Frank Talk - 1st Quarter Newsletter (2017)
Table of Contents
Hello, Clients and Friends!
As we embark upon a new year, we have much to be grateful for at PFS, first of which is the opportunity to provide the relevant, unbiased, and actionable advice you and your family seek along the path to the lifestyle outcomes you desire. As we reflect on the tumultuous social and political climate we’ve experienced in recent weeks, it only deepens our conviction as a firm that while Americans may broadly disagree on matters of politics and governance, at the core of our beliefs and values is the desire to do what’s best for our families and our children’s futures.
As financial planners and wealth advisors, we see that play out every day. Our clients are Republicans, Democrats, and Independents. They’re working women, business owners, retirees, CEOs, and veterans representing every race, creed, and color. They’re at different places in their lives, based on age, marital status, career stage, and physical health; and they have very different lifestyle and financial goals. However, the common thread that binds all of them is the desire to protect the financial independence they’ve worked so hard to achieve for themselves and their families. So as a new year begins, we are pleased to restate our ongoing commitment to you, the wonderful individuals and families we are privileged to serve, to always place your best interests first in everything we do in pursuit of the unique Return on Life® you seek for your family.
What does Return on Life® mean to you?
2016 Reflections & Highlights
We also want to take a moment to thank you for your role in enabling us to achieve many exciting initiatives in 2016 designed to enhance your experience in collaborating with our team, and enrich your life in the process.
Transition to Full-Service RIA Completed
Perhaps the most significant initiative for your PFS team in 2016 was the transition of Planned Financial Services from its current dual Registered Investment Advisor (RIA) registration with LPL Financial to serve as a full-service SEC-registered RIA. We’re happy to report that this transition was completed in a highly expeditious manner, thanks in large part to your tremendous response and cooperation in helping us update client account agreements to reflect our new business structure.
Our new business structure, effective January 1, 2017, has enabled us to unify trading and registered investment advisory fees, ensuring that clients who joined us as a result of a past acquisition, as well as new clients joining us in the future, enjoy the same high level of service, access, and advice from our award-winning team.
PFS & 401(k) Prosperity Website Launches
In July, we announced the release of our two new websites designed to offers clients and visitors a content-rich experience, contemporary format, and compelling imagery. The sites provide visitors with a clear understanding of how your Planned Financial Services and 401(k) Prosperity® team partners with you to create a memorable and rewarding experience along the path to pursuing your important financial, business, and life goals.
Visit us today at www.PlannedFinancial.com and www.401kProsperity.com
In 2016, your PFS team was recognized by several organizations for customer service, retirement planning expertise, and business growth, including:
- Smart Business 2016 Customer Service Awards - Planned Financial Services (PFS) was selected as an honoree for The 2016 Customer Service Awards and was recognized amongst its peers at the Power Players of Cleveland luncheon on November 3, 2016.1
- 401 Top Retirement Plan Advisers - Frank Fantozzi was named among the 401 Top Retirement Plan Advisers by the Financial Times.2
- The Weatherhead 100 - For the fifth time, Planned Financial Services was named a Weatherhead 100 Upstart company, which recognizes the 100 fastest-growing companies in Northeast Ohio.3
Visit our online Newsroom to learn more about these and other recent PFS awards and recognition.
2016 Educational Events
- In May 2016, we had the pleasure of hosting 120 clients, friends, and local business leaders at our 8th Annual Cleveland Economic Summit. The late afternoon event began with a networking and cocktail reception held at the world-renowned Cleveland Botanical Garden. The Summit featured two distinguished speakers: LPL Financial Vice President and Market Strategist, Ryan Detrick, and Horizon Investments Chief Global Strategist and Washington-insider, Greg Valliere. Watch for information about our upcoming 9th Annual Cleveland Economic Summit in the weeks to come!
- In early November, we hosted a complimentary educational seminar: The Alzheimer’s Tsunami: Preparing for the Worst, for clients, friends, and their guests at Corporate College East in Warrensville Heights, Ohio. Those attending gained a better understanding of how to prepare physically, emotionally, and financially should a loved one be diagnosed with Alzheimer’s or a related form of dementia.
