In today’s issue:

• Quick Reads - Powell’s hawkish hammer drops…

• Big Question - How optimized is your portfolio…

• Market Minute - Market recoils in horror…

• Deep Dive - How the wealthy give without losing control…

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WEEKLY WISDOM

ENGAGING IDEAS

Powell’s Hawkish Hammer Drops…

The Federal Reserve just dropped a bombshell, doubling down on high interest rates and sending shockwaves through every corner of the market. Stocks tanked, Bitcoin cratered, and even gold couldn't escape the carnage. If you want to understand why Powell’s hawkish tone has everyone scrambling—and what it means for your money—this article breaks it all down.

Bank CRE Limits Tested…

Commercial real estate lenders are hitting their breaking point, with loan modifications surging as banks struggle to stay within regulatory limits. This shift signals growing distress in the CRE market, and it’s not just a blip. Read the full article to uncover the cracks forming in this critical sector.

The Secrets Behind Art Prices…

Art auctions aren’t just about beauty—they’re driven by hidden forces like timing, trends, and collector psychology. Simon de Pury reveals the unspoken factors shaping the art market’s biggest sales. Read on to discover how the real game of art pricing is played.

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MARKET MINUTE

Market Tantrum After Powell’s Interest Rate Announcement

Markets took a sharp turn after Federal Reserve Chair Jerome Powell announced that interest rates will remain high to combat inflation.

Markets took a sharp turn after Federal Reserve Chair Jerome Powell announced that interest rates will remain high to combat inflation.

His comments signaled a more hawkish stance, sending shockwaves through multiple asset classes.

Key Market Reactions

• Crypto Plunge: Bitcoin dropped 12%, reflecting heightened risk aversion in speculative markets.

• Stocks Decline: The S&P 500 fell 4%, while the tech-heavy Nasdaq dropped 5.5% as investors fled riskier assets.

• Gold Slips: Surprisingly, gold—a traditional safe haven—declined 2%, suggesting a broader selloff.

• Global Impact: Powell’s remarks triggered a rapid shift away from "risk-on" assets, signaling investor unease about prolonged economic tightening.

Context

Powell’s statement follows a similar market reaction in October, when non-farm payrolls missed expectations, leading to widespread concern about economic momentum.

For more on that event and its implications, see Episode #0002 of The Shrewd Investor Newsletter: Choosing the Right Accounts: Roth vs. 401(k) vs. Brokerage.

What’s Next:

In recent history, these monetary news-cycle tantrums have been short-lived, but hit reply and let me know what you think happens next!

DEEP DIVE

The Art of Gifting Without Losing Control

What if you could set your kids up for life while ensuring they don’t squander their inheritance?

Meet Matt—a Shrewd Investor and successful entrepreneur with a $5 million portfolio and a dilemma every parent dreams of having. His solution?

A proven strategy used by some of the wealthiest families in history.

Here's how you can protect your wealth and empower your loved ones at the same time.

88% of wealth creators list supporting their family as a primary driver of their wealth.

But I cringe when thinking about giving large sums to children or other family members—especially if the recipients are young, inexperienced, or could potentially mishandle the money.

Am I setting them up for success or failure? One reader is in the same boat, let’s look at his case.

Matt is 40 years old, with a $5 million portfolio and three young children.

His startup is beginning to take off, and he’s in a position to make substantial gifts to his kids.

But what if his children waste the money on frivolous expenses, make poor investment decisions, or worse, fall into dangerous habits like drug and alcohol abuse?

He wants to give them a head start in life but also ensure that the wealth he’s building is protected and used wisely.

How Do Wealthy Families Handle This?

Matt’s dilemma isn’t unique.

Many of the wealthiest families in America have faced similar challenges and have devised strategies to give to their heirs while maintaining control.

Let’s take a look at an inspiring example from one of the most iconic families in the business world: the Waltons.

Sam Walton’s Strategy: Family Limited Partnerships (FLPs)

Sam Walton, the founder of Walmart, built a retail empire that continues to dominate global markets. But one of his greatest legacies is how he preserved and passed on his wealth.

Walton used Family Limited Partnerships (FLPs) to transfer wealth to his children while minimizing estate taxes and keeping control.

• Structure: Walton placed shares of Walmart into FLPs, then gifted limited partnership interests to his children.

• Control: As the general partner, Walton retained decision-making authority over the assets.

• Outcome: This allowed his children to benefit from the income and growth of Walmart’s stock while ensuring the family maintained control over the company’s direction.

This strategy was so effective that the Walton family remains one of the wealthiest families in the world, with FIVE members consistently appearing on the Forbes billionaire list.

It’s a testament not just to the wealth Sam Walton created but to how well he safeguarded it.

The Power of Annual Gifting

One of the simplest and most powerful tools for transferring wealth is the annual gift tax exclusion.

Each year, you can gift up to $18,000 per recipient (in 2024) without triggering any gift taxes.

By gifting shares of a privately held business, you can often take advantage of valuation discounts—reducing the fair market value of the gift because the shares are not publicly marketable.

Let’s break this down for Matt.

Suppose he gifts $18,000 each, for he and his spouse, worth of company shares to each of his three children every year.

Over 30 years, that’s $1,080,000 per child—or $3,240,000 total—transferred tax-free. But that’s just the beginning.

If we assume an 8% annual return on those shares, each child’s gift grows to $2,039,097 by the end of the 30 years, resulting in over $6 million in wealth transfer, entirely excluded from Matt’s estate.

Why FLPs May Work for Matt

An FLP could be an excellent vehicle for Matt’s wealth transfer. By placing his company shares in an FLP, Matt can:

• Retain Control: As the general partner, Matt can oversee how the assets are managed and distributed and keep all the voting rights in his company.

• Leverage Valuation Discounts: Limited partnership interests are typically valued at a discount because they lack control and marketability, reducing the taxable value of the gift.

• Protect Assets: FLPs can shield assets from spouses, creditors, and lawsuits, adding another layer of security.

• Ensure Long-Term Planning: Matt can transfer wealth gradually, ensuring his children grow into the responsibility of managing it.

Other Options

While FLPs are powerful, they’re not the only option. Matt might also consider other trust vehicles to achieve his goals:

1. Irrevocable Trusts: Useful for reducing estate taxes and protecting assets from creditors, though Matt would give up control over the assets placed in the trust.

2. Dynasty Trusts: These preserve wealth for multiple generations while avoiding estate taxes on future transfers.

3. Conditional Trusts: Matt can set specific criteria for his children to access funds, such as reaching a certain age, completing their education, or demonstrating financial responsibility.

What Can Go Wrong?

It’s important to be aware of the complexities involved in these strategies. FLPs, for example, are closely scrutinized by the IRS. To ensure they withstand legal challenges, Matt will need:

• Proper Documentation: Clear records of the partnership’s purpose and operations.

• A Legitimate Business Purpose: FLPs must have a purpose beyond just reducing taxes.

• Proportional Benefits: Limited partners (his children) must receive appropriate benefits from the partnership.

Working with experienced estate planning attorneys and financial advisors is crucial to navigating these complexities.

Building a Legacy

By combining tools like FLPs, annual gifts, and trust structures, Matt can create a financial legacy that empowers his children without putting the family’s wealth at risk.

Whether it’s ensuring funds are available for education, buying a first home, or starting their own businesses, these strategies provide flexibility and control.

The content provided in this newsletter is for informational purposes only and should not be considered as specific advice for any specific individual. The information is prepared by knowledgeable individuals and is not written by certified tax professionals or investment advisors. For personalized advice tailored to your unique financial situation, consult with a qualified tax professional, financial advisor, or attorney.

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