Marty Gross founded Sandalwood Securities in 1990 after a career practicing law and working at investment firms including L.F. Rothschild. Sandalwood began as a fund of hedge funds — one of the first to emerge — and has since evolved into a family office that shares its investment opportunities with clients. Gross discussed his business and the benefits of co-investing to clients and the firm.
Can you talk about how Sandalwood became what it is today?
The hedge fund space in 1990 was in its first inning. You didn’t have databases where you could compare different funds. The value proposition of Sandalwood was to find great hedge fund managers, analyze funds and help you afford them, and then monitor them. As the business grew, clients would ask us what we have invested in, and we’d show them our investment portfolio. We were able to help investors determine which funds were of high quality.
Over the last 30-some years, the profits from the hedge fund business allowed us to create our own family portfolio, which is institutionlike. Our holdings are similar to those of a major institution, foundation or endowment. We have publicly traded securities, both equity and credit, and a list of alternatives. Our family portfolio has eight “buckets”: equities, bonds, hedge funds, real estate (both funds and individual properties), private equity, venture and lending funds.
We know which clients would be interested in which types of investments, and when we decide to make an investment for ourselves, we create a feeder in one of our entities to house those investments and call those clients who might want to invest their capital alongside ours.
As such, in addition to the hedge fund business, we have a family office alternative platform that enables our clients on a deal-by-deal basis to invest alongside our family office money.
What are the benefits of co-investing?
We have a team of people who do a lot of research on funds. Once someone decides to invest in funds, they can either hire a team of people to do that research — including finding funds — or they can use us. We’re an add-on research capability to anyone who wants to work with us.
Clients know that we’re only putting them into investments that we’re putting our own money in. That differentiates us from a bank or a brokerage firm, where the people who are making the recommendations don’t always invest their own money into the funds they recommend.
What should families looking for co-investment opportunities know?
The first thing they need to know is what they want to accomplish. What is their portfolio all about? What do they want their money to do? Do they need liquidity? If they don’t want anything that’s going to be illiquid for more than a year, for example, there’s a whole set of investments they can’t make. They have to know what their goals are.
We can help families think through their investment plans, help them understand the types of opportunities that exist for what they want to accomplish, and discuss the tools that are available to them to achieve their goals.
What are some key principles for successful co-investing?
Understand the strategy that you’re using; and understand on a nonemotional, rational basis what a realistic expectation is from that strategy. That goes for all investing. With co-investing, you want to see the track record of the person you’re investing with.
What market opportunities are you watching now?
The main thing that’s been different over the last year or two from the previous couple of decades is the direction of interest rates. You’ve seen a lot of assets being marked down as interest rates have risen. At the same time, stock price-earnings ratios have come down. A lot of regional banks that would usually lend to commercial real estate investors are now out of the market.
One of the things we’re watching is lending funds. Funds are functioning as banks and generating 10% to 13% net to their partners. That’s higher than the historic return on equities. We’re seeing a lot of our clients moving into lending funds.
We’re also watching some very opportunistic real estate funds. A lot of people who bought properties with floating-rate mortgages are having a hard time. Funding, especially in real estate, is not as easy to get as it was a year or two ago.
These opportunities are driven in very large part by the substantial increase in interest rates.
What’s new in the family office space?
There’s been a significant increase in the number of family offices and a significant increase in the percentage of family offices started by people who have a background in financial markets. Many family offices are more sophisticated investmentwise than those started in the past.
We’ve also seen family offices hiring some very, very talented investment people. They’re willing to pay for talent. Family offices are creating an extensive network of advisers, high-net-worth individuals and other family offices.
Navigating tax asymmetry in mixed citizenship marriages
By CHRIS OPIE and SHELLY MEEROVITCH
EDITOR'S NOTE: Crain Currency brings you expert commentary from thought leaders on the topic of tax and estate planning.
For couples of mixed citizenship — where one partner is a U.S. citizen and the other a citizen of another country — their tax burden can get complicated and expensive without the right planning.
U.S. citizens and domiciliaries are subject to U.S. transfer taxes on their worldwide assets. U.S. gift taxes apply to the gratuitous transfer of property during life, and U.S. estate taxes apply to the transfer of property at death (i.e., bequests). Currently, the U.S. transfer tax rate is 40%.
Although annual exclusions and lifetime credits can help reduce the transfer tax burden, they are limited in their application. Once the threshold is exceeded, a transfer tax becomes due.
The only exception to this is the unlimited marital deduction. This deduction permits U.S. citizens’ spouses to transfer unlimited wealth to each other during life and upon death without triggering any transfer tax. Upon death, property owned by a surviving spouse is included in her taxable estate and subject to U.S. estate tax. The unlimited marital deduction essentially acts as a tax deferral mechanism, postponing the transfer tax until the death of the second spouse.
Unlimited marital deduction unavailable to surviving spouses who are not U.S. citizens
To qualify for the marital deduction, the recipient spouse must be a U.S. citizen. Put another way, for couples where only one spouse is a U.S. citizen, there is a fundamental lack of symmetry. While noncitizen spouses can transfer unlimited wealth to a U.S. citizen spouse, the reverse gives rise to a transfer tax liability.
Due to their focus on income taxes rather than transfer taxes, both planners and clients often overlook this asymmetry. Yet it can meaningfully affect the estate plans and financial arrangements of mixed-citizenship couples.
Fortunately, two key provisions unique to gifts and bequests made to noncitizen spouses can alleviate the potential tax burden. To explore them in further detail, let’s consider Alex and Yasmin, a mixed-citizenship couple living in the U.S. For illustration purposes, we’ll assume that Alex is a U.S. citizen and the primary wealth owner.
Gift and estate tax relief for noncitizen spouse
The couple’s first option is an annual gift tax relief that excludes the first $185,000 that Alex gifts to Yasmin. While the exclusion renews annually and is indexed for inflation, the amount involved is too low for many high-net-worth couples to move the estate planning needle. In this case, since it fails to transfer a meaningful amount of their overall wealth, the couple turn to the next option.
The second provision forestalls the immediate imposition of estate taxes upon Alex’s death by allowing Yasmin to benefit from a marital deduction. She does so through the creation of a qualified domestic trust (QDOT), which gives her access to the income generated by the QDOT assets without having to pay estate tax. Note: The term “income” here means fiduciary accounting income rather than taxable income and does not generally include capital gains.
If or when principal is paid out of the QDOT to Yasmin, U.S. estate taxes become due. In other words, the QDOT enables Yasmin to postpone the U.S. estate tax payment until one of three events occur:
- She receives a distribution of trust principal.
- The QDOT terminates upon her passing.
- The QDOT no longer qualifies as a QDOT.
In certain hardship cases, an exception to the imposition of the estate tax on principal distributions may apply if Yasmin has an urgent need and lacks alternative resources.
Here are some key QDOT requirements
- The surviving noncitizen spouse must be the sole permissible QDOT beneficiary.
- The QDOT’s trustee must be either a U.S. citizen or a U.S. bank or corporation.
- The QDOT must be established and funded by the time the estate tax return for the deceased spouse is due, either nine or 15 months after the deceased spouse’s date of death.
Putting it all together: Practical and planning considerations
If Alex has a taxable estate that exceeds the available unified credit (currently $13,610,000), the pair should consider:
- Establishing a QDOT as part of the estate plan.
- Allocating and investing QDOT assets for income generation, giving Yasmin access to wealth after Alex’s passing while postponing the imposition of estate tax.
- Including trust provisions that specifically authorize a trustee to invest with emphasis on income production.
- Yasmin becoming a U.S citizen.
If she becomes a citizen by the time the estate tax return is due for Alex’s estate, Yasmin will qualify for the unlimited marital deduction, and a QDOT will not be needed.
If Yasmin becomes a citizen after a QDOT is created and funded, estate tax will not apply to distributions from the trust after she becomes a citizen as long as either (1) Yasmin has continuously been a U.S. resident after Alex’s death and before becoming a citizen or (2) no QDOT tax had been imposed on any distributions from the trust before she becomes a citizen.
If Yasmin and Alex own property as joint tenants:
- Termination during life, such as the closing of a joint account by the couple, is a taxable gift from Alex to Yasmin if she receives more than her proportionate share of the account.
- Termination upon Alex’s death, absent community property rules, will cause the full value of property to be included in Alex’s estate. Alex’s executor can overcome that if he or she can establish that Yasmin made contributions to the property as well.
In both instances, good record-keeping is important. The couple should carefully trace contributions to assets and keep relevant supporting records in case Yasmin survives Alex.
Finally, if Alex needs to transfer an amount in excess of the annual exclusion to Yasmin, he could consider lending her funds. Later, Alex can annually forgive an amount equal to that year’s available annual exclusion.
Maximizing gift and estate tax relief for noncitizen spouses
The tax asymmetry in mixed-citizenship marriages can have a significant impact on estate plans and financial arrangements. To navigate this thorny landscape, it is essential for couples to tap into a team of experts who can advise and support them in a holistic manner. The team may include a tax attorney, wealth adviser and estate planning attorney who can work together to create a comprehensive plan that maximizes gift and estate tax relief for noncitizen spouses while ensuring that the couple’s overall financial goals are met.
For illustrative purposes only; not an advertisement and does not constitute an endorsement of any particular wealth transfer strategy. Bernstein does not provide legal or tax advice. Consult with competent professionals in these areas before making any decisions.