Trends – Roth&Co

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With the baseball lockout finally at an end, we can actually feel Spring in the air. Aside from being the great American pastime, baseball allows advisors to abuse sports clichés to the fullest. From “make sure all your bases are covered”, to the great, “Singles and doubles as opposed to homers”, and finally, the ultimate, “we’re in the seventh inning of the bull market”, baseball clichés make for useful tools. Using these clichés may help clients stay on track and make sure nothing comes out of left field. They also provide a great lesson, shared by Warren Buffet via Red Sox great Ted Williams.

In his book ‘Science of Hitting’, baseball legend Ted Williams breaks down the strike zone to seventy-seven squares. He explains how his batting average is seriously impacted depending on where the pitch lies within that zone. The position of the pitch inside those seventy-seven squares can range from one that is his sweet spot – where he can hit .400, to a spot far outside his comfort zone, where a bad pitch could drop his batting average down as low as .230.

Standing at bat, Ted didn’t really have a choice about his swing. If he avoided the pitches that would most likely result in a lowered batting average, he would be called out on strikes. Although he would have preferred a “fat pitch”, he didn’t have the luxury of waiting for it.

With his remarkable story-telling ability, Mr. Buffet describes how as investors, we have a decisive advantage over baseball players. When it comes to investing, there are no called strikes. The only way to strike out is by making a bad investment. By ‘avoiding the pitch’ you may miss out on a great investment – but you won’t lose money. And of course, we have the luxury of waiting things out and staying on the lookout for that “fat pitch” of an investment.

Nevertheless, though Buffet’s baseball analogy is cleverly and accurately drawn from the Ted Williams theorem, the reality is that the economy really did throw us a real curveball. Inflation remained very low for many years in the face of various market and the Federal reserve changes. Sitting on one’s cash while waiting for the fat pitch wasn’t the worst choice an investor could make. But now, with inflation rates rising like an Aaron Judge moonshot homer, cash has become trash.

This certainly doesn’t mean that, as investors, we should just go out and swing at balls in the dirt. Rather, the savvy investor needs a proper plan in place so that his money acts as the devoted worker it is meant to be. If an investor wants to make it to the big leagues, he must make sure to craft an investment plan that is resilient and secured against any unexpected changes in the economy.

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Business owners are regularly urged to “see the big picture.” In many cases, this imperative applies to a pricing adjustment or some other strategic planning idea. However, seeing the big picture also matters when it comes to managing the performance of your staff.

Perhaps the best way to get a fully rounded perspective on how all your employees are performing is through a 360-degree feedback program. Under such an initiative, feedback is gathered from not only supervisors rating employees, but also from employees rating supervisors and employees rating each other. Sometimes even customers or vendors are asked to contribute.

Designing a survey

As you might have guessed, a critical element of a 360-degree feedback program is the written survey that you distribute to participants when gathering feedback. You can inadvertently sabotage the entire effort early on if this survey is poorly written or difficult to complete.

For starters, keep it as brief as possible. Generally, a participant should be able to fill out the survey in about 15 to 20 minutes. Ask concise questions that have a clear point. Be sure the language is unbiased; avoid words such as “excellent” or “always.” Ensure the questions and performance criteria are job-related and not personal in nature.

If using a rating scale, offer seven to 10 points that ask to what extent the person being rated exhibits a given behavior, rather than how often. It’s a good idea to use a dual-rating scale that includes both quantitative and qualitative performance questions.

Another good question is: To what extent should the person exhibit the behavior described, given his or her job role? By comparing the answers, you basically perform a gap analysis that helps interpret the results and reduces a rater’s bias to score consistently high or low.

Encouraging buy-in

To optimize the statistical validity of 360-degree feedback results, you need the largest sample size possible. Tell feedback providers how you’ll analyze their input, assuring them that their time will be well spent.

Also, emphasize the importance of being objective and avoiding invalid observations that might arise from their own prejudices. Ask providers to comment only on aspects of the subject employee’s performance that they’ve been able to observe.