2017 Upcoming Events
9th Annual Cleveland Economic Summit
We’re pleased to announce that we will be hosting our 9th Annual Cleveland Economic Summit in late spring 2017. This year’s Summit promises to be an exciting one you won’t want to miss! Our speakers will address the highly-charged political, economic and global atmosphere, how new and anticipated policy decisions and tax law changes may impact your finances and your business, and our outlook for the continued strength of the financial markets. Stay tuned for more information from your PFS team in the coming weeks!
Smart Business: Smart Women Awards
As a program sponsor for the Northeast Ohio Smart Business magazine’s Smart Women Breakfast on April 20, 2017 in Westlake, OH, Frank Fantozzi is a member of the Host Committee and will serve as a presenter during the Smart Women Awards segment of the program. The event will combine a live event with digital and print content to address today’s issues facing women in the workplace and will recognize the achievements of leading businesswomen, inspiring male advocates, and effective women’s programs.
Want to participate? Learn more at Northeast Ohio Smart Women Awards
Smart Business: Family Business Conference and Family Business Achievement Awards
Frank Fantozzi will be a featured speaker at the September 2017 Smart Business magazine Family Business Conference and Family Business Achievement Awards interactive workshop. Fantozzi will participate on a panel of leading industry experts, providing the type of actionable insight necessary to plan for a smooth transition of family businesses. The dynamic line up of panelists will share real life examples of what separates success stories from failures. The networking breakfast and interactive workshop will offer perspectives from both industry experts and actual family business owners to address a myriad of issues and challenges family-owned businesses face.
Want to participate? Learn more at Family Business Conference & Awards
Join Us in Welcoming Our Newest Team Member!
In December 2016, we were pleased to welcome Brian Klecan, AIF® to our growing team. As an experienced Retirement Plan Advisor, Brian adds further depth to our 401(k)Prosperity® team, helping to ensure plan sponsor objectives are met and plan participants receive the level of advice, education, communication, and personalized service that leads to desired retirement outcomes.
Learn how 401(k)Prosperity® provides Simplicity in a Complex World®
Economic Outlook 2017
**Despite a strong 2016, there may still be some value in value. While value has lagged growth so far in 2017, based on the Russell style indices, we see several reasons to like value stocks, including accelerating economic and profit growth, and an improving outlook for the financial sector. But the growth side has enough going for it that we recommend investors maintain balance across the styles. Here we discuss our latest style views. SLOW GROWTH NO MORE? Economic and profit growth are both poised to improve in the coming months in our view, creating a more favorable backdrop for value stocks that have historically outperformed when growth is accelerating. Economic growth has been subpar during the entire economic expansion (approximately 2% growth on average in gross domestic product GDP]), which is one of the reasons why growth stocks have outperformed value during the current economic expansion. We recommend that investors generally maintain balance across value and growth stocks. Improving economic and profit growth create a favorable backdrop for value. Our sector views point to balanced style views, particularly our positive views of both technology and financials. Other factors to consider include relative valuations (favors growth) and technical analysis (favors value).
The logic here is that when economic and profit growth is scarce, you want to own stocks that can generate their own growth without the need for a macro tailwind. Value stocks tend to need help from the economy to grow. When all companies get a macro lift, and growth is plentiful, the market tends to prefer cheaper stocks to those that are more expensive. The following analysis (annual data back to 1990) supports this logic:
- When economic growth is slow (real GDP below 2.2% annually), growth outperforms value 60% of the time by an average of 3.1%. GDP came in below that pace in the fourth quarter of 2016, but we expect at least 2.5% in 2017. (Favors value.)
- When the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) is below average (less than 52), growth outperforms value 60% of the time by an average of 2.5%. The ISM, after accelerating four straight months, came in at 54.5 for December 2016. (Favors value.)
