The charitable trust that's best in a low-interest rate environment

Now is a great time to create a charitable lead trust, assuming it would further your client's estate planning goals.

That's according to Nadia Yassa, Director of Estate and Gift Planning for the Boston Foundation. She spoke on "Tax Benefits of Charitable Trusts" to the Boston Security Analysts Society on May 13.

Why now? Because when interest rates are low, the IRS will value the non-charitable remainder interest at a lower value, using the IRS discount rate in effect when the trust is established. That's regardless of what the actual value is when the transfer occurs. The bottom line: Ultimately, more of your assets will reach your beneficiaries because any growth in the trust above the discount rate passes free of gift tax to heirs. As Yassa explained, "A low Section 7520 discount rate allows donors to 'freeze' estate and gift values to minimize overall transfer tax liability."

A non-grantor charitable lead trust provides income to one or more qualified charities for a preset period. At the end of that period, the assets of the trust transfer to non-charitable beneficiaries. People often use this kind of trust to contribute to charity, while ensuring that their assets end up with family members at a lower cost in taxes.

On the flip side, low interest rates mean this is the least favorable time for creating a charitable remainder trust. However, in any case, taxes should not be your only consideration when establishing a charitable trust.

Want to learn more about planned giving, including charitable trusts? Check out the Planned Giving Design Center, suggested Yassa. "It’s a free on-line resource sponsored by the Boston Foundation. Go to www.tbf.org and click on the Professional Advisors section/Planned Giving Design Center. Advisors can register and have access to technical outlines, articles, rulings, news reports, and receive periodic emails with legislative updates, as well as the Section 7520 rate as it is announced each month by the IRS."



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Susan B. Weiner, CFA
Investment Writing
Writing that's an investment in your success

Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.

Use personal stories in your communications

"In a sea of competition, you’ve got to capitalize on what makes you unlike anyone else."

This advice from "Feel Great Naked: Confidence Boosters for Getting Personal" is aimed at bloggers. The author urges them to share personal stories. But also applies to financial advisors, especially solo practitioners or small firms, when you communicate with your clients and prospects.

Sharing your personality--and even a bit of your personal story--can help you connect with your clients.

For example, in a sales letter, one salesman shared his story of how his family had suffered needlessly because of an estate planning mistake. That mistake fueled his passion for bringing new clients to his firm. After sharing that story, the letter shifted to discussing the benefits his firm could offer his prospects. I'll bet that personal story prevented some prospects from dropping his letter into their wastebaskets.

Don't focus your communications exclusively on yourself. Ultimately, your client or prospect will care more about the WIIFM ("what's in it for me"). But a bit of sharing can create a connection that goes deeper than dollar and cents.

Any financial advisor can heed this advice in one-on-one meetings. It's more challenging when you work for a large firm and you get into written communications. There'll probably be a company-wide communications policy that sets an impersonal tone. This gives an opening for advisors with smaller firms to outmaneuver their colleagues at larger firms.

Have you tried taking a personal tack? I'd like to learn what your experience has been.

“The Top Four Investment Strategy Challenges for Financial Advisors”

One year ago it seemed as if the good times would never end. Today, many investors go to bed wondering what bad news will greet them in the morning. In this volatile environment, Advisor Perspectives asked financial advisors to identify their greatest investment strategy challenges.

Continue reading my article, “The Top Four Investment Strategy Challenges for Financial Advisors,” in Advisor Perspectives.

Asset allocation in a low return world

The rules of asset allocation have changed. Two of the new imperatives:

• Using tactical asset allocation (TAA)
• Investing in real assets

These are among the best strategies for individual investors in an environment in which U.S. stocks are expected to average annual returns of 6%-7%. This is what I took away from "Asset Allocation in A Low Return World," a March 13 presentation to the Boston Security Analysts Society, by Adrian Cronje, vice president and director of asset allocation, Wilmington Trust.

Tactical asset allocation doesn't deserve its bad rap

Everyone says, "Don't try to time markets." But TAA is not market timing, said Cronje. "It is not about forecasting turning points." Instead, it is a form of rebalancing that can boost your returns.