Even with anonymous feedback, you should require some accountability. Incorporate a mechanism that would enable someone other than the subject of the evaluation — for instance, a senior HR manager — to address any abuse of the program. And, of course, ensure that subjects of the feedback process can work with their supervisors to act on the input they receive.

Taking it slowly

If a 360-degree feedback program sounds like something that could genuinely help your business, don’t rush into it. Discuss the idea with your leadership team and take the time to design a program with strong odds of success. Finally, bear in mind that you’ll likely have to fine-tune the program in years ahead to get the most useful data.

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For 2022, the federal gift and estate tax exemption has reached its highest level ever. In fact, you can transfer up to $12.06 million by gift or bequest without triggering federal transfer taxes. This is a limited time offer, however, as the exemption amount is scheduled to drop to $5 million (adjusted for inflation) in 2026. (However, Congress could pass legislation to reduce it even sooner or to extend it longer.)

Many are considering making substantial gifts to the younger generation to take advantage of the current exemption while it lasts. Often, these gifts consist of hard-to-value assets — such as interests in a closely held business or family limited partnership (FLP) — which can be risky. A defined-value gift may help you avoid unexpected tax liabilities.

Hedging your bets

Simply put, a defined-value gift is a gift of assets that are valued at a specific dollar amount rather than a certain number of stock shares or FLP units or a specified percentage of a business entity.

Structured properly, a defined-value gift ensures that the gift won’t trigger an assessment of gift taxes down the road. The key to this strategy is that the defined-value language in the transfer document is drafted as a “formula” clause rather than an invalid “savings” clause.

A formula clause transfers a fixed dollar amount, subject to adjustment in the number of shares or units necessary to equal that dollar amount (based on a final determination of the value of those shares or units for federal gift and estate tax purposes). A savings clause, in contrast, provides for a portion of the gift to be returned to the donor if that portion is ultimately determined to be taxable.

Language matters

For a defined-value gift to be effective, it’s critical to use precise language in the transfer documents. In one recent case, the U.S. Tax Court rejected an intended defined-value gift of FLP interests and upheld the IRS’s assessment of gift taxes based on percentage interests. The documents called for the transfer of FLP interests with a defined fair market value “as determined by a qualified appraiser” within a specified time after the transfer.

The court found that the transfer documents failed to achieve a defined-value gift, because fair market value was determined by a qualified appraiser. The documents didn’t provide for an adjustment in the number of FLP units if their value “is finally determined for federal gift tax purposes to exceed the amount described.”

Seek professional advice

If you plan to make substantial gifts of interests in a closely held business, FLP or other hard-to-value asset, a defined-value gift can help you avoid unwanted gift tax consequences. Turn to a financial advisor before taking action because to be effective, the transfer documents must contain specific language that provides for adjustment of the number of shares or units to convey the desired value.

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Business transactions with related parties — such as friends, relatives, parent companies, subsidiaries and affiliated entities — may sometimes happen at above- or below-market rates. This can be misleading to people who rely on your company’s financial statements, because undisclosed related-party transactions may skew the company’s true financial results.

The hunt for related parties

Given the potential for double-dealing with related parties, auditors spend significant time hunting for undisclosed related-party transactions. Examples of documents and data sources that can help uncover these transactions are:

A list of the company’s current related parties and associated transactions,
Minutes from board of directors’ meetings, particularly when the board discusses significant business transactions,
Disclosures from board members and senior executives regarding their ownership of other entities, participation on additional boards and previous employment history,
Bank statements, especially transactions involving intercompany wires, automated clearing house (ACH) transfers, and check payments, and
Press releases announcing significant business transactions with related parties.

Specifically, auditors look for contracts for goods or services that are priced at less (or more) favorable terms than those in similar arm’s-length transactions between unrelated third parties.

For example, a spinoff business might lease office space from its parent company at below-market rates. A manufacturer might buy goods at artificially high prices from its subsidiary in a low-tax country to reduce its taxable income in the United States. Or an auto dealership might pay the owner’s daughter an above-market salary and various perks that aren’t available to unrelated employees.