- When S&P 500 profits grow at below-average rates (less than 7%), growth outpaces value 58% of the time by an average of 5.1%. S&P 500 year-over-year earnings growth is tracking right on that 7% number for the fourth quarter of 2016 (based on Thomson Reuters data). But it is early in earnings season, suggesting more upside may come, and consensus expectations are calling for double-digit earnings gains in 2017. Based on potential upside from policy (tax reform, infrastructure, deregulation, etc.), we believe earnings stand a good chance of eclipsing that 7% mark in 2017, particularly in the second half of the year. (Favors value.)
Accelerating growth is certainly not the whole story. We had accelerating economic and profit growth in the late 1990s, and the growth style outperformed. There are other factors to consider, such as sector positioning and valuations as we discuss below. We must also keep time frame in mind and consider that this dynamic may not last very long. The bump up in economic growth that most expect may not come through or may be short-lived, suggesting stints of growth and value outperformance are possible in the year ahead.
Sector outlooks are another important consideration in the growth-value decision. Performance of the biggest value sector, financials, relative to the biggest growth sector, technology, is a key determinant of style performance, as discussed below, but other sectors also play a role:
- Financials: The outlook for the financials sector has been steadily improving in recent months. First, interest rates have been rising and steepening the yield curve, which benefits lending margins and returns on cash. Second, the Trump administration will likely roll back financial regulations, which is expected to stimulate lending and may open up more growth opportunities. Third, because of the sector’s domestic focus, the sector is one of the biggest beneficiaries of lower corporate tax rates (more global companies pay lower tax rates due to lower rates overseas). And finally, financials are very economically sensitive and economic growth expectations have improved lately. (Favors value.)
- Technology: We maintain our positive view of the technology sector, which is enjoying solid growth, remains attractively valued, and will be a big beneficiary of an expected lower tax rate to repatriate cash overseas (based on the current tax code, companies must pay the corporate tax rate of 35% when deploying profits earned overseas for domestic purposes including share repurchases, dividends, reinvestment or acquisitions). Although we expect the technology sector to outperform the market in 2017, a potentially smaller immigrant labor pool, rising risk of protectionism, and less benefit from lower corporate tax rates than other sectors may make it difficult for technology to outpace financials. (Favors growth.)
- Energy: We like the progress oil producers have made to balance supply and demand, with help from the OPEC agreement (plus Russia) to cut production. However, near-term upside to oil prices may be capped in the mid-to-high $50s, just a few dollars above current levels, because higher prices are likely to be met with more production. (Favors value.)
- Utilities: We continue to recommend avoiding the utilities sector due to its interest rate sensitivity and our expectation that economically sensitive sectors perform better. The sector’s heavy debt usage is another cause for concern because tax reform may eliminate the deductibility of interest payments on corporate debt. (Favors growth.)
- Consumer Discretionary: We maintain a negative view of consumer discretionary because the sector tends not to do well in the mid-to-late stages of business cycles, even though lower individual tax rates may arrive later this year. Other concerns include ecommerce disruption and a possible border adjustment tax out of Washington, D.C. that would hurt the many importing companies in the sector, including autos and apparel retailers. (Favors value.)
- Healthcare: We continue to see value in the healthcare sector, although given the policy uncertainty, we recognize risk is high. The sector is as cheap as it has ever been relative to the broad market, but there is no guarantee that millions of individuals won’t lose their insurance once the Affordable Care Act (ACA) is replaced, and drug price scrutiny may linger. (Favors growth.)
Rolling this up, the sector score is a draw. We have positive views of two growth sectors (technology and healthcare) and two value sectors (financials and energy), and negative views of one growth sector (consumer discretionary) and one value sector (utilities). We would not make the style decision on sector views alone, but this exercise results in a fairly balanced picture.
Growth Looks Like a Better Value
Valuations are another consideration in the style decision, and value stocks appear a bit expensive relative to growth. Although by definition value stocks are always cheaper than growth on an absolute basis because valuations are used to classify the securities, the relative relationship between the two changes. Currently, the Russell 1000 Value Index is trading at a smaller discount to its growth counterpart (13%) than its 20-year average (26%). Even if we eliminate the tech boom—a period when growth was dramatically overpriced—value is still 7% more expensive than its average (a 13% discount vs. the post-2003 average discount of 20%). So, although we do not put a lot of weight on valuations for short-term decisions, over the next year or two valuations may present a headwind for value outperformance.
