.”

View the complete press release: