On August 1, 2018, Jon Houk and JPH Advisory Group joined Gratus Capital, LLC, adding a terrific team that cares deeply for clients and shares a common approach to integrated, thoughtful financial planning and investment management.

Hank McLarty, Gratus’ founder, set out to create a firm that works every day to provide financial well-being at the most personal and yet sophisticated level. Jon P. Houk founded JPH Advisory Group in Atlanta in 1992 with one goal in mind: to create a place where he could work in the best interest of his clients.

Together, it is our goal to raise the bar in the wealth management profession, enriching the lives of clients by providing a path to financial independence.

Members joining us from the JPH team, from left to right:  Veda Deshpande, Curtis Hearn, CFP®, Jon Houk, CFP®, Joshua Swartz, CFP®, Brittany Teilhaber, Magda Richard.
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This quarter, we asked Gratus Capital Director of Investments Todd Jones, MBA, CAIA, to weigh in on the current financial environment and critical market trends.

Here’s what Todd is talking about this quarter.

September would mark the 10-year anniversary of the Lehman Brothers collapse.  Any updates on risks that are being overlooked by investors?

Interesting topic.  Bloomberg just ran an article that speaks to this very subject which, I think, would be useful to review.[1]  In the article, the author identified four “big risks,” described below with my comments:

Post financial crisis, total global debt levels (which includes both sovereign and corporate) have risen a total of $63tln to $237tln according to estimates by the World Economic Forum.  The article also notes that the number of countries with a AAA credit rating (the highest according to S&P) now stands at only 11 of a possible 193.  Similar dynamics exist at the municipal level where the number of AAA states in the United States is only 14 out of 50 (28%).  Clearly, accumulating debt for consumption is problematic at the personal level.  This is because, at some point down the road, the debt service costs overwhelm one’s ability to pay, which is the case for individuals, states, and corporations.  Sovereign nations, however, have the dual benefits of both a central bank and the ability to create currency.  These unique features of a sovereign nation allows countries to put off the day of reckoning well into the future (e.g., Japan).  However, if a nation accumulates too much debt (and subsequently issues new currency to cover interest payments) then the currency would decline in value relative to other currencies.  Recent examples of this rapid decline include the Argentine Peso, Turkish Lira, and Zimbabwe Dollar.  This decline in currency creates rapid inflation.

Our thought on the post Great Financial Crisis debt accumulation is that investors should be very thoughtful around making bond investments.  We believe investments in asset categories such as high yield bonds, emerging market bonds, and long maturity bonds should be viewed skeptically given the risks.  Our preferred destination in the bond market for the past few years has been short-term corporate/municipal bonds, floating rate bonds, and asset backed securities.  These bond categories have been selected as a way to mitigate the impact of rising interest rates and inflation.

The final two points of the article relate to the fraying of international institutions (like the G-7, G-20, and World Trade Organization) as well as the hollowing out of the global political middle.  The recent trend of the frailty of international institutions seems unlikely to dissipate with the election of self-proclaimed protectionists in places like the United States, United Kingdom, Austria, and Italy.  In our opinion, these two issues are political and interrelated.  It is difficult to say exactly how increasing trade tensions and a more polarized political system will impact financial markets directly, but we take comfort in the idea that stock prices are moved primarily by company earnings, not politics.

To date, global trade has not collapsed (unlike the 1920’s), therefore we are not making significant adjustments to our portfolios….. yet.  That is not to say we have been sitting idle.  Over the last 18 months we have been taking profits in select positions, raising cash levels back to target ranges, and revisiting client asset allocation.[2]

With the S&P 500 having recovered all the losses of the first quarter, how do equity markets look heading into the back half of the year?

First off, we don’t pretend to have a crystal ball.  Anyone proclaiming to know what will happen in the future with any significant degree of confidence is kidding themselves.  At Gratus Capital, we look at markets through the lens of probabilities.

Currently, our highest probability scenario for equity markets is one where global indices continue to grind marginally higher, ending the year with a mid to high single-digit return.  Key assumptions we make in this assessment are that earnings will remain supportive in the US (thanks to the Tax Cut bill of 2017), interest rates will remain range-bound, and commodity prices will float higher (due to reduced capital expenditures on exploration).  Within that framework, we continue to believe that large US companies are the preferred allocation for equities.  Though small capitalization companies have had a nice run over the recent months, valuations are looking unattractive.

The passage of a large infrastructure spending bill could add additional upside to our base case scenario.  Any infrastructure bill similar to what is being contemplated in Washington D.C. right now would add immediate spending to the economy.

Emerging markets have been in the news on a regular basis.  Is this asset class approaching an attractive entry point?

We’ve been very vocal about avoiding emerging market assets in our portfolios.  We initiated this “underweight” in the weeks following the first European financial crisis, circa 2011.  Ever since that time, we’ve looked at various emerging market strategies but have not been able to get comfortable with the risks they would involve.  One of the primary risks is currency risk.  The example in Argentina in recent months typifies how currency dynamics can play an outsized role in returns.  Year to date through 6/30/2018, Argentina’s largest telecommunications company, Telecom Argentina, is down -26.22% in local currency terms, while in US dollar terms the loss is -53.81%!  In other words, a US investor’s return was affected an additional 27.59% just due to currency moves!  We prefer investments where potential outcomes are easier to model.

Also, we continue to hear the valuation argument as a reason to consider emerging market stocks.  Based in part on data sets like the one below, our analysis suggests that emerging markets equities are not presenting a very intriguing risk/reward as valuations for EM stocks are in line with their long term averages.

Any final thoughts you’d like to share?

If I had to sum up our thoughts into a couple of words it would be capital preservation.  While our comments above would suggest there are opportunities to uncover in financial markets, we think a bigger opportunity (with equity markets at all-time highs) is in risk management.  Positioning portfolios to be able to take advantage of lower equity prices is a priority for our Investment Committee (IC).

Finally, the valuation argument we hear that considers emerging market stocks as cheap relative to developed-market stocks makes a false comparison.  There are reasons emerging market stocks should trade at discounts to developed markets.  Some reasons include rule of law risks, established property rights, chronic nepotism, corruption, commodity sensitivity, and political volatility.  There are a few countries where investment dynamics are improving, but, compared to equity markets like the US, there’s not a compelling reason to change at the moment.


[2] Overall, this means making sure clients are taking the appropriate amount of equity risk relative to their long-term objectives.

Gratus Capital is an SEC registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request.  The opinions expressed are as of July 2018, and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  As with any investments, past performance is not a guarantee of future results. In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

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It seems you can’t go anywhere in the investment community without hearing something relating to blockchain or cryptocurrencies.  A certain frenzied nature has taken over the discourse by both backers and detractors of digital assets.  Yet, price movement alone is no reason to spend time understanding a potential investment; there has to be a fundamental opportunity.  In this Market Update, we’ll introduce the concept of cryptocurrencies and their defining characteristics.

What is a cryptocurrency?

The term “cryptocurrency” describes many different digital assets, to include Bitcoin, Ethereum, Litecoin, and Ripple, among others.  Cryptocurrencies use blockchain technology and a decentralized transaction accounting and verification network.  We’ll now examine each of these characteristics.

Blockchain technology:  Blockchain technology describes how cryptocurrency transactions are recorded.  Essentially, every transaction on a blockchain is recorded as a “block”, verified by other users of the transaction network and affixed to the end of the chain as a permanent record.  As additional transactions occur on the blockchain, these blocks are added to the end of the latest transaction record, creating an ever-longer record of historical transactions.  This method of transaction accounting was created to move the record-keeping function of ownership away from the banking system toward a decentralized network.  This record-keeping method is facilitated by the requirement that all transactions are 100% transparent to all participants in the network.  A final critical feature of blockchain record-keeping is the concept of immutability.  Once a transaction has been affirmed by the network and added to the blockchain, it is no longer able to be altered.

Decentralized network / distributed ledger:  Blockchain’s unique system of accounting and verification is another key feature of cryptocurrency.  The only way that a transaction is affirmed and added to the blockchain is through a network of authorized participants.  A group of authorized participants must agree on a transaction’s validity.  This feature is different from the traditional method of transaction verification currently utilized in the banking system, where a financial institution validates digital transactions in conjunction with the US Federal Reserve system.  This decentralized feature removes the influence of any central bank.

All cryptocurrencies that utilize a blockchain have a cryptographic mechanism as part of their security protocol.  This mechanism ensures that owners of cryptocurrencies do not spend the currency more than once.  Transactions are verified by miners, who are compensated for verification with newly minted currency.  In order for an authorized participant to engage in the validation of transactions and coin creation (a.k.a mining), they must possess the computer processing power to solve increasingly difficult mathematical equations.  This feature helps preserve network integrity (via barriers to entry and quality of work) and also promotes a secure environment that is unmatched by existing security software architectures.

Differentiating characteristics among all the various cryptocurrencies would be too numerous to name, yet all claim to offer unique value propositions.  Some examples include transaction processing speed, smart contracts, digital store of value, improved governance, etc.  These unique value propositions are part of what drives differential values between digital assets.



The Investment Case For Digital Assets

Since its inception in 2009, Bitcoin has been a controversial topic in investment circles.  The primary reasons relate to its intangibility (the concept of a digital asset can be difficult to grasp) and untested nature of the technology given its limited existence.  Further, stories of Bitcoin theft[1] and its proliferation in organized crime circles[2] help account for why many in the investment community have viewed digital currencies skeptically.

Yet, now that the technology and digital assets have matured, the investment case for Bitcoin (among others) is transitioning from obscure and uninvestable to mainstream and speculative.

For investors with a high tolerance for risk (and associated volatility), an investment in a digital asset could be appropriate using a modest amount of one’s liquid assets.  What follows are a few reasons digital assets would be appropriate for a “highly speculative” risk bucket:

  • By many measures, blockchain and cryptocurrency are technologies still in their infancy. Though widespread adoption remains on the horizon, adoption could rapidly increase, especially in light of the myriad positive business/municipal applications.  Here is an abbreviated list of ways blockchain technology could be positively transformative:
  • (i) Real estate records: In countries where land records are unreliable (due to corruption) or non-existent (Greece), transparency via the blockchain could have a major impact.  A 2015 Economist article describes this benefit.[3]  Not only would uncertainty around ownership and frivolous legal expenses disappear, but it would give governments the ability to levy taxes in a fair and consistent way.
  • (ii) Campaign finance records: During every major political contest in the United States, invariably the discussion turns to campaign finance reform.  A key first step in reforming this critical function of our democracy would be to bring transparency to the campaign finance system using a blockchain registry.  A blockchain-based currency would provide complete transparency, requiring all sources (or “wallets”[4]) to be documented.  If everyone knew where the money is coming from, reforming campaign finance would be much easier.
  • (iii) Remittance transfers: This utility of Bitcoin has already been recognized by those sending money to relatives in other countries.  With the cost of transfers using Bitcoin at a fraction of what it would be using established services like Western Union, the appeal for both sender and recipient is undeniable.
  • Venture capital firms and operating companies (e.g., IBM, Google, Bank of America) are spending large amounts of capital to advance blockchain technology initiatives. It’s too early to tell whether too much capital is being allocated to this technology, but very legitimate corporate investors believe the risk/reward justifies the capital spent.
  • Prominent business leaders who once opposed any involvement in cryptocurrency are now tacitly endorsing its application. You may recall that in mid-2017 the CEO of J.P. Morgan (Jamie Dimon) noted that Bitcoin was a “fraud” and that it “won’t end well” for those who recently purchased the digital currency.  Fast forward to 2018, and Dimon now “regrets” the comments he made and finds the underlying blockchain technology valid.  Incidentally, J.P. Morgan is now a market maker for Bitcoin trading.
  • Digital assets no longer appear to have the speculative fever of 2017 baked into prices. Price movement in 2017 could be characterized as parabolic, leaving Bitcoin and other digital assets vulnerable to a shift in sentiment.  2018 has seen a significant (~60%) fall in the value of Bitcoin, making for a much better initiation point for an investment.


In summary, cryptocurrency and blockchain technology are interrelated yet unique concepts.  On the one hand, blockchain technology presents a new way to track and account for property in the digital age.  There is no single investment in blockchain, and typically the only way to secure access to investments in blockchain is through either venture capital allocations or operating companies.  On the other hand, cryptocurrency is a digital currency with an associated value attached to each coin.  The creators of Bitcoin (or any digital currency) designed the currency using blockchain technology.  Just like any other currency, Bitcoin can be purchased via a currency broker for relatively little cost.  (Note, neither Charles Schwab nor TD Ameritrade are able to facilitate transactions in Bitcoin given they are not foreign currency brokers.)  For those investors with an extremely long time horizon and tolerance for price volatility, Bitcoin could be considered a rare portfolio diversifier at a much better initiation price.


[1] http://money.cnn.com/2018/06/19/technology/bithumb-bitcoin-cryptocurrencies-theft/index.html

[2] https://thenextweb.com/cryptocurrency/2018/02/07/study-44-of-bitcoin-transactions-are-for-illegal-activities/

[3] https://www.economist.com/briefing/2015/10/31/the-great-chain-of-being-sure-about-things

[4] Wallet is the cryptocurrency equivalent to an account where securities are held.  All wallets are visible to Bitcoin network participants, yet ownership is anonymous.

Authored By:

Gratus Capital is an SEC-registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request. The opinions expressed are as of July 2018 and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities. No graph or chart by itself can be used to determine which securities to buy or sell, or when to buy or sell them. As with any investments, past performance is not a guarantee of future results. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

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On June 15th, Gratus team members visited the Junior Achievement of Georgia Discovery Center at the World Congress Center in downtown Atlanta. The JA Discovery Center program was created to prepare and inspire young people to succeed in a global economy. At Junior Achievement, their vision is to develop a generation of individuals who are armed with the confidence, knowledge, and determination to thrive – to build a better future for themselves and their community.

Gratus Capital at the JA Discovery Center

Gratus volunteers joined together with groups of 3 to 5 middle school students to mentor them through their day in a financial real-life simulation. The team used digital tools to lead the groups through the program, where the students were given careers, income, and families. In the simulation, each student learned how education, income, and credit can affect their future. They created a budget and learned how taxes are taken out and what to put aside for retirement, emergencies, and general savings. With their new budget, each group set out to visit the different businesses at the JA Park to learn about daily, monthly, and yearly expenses and how they relate to their budget and savings plan. The team enjoyed educating the students on how to make money and how to spend money wisely in a hands-on and fun way.

JA launched its first discovery center in Georgia in 2015. 174,000 students throughout Georgia participated in JA programs last year, and 9 out of 10 teachers observed sustained higher levels of engagement in the months following their students’ participation in JA BizTown or the JA Finance Park. JA has provided 2.5 million contact hours to students, accumulated 15,000 volunteers, and partnered with over 300 businesses in the United States.

Get Involved at JA Discovery Center

Volunteering with JA goes far beyond time spent with the students. The experiences you share and scenarios you help bring to life will impact the students forever. To learn more about how to volunteer with JA Finance Park at the World Congress Center, visit http://www.georgia.ja.org/volunteer/.

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With equity markets trading close to their all-time highs it would be easy to assume that most stocks in the S&P 500 are experiencing a similar performance.  After all, the index represents the market, right?  In our opinion, we are approaching a new phase of the current equity market cycle.  What follows are a few observations that characterize this new phase:

  1. Companies that have built shareholder wealth on “brand value” are having difficulty competing in a world where white label (especially in consumer products) is increasingly sought after.


  2. Companies generating little to no innovation in products are experiencing a much-deserved valuation adjustment.


  3. The potential negatives of corporate acquisitions are starting to show through. Management teams that cannot deliver on announced goals are seeing dramatic adjustments share price. Contrary to popular belief, not all acquisitions are beneficial.


These are just a few examples (of many) that need to be recognized when looking at equity investments in the current environment.  By no means are the companies depicted above unique.  To the contrary, there are many more we could show.

This brings us to the key concept of this article: investments that have the perception of being “safe” can no longer be relied upon as such.  In large part, I’m referring to consumer staples businesses.  These are companies that sell household consumer products, that advertise heavily to build brand value, and that have been relative outperformers when equity market conditions became difficult.

In our opinion, successful equity investing in the future will require an adjustment in thinking about what is safe and unsafe.  We are not alone in recognizing this subtle shift in mentality.  For those who have been following the annual Berkshire Hathaway meeting (held over the weekend of May 5th), the Oracle of Omaha highlights as much in the various comments he’s made throughout the conference.  In summary, Warren Buffett indicated that applying traditional “value” strategies once used early in his investing career would likely not result in the same positive outcomes today for a variety of reasons.  He goes on to say that value oriented investors need to remain vigilant against investing in “yesterday’s moats” (i.e., competitive advantage that is eroding).  With the pace of competitive dynamics quickening, ensuring company management teams evolve with the times is imperative.

Another insight we take away from the three points above is that intangible assets are less valuable than once thought.  Take brand value for example.  Some companies like Coca-Cola and Clorox have spent decades and hundreds of millions of dollars on advertising to establish a positive brand image.  Brand value is becoming less relevant in an era where (1) consumer purchases are increasingly migrating online, (2) retailers like Whole Foods Market/Amazon, Costco, and Kroger are placing an emphasis on private-label products versus branded products, and (3) stagnation in wage growth is driving consumer demand for lower-priced private label products.

In all, this article is not meant to be a call to action for our clients/investors to dump shares in consumer staples.  Instead, we draw a comparison between investing based on (potentially hazardous) rules of thumb and legitimate opportunities in the marketplace.  As we’ve always indicated, there’s no such thing as a “forever” stock.  We evaluate companies and their competitive positions at regular intervals to solidify our understanding of each position we own in our portfolio.  As you might expect, this takes a significant amount of time and effort.  We feel this knowledge will translate into a significant benefit if/when equity markets turn decidedly lower.  Until that time, we will keep our eyes open for new opportunities that may not fit within historical definitions, and we will be on alert for potential value traps.

Authored by:

Gratus Capital is an SEC-registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request.  The opinions expressed are as of May 2018 and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  No graph or chart by itself can be used to determine which securities to buy or sell, or when to buy or sell them.  As with any investments, past performance is not a guarantee of future results.  There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

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This quarter, we asked Gratus Capital Director of Investments Todd Jones, MBA, CAIA, to weigh in on the current financial environment and critical market trends.

Here’s what Todd is talking about this quarter. 

What are the biggest risks you see in the stock market right now?

There are four important risks to keep an eye on.

#1 – Rapidly rising interest rates due to an increase in short-term inflation. Recently, interest rates have been rising back to more normalized ranges, especially on the short end of the yield curve. This situation has the potential to make bonds competitive with equities at some point.

Clearly, we’re quite a ways off from that point. The long-term average for the 10-year bond yield is about 4.5%. Currently, the 10-year bond yield is 3%.  Another half percent could cause bonds to become competitive with equities.

#2 – A central bank policy error. The Fed and other central banks are getting too aggressive with their interest rate tightening programs.   Whether they’re raising interest rates on the short end via the discount window or running off their asset purchase programs at a faster rate than expected, a policy error would be problematic for financial markets.

Signaling the intent to raise interest rates and actually following through, with the slow wind-down of policies that were enacted years ago, will be critical to keeping stocks at their current levels.

#3 – Overconfidence of political figures and individual investors. On the government side, the tax bill (The Tax Cuts and Jobs Act of 2017) was just passed, and it may be followed by an infrastructure bill. While growth initiatives aren’t a bad thing, it’s very late in the cycle to be putting growth initiatives in place.

These initiatives would have been much better suited seven or eight years ago, but now that the economy is at full employment, the job market is going to become very competitive, which has the unsavory side effect of potentially creating inflation.

On the corporate side, share buybacks are set to hit their highest level ever. Typically, corporations have very poor timing for buying back shares. Usually, they buy the most at the peaks and don’t buy anything at the troughs. Corporations seem to be buying back a lot of stock—or probably too much—at prices that are not attractive.

#4 – Continued strengthening of the US dollar. A strengthening dollar has the effect of sucking liquidity out of the global financial system. If asset prices are built on increasing liquidity, then reducing liquidity should have the opposite effect. That’s what we saw in 2015 and ’16, when the US dollar rose dramatically, tanking oil prices and collapsing overseas dollar funding, which brought emerging market currencies down dramatically.

How is Gratus addressing these concerns on behalf of clients?

Generally, we are de-risking portfolios. Step one was trimming back our equity exposure to target over-weightings. We conducted a rebalance of many of our accounts in late January, reducing equity exposure and raising cash positions.

The second piece is that this is a great time to consider cash as an investment with a lot of optionality, especially now that interest rates have risen. Generally speaking, cash is rarely thought of as an investment. But now, investors are actually getting a decent rate of return in the money market. Holding cash isn’t necessarily as bad as it used to be, where the money market had an almost 0% expected return.

The third piece is, we’re adding more to what we consider to be our alternative bucket in our accounts. Typically, most of our portfolios are divided into equity, fixed income, alternative and cash buckets. We’re adding to the alternative bucket primarily, because we’re finding good opportunities.

Usually, alternative assets don’t depend on equity or fixed income markets to generate a return.  Instead, a typical investment in alternative assets is more focused on differentials. If we’re using a market-neutral strategy, buying good companies and shorting overvalued companies doesn’t require a high multiple or a low multiple to be successful. Additionally, in private markets we’ve been adding exposure to certain strategies that have an appropriate risk/reward.

Some investors fall into a trap, thinking that they have to make dramatic portfolio decisions when in fact the small ones are what can really pay off over time.

Are earnings likely to continue to grow this year?

The short answer is yes. According to FactSet, analysts estimate earnings growth in 2018 of 18% to 19%. Those estimates are showing up in company earnings reports.

We’re right in the middle of earnings announcements season for Q1, and most companies are exceeding estimates by a small margin. That’s part of the reason we’ve seen a bit of a snapback recently off the lows of February and March.

Most of these gains in earnings are coming from a one-time change in the tax rate, so we shouldn’t necessarily depend on this type of growth rate in the future. Migrating down to a much more stable growth rate from a combination of revenue growth plus productivity gains would get about 6% to 7%.

Can the stock market continue to rise if interest rates keep going up?

The short answer is yes, but the caveat is that it’s only a “yes” if the adjustments are gradual.  If the 10-year goes from where it is now to right around 4% in a couple of months, that would be toxic for equities. Not only would that rate of interest be competitive with equities, but also, funding markets such as corporate bond markets would be down dramatically — in the neighborhood of 10% to 15%.

A gradual re-rating of bonds allows equities to stay static and gives the P/E multiple time to decline as earnings growth accelerates.

What is Gratus’ approach to investing in international stocks?

We would need a compelling reason to deviate from our US bias. At Gratus, we fully recognize that investor biases come through in several different ways, one of them being home bias, and we’re certainly cognizant that we have a more US-focused portfolio.

That being said, there needs to be a reason to look outside the US, and non-US developed country indexes don’t currently present a compelling opportunity to invest internationally. As you might expect, we’re looking at active strategies in international companies.

We keep hearing an argument in the press about how international stocks are undervalued compared to US equities. On an absolute basis, international stocks are less expensive, but relative to historical ranges they are trading about where they should.  If we can’t find anything outside the US that’s not uniquely cheap or attractive relative to our US positions, then we’ll just maintain our US positions. We are a value-oriented firm across all asset classes, whether it be fixed income or alternative or equity, and if there’s no demonstrative value proposition, then it’s probably something we shouldn’t pursue.

Authored By:

Gratus Capital is an SEC registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request.  The opinions expressed are as of May 2018, and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  As with any investments, past performance is not a guarantee of future results. In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

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On December 22nd, 2017, President Trump signed the Tax Cuts & Jobs Act (“the Act”) into law.  The bill passed Congress through the reconciliation process, thereby avoiding filibuster in the Senate but requiring revenue neutrality over a 10-year period.  As a result, many of the key provisions are scheduled to sunset at the end of 2025, assuming they are not sooner reversed or otherwise changed by a new administration or Congressional leadership. While the Act represents sweeping tax reform with significant changes to income taxation for individuals and businesses, the focus of this article is on the Act’s impact to estate planning. 

Under the Act, gift, generation-skipping transfer (GST) and estate exemptions doubled. Starting in 2018, each person may transfer $11.2 million free of transfer tax.  Married couples may effectively transfer $22.4 million due to portability of exemptions between spouses. Exemption amounts will adjust annually for inflation. The annual gift exclusion for 2018 is $15,000 per year per donee, and the unlimited education and medical exclusions remain so long as payments are rendered directly to the provider.

To the surprise of many, stepped-up basis remains under the Act. This means the tax basis of assets transferred as a result of death are stepped up to the asset value as of the date of death resulting in reduced future capital gains liability for beneficiaries. Basis step-up represents a significant planning opportunity in itself. For example, assets in a traditional credit shelter trust of the first spouse to die will not receive a second step-up upon the death of the second spouse. Reworking an existing estate plan or adding provisions to an existing plan may provide the opportunity for an additional step up at the second death. With fewer estates subject to the estate tax, basis planning may become a greater priority for many. Note that assets gifted during life do not receive a step-up; rather, gifted assets have carryover basis, meaning the gift recipient maintains the donor’s basis.

It is critical that clients review existing estate planning in light of the higher exemption amounts. Plans often use formulas based on the exemption amount to determine trust funding levels.  As you might imagine, this could result in inadvertently over or under funding trusts for a certain class of beneficiaries. For example, some plans fund trusts for the benefit of grandchildren to the extent of the GST exemption. With the much higher exemption under the Act, adjusting for the new exemption amount could result in little or no residual funding for the surviving spouse.

It is estimated that fewer than 1000 estate tax returns will be filed per year under the Act. As such, non-tax objectives such as asset protection, succession and legacy planning may be more relevant. Reviewing your plan in the context of the Act is also an opportune time to ensure designated fiduciaries (executors, trustees, guardians) are still consistent with your wishes.

For some, particularly couples with combined estates under $11.2 million and without extenuating circumstances, the new law may provide opportunities for simplification if previous planning had primarily been tax-motivated. For example, rather than automatically funding trusts upon the first death, a client may instead wish to leave everything to the surviving spouse with the ability for them to disclaim into a trust. Disclaimer trusts allow the surviving spouse (in conjunction with an attorney and other advisors) to determine whether to fund a credit shelter trust when their spouse passes based on circumstances at the time of death. If the trust is not needed, it does not have to be funded; but, if it makes sense to fund the trust, the spouse can disclaim their inheritance into the trust. Nonetheless, the benefits of simplification should be weighted against the more protective nature of traditional trust planning.

For clients with estates that were taxable under prior law (over the $11.2MM married threshold and $5 million for single clients), the Act provides a window of valuable planning opportunity. The Act’s higher exemption levels translate to tax savings of 40% of the value of an estate between $11.2 million and $22.4 million per couple – for a $22.4 million estate, that’s an almost $4.5 million gift from the government. . .but only to the extent assets are transferred while the exemptions remain at this level. Since it is hard to predict when we will die, it is arguably prudent to use the higher exemptions now via lifetime transfers. Another benefit of lifetime transfers is that subsequent growth of assets transferred occurs outside of your estate. To the extent leverage can be infused into the planning, e.g., through sale of assets to trusts or transfer of discounted assets, the tax savings can be amplified. If you are eager to capitalize on the higher exemption amounts but uncomfortable parting with significant assets, non-reciprocal spousal limited access trusts, aka SLATs, (or self-settled domestic asset protection trusts, aka DAPTs) for single clients, might be advisable. These strategies are too complex to cover in a couple of sentences but may warrant further exploration with your advisor. 

Regardless of your wealth level, as existing estate plans are reviewed, it is important to weigh the pros and cons of prior planning. Just because a strategy may no longer seem relevant, formalities such as required payments between entities or administrative procedures cannot be ignored. Many clients may be wondering if their life insurance trusts are still necessary; we recommend a thorough evaluation of available options before acting. For example, perhaps the policy could be modified to a paid-up policy, or a large gift could be made to the trust to facilitate future maintenance of the policy while eliminating the need for future annual Crummey notices; or alternatively, the policy could be terminated with cash surrender value distributed among beneficiaries. Before deciding to unwind strategies that may be in place, consider the potential for laws to change again.

A couple of final thoughts – with higher exemptions, it may seem unnecessary to file an estate tax return for a nontaxable estate. However, a return must be filed to preserve the unused exemption of a deceased spouse. This will be particularly critical if exemption amounts decrease in the future. And regarding incapacity planning (powers of attorney, revocable trusts) for higher net worth clients, it might be advisable to allow your agent or trustee to make transfers up to the exemption amount to ensure maximum planning opportunities if you were to become incapacitated prior to a provision sunset.