You might think of rebalancing as buying and selling assets to return them to predetermined percentages. That's not what Cronje meant. He spoke instead about adjusting allocations to take advantage of changes in risk premiums.

"Dispersion among sub-asset class returns reflects risk premiums that are not stable, but cyclical," said Cronje. He talked about sub-asset classes because he looks at distinctions finer than large-cap vs. small-cap or growth vs. value. He'd prefer to invest in narrowly defined subsets, such as value as defined only in terms of book value or growth in terms of earnings.

Sub-asset class outperformance can be significant—what Cronje calls "large amplitude"—and last one to four years. That's often enough to justify the transaction and tax costs of TAA.

Cronje believes it's possible to identify when there has been a strategic shift in sub-asset class returns, so you can change your allocation once the new cycle is already under way. That's a lot better than suffering for getting in too early.

TAA can deliver returns that made Cronje say, "Beta is not always boring, cheap and alpha's unloved cousin."

Investing in real assets is essential for individual investors

"Today, traditional stocks and bonds just aren't good enough any more," said Cronje. Individuals should diversify into real assets and alternative assets. These are asset classes that can deliver real sustainable earnings power.

In one sense, real assets can be defined as physical or tangible assets. But more importantly, they're assets that offer a hedge against inflation. For example, inflation-linked bonds, real estate securities, and commodities. Since the debut of ETFs, these asset classes have become much more accessible to individuals.

A typical Wilmington Trust client might have 10%-15% in real assets. But they're a lot wealthier than your typical individual investor. Cronje didn't describe the profile of the individual investor who should consider these techniques. Presumably there's a minimum level of investable assets required.

Alternative assets—hedge funds, private equity, and private real estate—are also expected to outperform over the long term. They're not as accessible to individuals. In fact, even institutions must compete to invest with top performers. Although Cronje didn't discuss them, there are new investment vehicles—such as mutual funds that pursue long-short strategies—that alternative investments more accessible.

Cronje based these asset class recommendations on a long-term, inflation-adjusted forecast for returns. He called forecasts for periods of 10 years or more "highly reliable." Of course, he's not looking for accuracy down to decimal points. What's important is which asset classes will outstrip others, and in what order.

Follow Cronje's advice, and perhaps your portfolios will be better positioned for today's uncertain environment.

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Susan B. Weiner, CFA
Investment Writing
Writing that's an investment in your success

Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.

Speaking to high net worth audiences

I agree with PR expert Beth Chapman's advice in her recent newsletter that your preparation for speaking to high net worth clients should include:
1. Honing your speaking skills
2. Understanding that educational, non-self-serving content is required
3. Trusting that your current clients are the conduit you need to the audiences you seek.

I was intrigued by her suggestion that you

"Offer to speak to your clients' social groups, condo associations, or at a coffee in their homes for ten or more friends. I can hear you now -- this is so low brow, good grief. But, wait. Don't misjudge the importance of small groups of clients and who they know. Your existing clients have conduits to all the high net worth groups you wish to access. But you have never asked your clients to introduce you to these target groups as a speaker, have you?"

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Susan B. Weiner, CFA
Investment Writing
Writing that's an investment in your success

Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.

Hedge Funds in High Net Worth Portfolios

There’s more than one way to invest responsibly in hedge funds.

That’s a lesson from RINET Company, LLC and The Colony Group, LLC, two Boston-based wealth management firms. RINET typically puts its clients in hedge funds of funds. Although it sometimes relies on its own due diligence, The Colony Group prefers direct investment in hedge funds in which its wholly owned subsidiary, Colony Funds, LLC, serves as general partner. Yet RINET’s and Colony’s approaches to due diligence overlap. Both delve deep into the quantitative and qualitative details. Without extensive due diligence, clients could lose everything to fraud, deviation from strategy, or reckless investing.

Read more about these two firms' strategies for hedge fund investing in my article published in Advisor Perspectives.

_________________
Susan B. Weiner, CFA
Investment Writing
Writing that's an investment in your success

Check out my website at www.InvestmentWriting.com or sign up for my free monthly e-newsletter.