Taking a technical analysis perspective, we observe that the value relative performance line versus growth broke out of a four-year downtrend in late 2016. We believe this positive technical development favors value, although the Russell 1000 Value Index does appear to be working off short-term overbought conditions (a technical way of saying in the short-term, relative performance may be a bit ahead of itself). Nonetheless, strictly from a technical perspective, the extended value underperformance suggests a potential long-term opportunity in value.
We see several reasons to like value stocks, including accelerating economic and profit growth, the better outlook for financials, and the breakout versus growth from a technical analysis perspective. But the growth-heavy technology sector looks good to us, the value-oriented utilities do not, and value looks expensive relative to growth. Bottom line, the growth side has enough going for it that we suggest investors maintain fairly balanced style allocations.
There’s no doubt that this will be an exciting year. We expect the Trump administration to continue to usher in change and will continue to provide you with relevant market and economic insights on how policy decisions may impact your life, business, and family, as well as the global economy. In times of change, we can’t overstate the critical role a well-formulated plan and a long-term focus can be to weathering varying market cycles, conditions, and challenges. It also guards against the temptation to adopt a herd mentality or make decisions based on emotions—both of which can easily derail your strategy as you pursue your life plans.
Your Return on Life® is always our top priority and we remain committed to providing you with the education, advice, and insight required to retain a long-term perspective and focus on your individual goals. If you need additional help or someone you know needs our advice, remember, we’re only a phone call away at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with the guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.
Real People. Real Answers.
Health, Happiness, and Good Fortune,
President & Founder
CPA, MT, PFS, CDFA, AIF®
Planned Financial Services
Registered Investment Advisor
How to shift income to family members and save money
Today, high-income earners face a top federal income tax rate of 39.6% — 43.4% if they’re subject to the 3.8% surtax on net investment income (NII). And the top tax rate for long-term capital gains is 23.8%, including the NII tax.
One strategy for easing this tax burden is to transfer income-producing or capital assets to children, parents or other family members in lower tax brackets. Such a move can be particularly effective if your loved ones can take advantage of the 0% capital gains tax rate for taxpayers in the two lowest (10% and 15%) tax brackets. The “kiddie tax” eliminates these benefits in many cases, but income shifting continues to offer significant tax savings under the right circumstances.
Work around the kiddie tax
For many years, parents saved taxes by transferring stock or other investments to a child’s custodial account, where income and capital gains would be taxed at the child’s lower rate. Congress enacted the kiddie tax to curb this practice. Currently, a child’s investment income in excess of $2,100 is taxed at the parents’ rate when the child is:
- Under the age of 18 at the end of the tax year,
- Age 18 at the end of the tax year, with earned income (such as wages from a job) that doesn’t exceed half of the child’s support needs, or
- A full-time student over 18 and under 24 at the end of the tax year, with earned income that doesn’t exceed half of the child’s support needs.
The tax doesn’t apply to children who are married filing jointly.
The kiddie tax essentially eliminates the benefits of income shifting for children under 18, but tax-saving opportunities remain for older children. You might still consider it if your kids are between 18 to 23 and their earned income exceeds half of their support needs or if they’re between 19 to 23 and are part-time students or nonstudents.
Suppose, for example, that your daughter is 20 at the end of the year, is a full-time college student and earns more than half of her support needs from a part-time job. The kiddie tax doesn’t apply, so you give her $30,000 worth of stock that you purchased for $15,000. Assuming her taxable income is $20,000, she can sell the stock tax-free at the federal level. That’s because, even after adding the $15,000 gain to her taxable income, she’s still in the 15% tax bracket.