Bottom line – it is prudent to review your estate planning in light of the new tax law. And, as with many things in life, flexibility is key. 

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you our your business.

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Every year, Gratus team members organize and participate in quarterly volunteer events.  After each event, the team completes a survey and votes to determine which one had the biggest impact on the Gratus team and the community.  In 2017, Gratus hosted an event for Make-A-Wish®, volunteered on the farm at Camp Twin Lakes, planned a carnival for Children’s Healthcare of Atlanta℠ Scottish Rite Hospital, and helped families Christmas shop at MUST Ministries Marietta.  The events helped provide resources to those in need and aimed to make a difference.  Although all four events were successful, the Gratus team voted and decided the event at MUST Ministries Cobb Toy Shop made the greatest impact overall.

MUST Ministries Donation

In March, a few team members visited MUST Ministries Marietta to deliver a donation acknowledging the impact of their event.  The donation will go towards the services MUST Ministries provides including groceries, job training, housing options, and meals.  Donations to MUST Ministries help 30,000+ clients they serve each year.  For 47 years, MUST Ministries has worked to fulfill their vision of connecting people who have a desire to help with those who need it most.

For More Information

Taking the time to invest in our communities is an important belief for team members at Gratus.  In addition to being fun team-building experiences, these events provide an opportunity to pause and put others first.  To get involved with MUST Ministries, please visit their website at www.mustministries.org.  If you are short on time, please consider making a financial donation online or contributing much-needed items from their Amazon wish list.

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On March 20th, members of the Gratus team enjoyed a community garden workday with the Atlanta Community Food Bank. The ACFB Community Gardens project supports a local movement designed to give all residents of Atlanta access to fresh, organic fruits and vegetables. The program develops and maintains more than 100 gardens around the Metro Atlanta area by offering expertise, seed donations and coordination of volunteers and community members.

Our Giving Garden in Mableton

At Our Giving Garden, volunteers work together to grow and sustain affordable and healthy food.  Our goal was to help prepare Our Giving Garden in Mableton for the growing season.  During our time at the garden, we built pallet shelves to house the compost, weeded, dug trenches between beds, and prepped pea seedlings for a bamboo trellis. Team members went home tired, dirty and full of appreciation for the effort that goes into maintaining these great community assets.

Our Giving Garden was established in October of 2016.  Since then, they have donated nearly 600 lbs. of organic produce to the Sweetwater Mission Food Pantry.  All proceeds are used for maintaining the land the garden uses or to provide donations within the community.

For More Information

Our Giving Garden has several ways to get involved. We encourage you to explore volunteer opportunities or to make a donation.  To learn more about the Atlanta Community Food Bank or Our Giving Garden, please visit their websites at www.acfb.org and https://ourgivinggarden.org.


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We’re proud to say that our Director of Investments, Todd Jones (CAIA), was recently quoted in the Forbes article “3 Lessons Traders Can Learn from Investors.” He was the article’s primary source.

The Forbes article details the dangers of emotionally charged investments, the importance of keeping a balanced portfolio and the difference between risk and volatility in investments.

Todd is quoted on the importance of keeping a balanced portfolio (which we cover a lot in our insights, including this one on the benefits of alternative investments and portfolio diversification).

On the issue of short-term traders selling quickly in times of stress, Todd says, “To me, this makes no sense, as the need to rebalance should be based on the returns of each asset class as they relate to each other. This prevents unnecessary trading/capital gains and maintains a consistent risk profile.”

As for volatility, “It’s just noise,” says Todd. Invest in your own knowledge of fundamentals: it’ll help you understand if there is a risk in sudden stock surges or dips or if it is simply the natural highs and lows of the market itself.

At Gratus Capital, we serve clients across the US with a tailored team approach based on the principles expressed by Todd in this article. We’re a boutique wealth management firm focused on serving successful individuals, families, foundations, and endowments with a low client-to-advisor ratio and fee-based advisory services. What new financial goals do you have in mind? Contact us to learn how we can help.

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Gratus Capital, LLC
3350 Riverwood Pkwy, Suite 1550
Atlanta, GA 30339
Phone: (404) 961-6000
Toll Free: 1 (888) 707-0773
Fax: (404) 961-6020