Audit procedures

Audit procedures designed to target related-party transactions include:

Testing how related-party transactions are identified and coded in the company’s enterprise resource planning (ERP) system,
Interviewing accounting personnel responsible for reporting related-party transactions in the company’s financial statements, and
Analyzing presentation of related-party transactions in financial statements.

Accurate, complete reporting of these transactions requires robust internal controls. A company’s vendor approval process should provide guidelines to help accounting personnel determine whether a supplier qualifies as a related party and mark it accordingly in the ERP system. Without the right mechanisms in place, a company may inadvertently omit a disclosure about a related-party transaction.

Let’s talk about it

With related-party transactions, communication is key. Always tell your auditors about known related-party transactions and ask for help disclosing and reporting these transactions in a transparent manner that complies with U.S. Generally Accepted Accounting Principles.

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Today’s workforce may be the first ever to include five generations (Silent Generation, Baby Boomers, Gen X, Millennials, and Gen Z) working side by side. For many business leaders, managing multiple generations in the workplace presents unique challenges, but it also creates unique opportunities.

A generation is an age cohort whose members are born during the same period in history. Each generation grows up in a different context and experiences significant events at similar life stages. As a result, different generations may have different work expectations. If not addressed correctly, sometimes these generational differences can cause tensions in the workplace, and can hurt your organization’s productivity by limiting employee collaboration, creating emotional conflict, and lowering performance.

Sadly, many businesses do not take any steps to address intergenerational issues. Even when organizations do try and address them, the strategy has often been to encourage employees of different generations to focus on their similarities or deny the existence of any differences. But this is a huge, missed opportunity. Age-diverse teams can be incredibly valuable because they bring together employees with different but complementary skills, abilities, and networks. Age- diverse teams are known to be more productive and offer better decision-making, if managed effectively.

So how do business leaders embrace the challenges and benefits of a multigenerational workplace? The following steps may help bridge generational gaps and help create an intergenerational workforce that uses its age diversity to build something that no single generation could build on its own.

1. Identify and Acknowledge Differences.

The assumptions we make about generational groups (or any groups for that matter) can hold us back from understanding our coworkers’ true character, as well as the skills, strengths, and connections they have to offer. Having the awareness to recognize we are making these assumptions is the first step to combating them.

As an example, imagine you oversee a social media campaign. Which employees or coworkers would you choose to work on this campaign? Most of us would probably say our younger colleagues. Consciously, you likely believe you are choosing the most qualified and the most interested workers. Unconsciously, you may be giving in to deeply held assumptions that older people dislike technology or are uninterested in learning anything new.

2. Adjust your Assumptions.

Recognizing assumptions is important, but the next step is actively addressing them. Stereotypes often cause us to incorrectly attribute differences to a group, which causes tension for no real reason. Consider whether your assumptions align with the reality of the situation at hand, or whether you’ve been judging someone’s actions and attitudes based only on a stereotype. Try to understand why colleagues from different generations might approach a situation differently than you do.

A well-known example is an older coworker may get frustrated with their younger colleague, when, in the middle of a conversation about a difficult work project, the younger coworker starts using their cell phone. Of course, checking a phone mid-conversation might offend a lot of people, but, if the older employee can adjust their assumptions, they may realize that their younger coworker was just checking their phone to try and get information to help with the difficult work project.

3. Encourage Mutual Learning.

The key to truly getting the most out of intergenerational teams is that each employee must believe that they have something to learn from colleagues in all different age cohorts. The ultimate goal is to have mutual learning among every employee, with coworkers of all ages teaching and learning from one another in an ongoing loop. Mutual learning happens best when coworkers of different generations have good relationships with each other, and everyone is looking for opportunities to grow.

Businesses and organizations need to acknowledge that skill sets, motivations and values differ among different generations. Leaders need to view this diversity as a strength and encourage a culture where generations can work in harmony and learn from each other. Every generation has something to teach and something to learn.

Baseball Missive

360-Degree Feedback Helps Business Owners See the Big Picture

Defined-Value Gifts: Plan Carefully to Avoid Unpleasant Tax Surprises

Eyes on Related Parties

Don’t Ignore Generational Differences