During the drafting of a trust, a frequently overlooked provision is also perhaps one of the most important ones to consider, discretionary distributions. What is a discretionary distribution? Who makes them and how?
Most trusts provide named beneficiaries with net income for their lives or a term of years. They often include a provision that allows a beneficiary to request additional distributions from income and/or principal.
Anyone who has read a will or trust knows they are full of legal jargon that is, at least initially, difficult for most laypeople to grasp. The reality is that they are not that complicated after some time is taken to read them a few times and understand the common terms.
What to look for in analyzing a Will….
A Trust Protector is an independent person appointed under a trust instrument by the grantor (creator) of a trust with responsibilities and powers regarding very specific aspects of the trust.
Although the concept of a Trust Protector (previously referred to as “Trust Advisor”) has been a part of U.S. trust law for many years, it gained popularity within the last thirty years as many ultra-high net worth Americans established off-shore trusts in what were often tiny island nation-states.
Imagine that you have spent a working lifetime accumulating a significant level of assets in order to leave a financial legacy to your loved ones. Perhaps you built a substantial and respected medical practice, a thriving manufacturing business, or a prosperous farming ranching operation Consider also that this legacy could be impaired or lost altogether in a relatively short time. We live in a litigious society and successful individuals have always been good targets.
Donating to the causes you care about not only benefits the charities themselves, it can be deeply rewarding for you as well. Millions of people give to charity on a regular basis to support causes they believe in as well as for the positive effect it has on their own lives. There are a number of reasons why people have charitable inclinations beyond the obvious tax-deductible benefit as most charitable gifting is actually from the “heart” vs. from the “head”. Following are several reasons why people give to charity:
After free-falling over 33 percent from its peak, the market has since recovered nearly all these losses thanks to an increase in confidence surrounding the reopening of our economy. Year to date, the S&P 500 is now only down 2 percent, while the technology-heavy NASDAQ is up over 16 percent. This puts the NASDAQ’s advantage over the S&P and DOW at its largest margin since 1983. Considering it took place while the U.S. economy was falling into a recession, this recovery has been especially perplexing. Right now, we are in the top 10 percent of historical price to earnings ratios for the S&P, yet at the same time, we are in the worst 10 percent of historical economic conditions. As a reference, the forward earnings multiple on the S&P 500 reached 10.8x in March 2009, while it rests at 22.1x today.
The quick recovery markets have experienced can be attributed to two main variables: The Federal Reserve’s intervention and the optimism associated with reopening the economy. After lowering interest rates to essentially 0 percent, the Fed is also now buying bonds in the open market to help keep rates at low levels. Keeping interest rates this low is a way to stimulate the economy by promoting the flow of credit to consumers and small businesses, although, it does not come without consequences. Artificially low interest rates may encourage excessive risk taking by promoting companies to lever up with debt and make risky investments. Congress also authorized a $3 trillion Covid-19 relief package by way of individual stimulus checks, unemployment programs, small business loans through the Paycheck Protection Program, and satisfying liquidity needs in U.S. markets. The Fed’s balance sheet has grown from $4 trillion to $7 trillion over the past few months and Federal Reserve board member Dudley suggests a $10 trillion Fed balance sheet is on the way. The speed and size of the Fed’s actions were successful for the short-term, and Fed Chairman Powell suggests there is still more they can do, but that does not mean we are out of the woods by any means.
As financial markets continue to recover, many investors still seem to remain skeptical. According to LPL Financial, 33 percent of all investors over the age of 65 sold their full equity holdings between February and May 2020. Total assets in money market funds have nearly doubled since 2018 and peaked at nearly $4.8 trillion just five weeks ago but have since begun to decline. Of the money that has returned to equity markets, large technology stocks seem to be the hot spot. The NASDAQ may be positive for the year, but roughly 75 percent of the stocks in the index are down in 2020. This reflects the disproportion in the size of its top ten holdings, which account for approximately 44 percent of the value of the 2,700 stock index.
While financial markets have improved, the economy continues to suffer as we uncover more of the damage inflicted by the pandemic and economic lockdown. From what we know so far, the economy seems to be experiencing an “income shock,” compared to the great financial crisis during 2008-09 when it was hit with a credit shock. While the Congressional Budget Office projects the U.S. budget deficit will reach $3.7 trillion in 2020, the damage done to corporate balance sheets and income statements has shaped a consensus amongst economists that the U.S. GDP will take a $5 trillion hit through 2021. A year ago, jobless claims were 1.7 million in the U.S.; in early May, the claims peaked at 25 million before slowly coming down to 19.3 million, where it remains today. Unemployment in the U.S. is still extremely high at 11.1 percent as permanent layoffs continue to rise. On a global scale, the UN’s labor arm reported that in Q2, the world lost an equivalent of 400 million full-time jobs due to the COVID-19 crisis. The IMF also predicts that the global economy will shrink by 4.9% this year.