Look to your parents
Transferring assets to your parents can be a great way to take advantage of lower tax rates without worrying about the kiddie tax. Suppose you own stock that you originally purchased for $50,000 but whose value has grown to $250,000. Assuming that you’re subject to the NII tax, selling the stock would trigger $47,600 in federal taxes (23.8% × $200,000).
Transferring the stock to your elderly parents can save taxes in two ways. First, if your parents are in a lower income tax bracket than you, they’ll pay less tax on any dividend income the stock generates. Second, if you give your parents the stock with the understanding that it will come back to you as part of their estate plan, you’ll avoid taxes on the capital gain.
Let’s say you give the stock to your father. Five years later, when its value has grown to $325,000, he dies and you inherit the stock. Your basis in the stock is “stepped up” from $50,000 to $325,000 (its date-of-death value), so you can sell it without any capital gains tax liability. Had you held the stock yourself for five years, you’d owe $65,450 in taxes on the gain (23.8% × $275,000). A caveat: This strategy increases taxable estates, and may also represent a reportable taxable gift.
Reduce your tax bill
These are just a few examples of the ways income shifting can lower your family’s overall tax liability. It’s important to keep in mind that to evaluate the benefits of income-shifting strategies you must also consider any potential gift or estate tax liability, as well as state income taxes. Consult with your tax advisor to identify appropriate strategies for taking advantage of your loved ones’ lower tax rates.
Sidebar: Are taxes trapped in your trust?
Individuals with nongrantor trusts often try to reduce their tax bills by distributing trust income to beneficiaries in lower tax brackets. Generally, trusts are subject to tax only on their undistributed income, while income distributed to a beneficiary is taxed to the beneficiaries at their marginal rates.
But trust accounting rules limit distributions to distributable net income, which typically includes dividends and interest but excludes capital gains. As a result, capital gains are trapped in the trust and may be taxed at rates as high as 23.8%.
Is there any way to liberate trust capital gains? Depending on applicable state law and the terms of the trust document, it may be possible to include capital gains in distributable net income, either by amending the trust or through an exercise of trustee discretion. Talk to your tax or estate planning advisor to learn whether this is an option in your situation.
Managing volatility by combining cyclical and defensive stocks
A well-diversified portfolio consists of multiple investment types that often can be expected to behave differently from one another. This strategy tends to produce the most favorable risk/return profile. But even within the equities asset class, different types of stocks can perform differently based on market and economic factors.
Cyclical stocks, in particular, are known for their ups and downs, while defensive stocks generally perform more predictably. The key is to strike a balance between the two.
Riding the waves
Cyclical companies generally are more profitable when the economy is strong or improving and less profitable when it’s weak or declining. Most of these companies offer discretionary products and services — what people want, rather than what they need. When consumers are anxious about their economic situation (for example, in times of high unemployment), they’re less likely to make unnecessary purchases. Instead they may choose to delay their spending or make less-expensive purchases.
Automobile manufacturers, homebuilders and travel-related enterprises, such as airlines and hotels, are prime examples of cyclical businesses. Facing an uncertain economy, consumers are less likely to buy new cars and homes or take expensive vacations. To limit expenses, businesses may require employees to use videoconferences instead of long-distance travel.
Other examples of cyclical businesses include IT consultants, whose customers may choose to delay systems upgrades; construction equipment manufacturers, which will see fewer orders when building activity slows down; and commodity-oriented businesses, whose earnings become vulnerable when raw material prices drop.
Consistency as a virtue
In contrast, companies that make or sell consumer essentials, such as soap, toothpaste or groceries, are more resilient in difficult economic conditions. These businesses tend to generate consistent demand for their products and services, regardless of underlying economic conditions. After all, most consumers don’t brush their teeth less or stop drinking milk during a recession. Many health care companies fall in the same category because people get sick in all types of economic environments.
For investors, these types of stocks are considered “defensive.” Defensive stocks don’t typically provide as much growth potential. But many defensive stocks offer relatively high dividends to entice investors, and the regular income stream can add to the stocks’ overall stable performance over time.
Achieving the proper balance
In a well-diversified portfolio, cyclical and defensive stocks can be complementary. Here’s how.