With individual states beginning to slowly re-open their economies and assess the damage done, we are already beginning to see both the positive and negative effects. Foot traffic at TSA checkpoints is at about 15 percent of normal, up from 5 percent in April and May. U.S. new homes sales rose 16.6 percent month-over-month in May and retail sales also improved 17.7 percent in May. While most businesses are starting to reopen their doors, many have been permanently closed as more than 3,400 bankruptcies have been filed year to date. OpenTable’s CEO predicts that 25 percent of the restaurants that were forced to close during the lockdown, will not be able to reopen again.
New daily cases of COVID-19 in the United States were on a downward trend until very recently, but we are now seeing an increase in cases around the country. Regardless of whether it is from reopening of states’ economies or a wider availability of testing, this trend does not help to instill confidence. The economic lockdown helped to reinforce a fear-driven pullback in the financial markets; however, the re-opening of the economy may not result in an immediate economic rebound that the financial markets now seemingly anticipate. The U.S. savings rate in 2019 was 8 percent, but it rose to 32.2 percent in April and was still 23.2 percent in May. Consumer spending is the main driver of the US economy, accounting for more than two-thirds of economic output. If consumers are still fearful and unwilling to spend, the road to a full economic recovery will take longer than expected – likely until an effective vaccine becomes available. As we slowly emerge from the “Great Lockdown” with the reopening of the economy, the second half of 2020 will be anything but ordinary as we continue to deal with the ongoing pandemic and approach what promises to be one of the most volatile U.S. presidential elections in history.
Mackenzie Edwards – July 6, 2020
During the past 30 years, the traditional pension plans that were historically important to the American workforce post-WWII have largely gone away and been replaced by the individual retirement account. Today, a substantial portion of the wealth possessed by Americans consists of tax-deferred retirement accounts such as traditional IRAs, 401(k)s and 403(b)s, profit-sharing plans, stock bonus plans and Employee Stock Ownership Plans (ESOPs).
The primary focus of estate planning is often on tax-saving strategies: however, as federal estate tax laws continue to increase federal, estate, gift and generation-skipping transfer tax exemptions year after year, it is important to point out that there are many other valuable reasons why estate planning should be a priority. Below is a summary of several non-tax examples for effective estate planning.
The topic of South Dakota as a favorable trust situs often leads to a discussion comparing the virtues of South Dakota versus Delaware. Which jurisdiction is better? Why South Dakota?
Since abolishing the rule against perpetuities in 1983, South Dakota has worked diligently to become the most trust-friendly situs in the nation. The following table …..
After making a record high on February 19, 2020, the equity markets have since fallen by as much as 35%. This decline into a bear market has occurred at the fastest pace in history. New records for volatility have been made with the average daily price change of 5.2% during March exceeding the previous record set during the Great Depression. Even investments traditionally considered “safe havens” experienced declines as investors sought to raise cash or were forced to meet margin calls.
Unlike events typically associated with past bear markets, this market decline has been due to an unexpected public health crisis. The Covid-19 virus currently has no vaccine and given the risk it poses to the lives of their constituents, governments across the globe have responded by effectively shutting down their economies. Equity and fixed income markets rapidly declined as a result, perversely serving as a vigilante to fiscal and monetary policy makers. The Cares Act was promptly passed with rare bipartisan support and will provide $2+ trillion of stimulus with more likely to follow. The Federal Reserve cut interest rates to zero and by increasing its balance sheet to more than $5 trillion demonstrated a willingness to go to infinity and beyond with quantitative easing, stabilizing the investment grade credit markets in the process. Economic data will become significantly worse in the short-term, already unemployment claims increased to approximately 10 million in the U.S. during the two-week period ending of March 29th. Through no fault of their own, many will now be without a paycheck indefinitely while their ongoing financial obligations including rent, car payments and utilities remain. The Cares Act will help to bridge some financial obligations but very few people or businesses can withstand zero revenues for any extended length of time. A global recession now seems certain. However, these monetary and fiscal policy efforts will help to meaningfully dampen its depth and duration.
Due to the Fed’s efforts, the interest rate on the 10-year U.S. Treasury Note is currently 0.67% which is the equivalent to buying a stock at 150 times earnings that guarantees no growth over the next ten years. Whereas a $5 million portfolio of municipal bonds could have generated $350,000 of tax-exempt income annually in 1990, today it takes over $17.5 million to generate this amount. Artificially low interest rates can cause distortions and encourage excessive risk taking. Many investors that would prefer to own bonds can no longer “afford” them and the 2.1% dividend yield on the S&P 500 Index currently makes stocks seem relatively attractive to income seeking investors. Low rates have also incentivized many corporations to increase their debt levels. During the past decade, the investment grade corporate bond market nearly doubled to $6 trillion, its highest level ever relative to GDP and approximately half of this amount is rated BBB or one level above non-investment grade. The longer the global economy remains closed, an increasing number of companies will become financially challenged with debt they may have been able to comfortably service during normal times. Capitalism without bankruptcy has been likened to religion without hell and many have already started feeling some heat.
Economic and market downturns are never pleasant but as John Stuart Mill once said, the seeds of each economic boom are sown during the preceding crisis.
Ted E. Furniss – April 3, 2020
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