A portfolio heavy with cyclical stocks is likely to be relatively volatile, with more dramatic positive and negative performance. Meanwhile, a portfolio focused on defensive stocks will be less extreme in its movements, tending toward lower highs and higher lows. Mixing the two types of equities, however, can help an investor access both cyclical and defensive traits. In theory, investors can take greater advantage of a growing economy and improved stability when conditions aren’t as favorable.
Note the exceptions
That said, not all cyclical or defensive stocks perform identically. Many factors affect a particular stock’s performance, including industry, size, regulatory pressures and company-specific issues such as competence of management.
However, it’s safe to say that good economic conditions provide a tailwind to stocks that benefit from a stronger economy, and weak conditions will make it more difficult (though not impossible) for cyclical stocks to outperform. Your financial advisor can help you combine cyclical and defensive equities in a portfolio that balances returns and risk.
Is there unclaimed property with your name on it?
According to the National Association of Unclaimed Property Administrators (NAUPA), state unclaimed property programs are holding nearly $42 billion in assets, just waiting to be claimed by their rightful owners. Could some of it be yours? The answer may be a few clicks away.
Digging for treasure
Unclaimed property generally refers to financial assets being held for owners who haven’t been found. Examples include:
- Financial accounts,
- Stocks and bonds,
- Uncashed dividend and payroll checks,
- Tax refunds,
- Trust distributions,
- Traveler’s checks, unredeemed money orders and gift certificates,
- Insurance payments, refunds or policies,
- Utility and rent security deposits,
- Mineral royalty payments, and
- Safe deposit box contents.
State unclaimed property programs require asset holders to turn them over to the state if they lose contact with the owner. In some cases, the state sells stocks or bonds — or auctions off the contents of safe deposit boxes — and holds the proceeds for the owner. There are also several federal programs that hold unclaimed property, such as tax refunds, pension or veterans’ benefits, insured deposits from failed financial institutions and unredeemed savings bonds.
Consulting the map
How do you find out whether you own unclaimed property or whether you’re entitled to such property as the heir of a deceased owner? Start by searching databases maintained by the state or states where you live and work, as well as states where you (or a deceased relative) previously lived and worked. Unclaimed property is sent to the state of the owner’s last known address.
Most states participate in MissingMoney.com (http://missingmoney.com), a national unclaimed property database that you can search free of charge. For states that don’t participate in this database, you can find links to every state’s unclaimed property database on the NAUPA’s website at https://www.unclaimed.org. There’s no centralized database for federal unclaimed property, but you can find links to the relevant federal programs on the NAUPA’s site.
Staking a claim
If you discover unclaimed property in your name, follow the instructions on the website where you found it. Typically, you’ll need to provide proof of ownership or, in the case of a deceased owner, a death certificate and proof that you’re entitled to the assets (such as a will).
Finally, be wary of companies that offer to locate and obtain property for a fee. Some of these offers are scams. But even if they’re legitimate, in most cases you can find and claim assets yourself for free or by paying a nominal handling fee.
Charity begins at home
CRTs and CLTs offer philanthropic and family benefits
For many people, a significant part of the estate planning process is deciding how (and how much) they want to leave to charity. Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) can help individuals achieve such goals and benefit family members. For this reason, they’re known as split-interest trusts.
Minimizing capital gains tax
CRTs provide noncharitable beneficiaries with exclusive rights to specific distributions until their interests have terminated. At that time, charitable beneficiaries receive the remainder — the assets left over in the trust. This tool can be particularly useful if you want to divest yourself of a highly appreciated asset to diversify your portfolio but are concerned about the capital gains tax.
Here’s how it typically works: You create a CRT, name yourself the noncharitable beneficiary and transfer the appreciated asset to the trust. Then, the CRT can sell the asset (tax-free to the trust as a tax-exempt entity) and use the proceeds to purchase diverse, income-producing assets. You can receive annual payments from the trust for a specified period of up to 20 years or for your lifetime, increasing your cash flow.
A portion of each payment may be taxable to you based on the income earned or capital gains recognized by the trust. You might, for instance, have capital gains income attributable to the sale of the highly appreciated shares you transferred to the trust. But the gain you report will be spread out and taxed to you only as you receive payments. Plus, you’ll enjoy a partial but immediate income tax charitable deduction when you create the trust, calculated as the present value of the charity’s remainder interest.
If you’re worried that there won’t be enough assets in your estate for your heirs to receive the inheritances you intended, should you die early in the CRT’s existence, there are two potential solutions:
- Set the CRT term for a specific number of years (rather than your lifetime) and name your heirs as contingent beneficiaries, or
- Purchase a life insurance policy to make up for the shortfall your heirs might experience.
Finally, keep in mind that you can name someone other than yourself as noncharitable beneficiary or set up the trust to be funded at your death. However, the tax consequences will be different.
Reversing the timing
CLTs reverse the timing of when charitable and noncharitable beneficiaries receive distributions. The charitable beneficiaries receive the initial distributions and the noncharitable beneficiaries receive the remainder. A CLT can be useful when an asset generates substantial income every year, you don’t need the income and you wish to eventually pass the asset to your heirs.
The CLT generates an income stream for the charity during the trust term, and at your death — or the end of the CLT term if you’ve set it for a specific number of years — the asset passes to your family. If structured as a grantor trust, the trust is essentially disregarded for income tax purposes, and a CLT then works similarly to a CRT in that you receive an immediate income tax deduction on the transfer of assets into the trust. But in subsequent years, the income generated by the CLT will be taxable to you. If you don’t structure it as a grantor trust, the CLT income won’t be taxable to you, but you also won’t get an income tax deduction when you fund the trust.
Unlike a CRT with you as the noncharitable beneficiary, a CLT has a gift tax component, which is calculated based on the present value of the noncharitable beneficiary’s remainder interest. As with CRTs, CLTs can also be funded at your death, with different tax consequences.
Asking for advice
Whatever your estate plans, professional advice will be essential. If you’re considering a CRT or CLT, talk it over with your advisors.
1 - Smart Business 2016 Customer Service Awards - Presented by Smart Business magazine, The 2016 Customer Service Awards recognizes 25 organizations in the Cleveland area that have demonstrated their commitment to delivering world-class customer service – both internally and externally. The program serves to raise awareness of the importance of customer service in the business world and to share best practices from those who strive to do it best.
2 - 401 Top Retirement Plan Advisers - The list, produced by financial services publication Financial Times in collaboration with Ignites Research, recognizes the top financial advisors who specialize in serving defined contribution (DC) retirement plans. Advisors were chosen based on several criteria, including the amount of DC plan assets under advisement, and growth and specialization in DC plan business, among other factors.
3 - The Weatherhead 100 was established to celebrate the strength and spirit of entrepreneurship and to recognize the elite companies headquartered in the region. This year’s winners were evaluated on revenue growth from 2011 to 2015 and were listed in a special issue of Community Leader Magazine. PFS will be honored among its peers and other professionals at the Weatherhead 100 awards ceremony on Thursday, December 1, 2016 in Cleveland.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Because of their narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. All investing involves risk including loss of principal.
DEFINITIONS: Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. Purchasing Managers Indexes are economic indicators derived from monthly surveys of private sector companies, and are intended to show the economic health of the manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change. The two principal producers of PMIs are Markit Group, which conducts PMIs for over 30 countries worldwide, and the Institute for Supply Management (ISM), which conducts PMIs for the U.S. The Institute for Supply Management (ISM) Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.
INDEX DESCRIPTIONS: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Russell 1000 Index measures the performance of the large cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.
Research source: LPL Financial, January 2017.
Investment advice offered through Planned Financial Services, a Registered Investment Advisor
Securities offered through LPL Financial, Member FINRA/SIPC
Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor. Other advisory services offered through Planned Financial Services, a registered investment advisor. 401(K) Prosperity and Planned Financial Services are separate entities from LPL Financial.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Portions of this material were prepared for the representatives' use.