Investors have experienced a choppy, volatile bond market in 2013. For many bondholders this has led to negative total returns for the year. For example, the AGG (or iShares Core Total US Bond Market ETF), which is widely seen as a proxy for the U.S. investment-grade bond market, is down -3.5% year to date.
We have had a defensive posture in our Lifestyle Income Bond (LIB) strategy since the beginning of the year, focusing on 1) keeping maturities short and 2) investing in high-yield bonds. We also entered 2013 with a floating rate fund that invests in bonds whose interest payments reset upward as interest rates rise. These moves have helped counter the down performance of bond funds, such as industry legend Bill Gross’s Pimco Total Return Fund (PTTRX), now down -3.5%; and the Pimco Real Return Fund (PRRIX), down -9.03%. Year to date, our LIB account is down -0.38%, net of the highest management fee charged, and is up 0.61% gross of fees.
While bonds will still provide an essential long-term anchor for many portfolios, we expect that the volatility and instability will most likely continue in the short term. At this time, it appears that the 10-Year Treasury Yield is heading towards a rate of 3.00%. Reaching that level will drive down bond prices still further.
With this outlook in mind, we still favor bonds with shorter maturities, as well as over-weighting high-yield individual bonds and floating rate bonds. For both our Foundation and our LIB models, we have also invested in the Pimco Credit Absolute Return Fund (PCARX), a more conservative fund that seeks to generate return in any market.
In addition, we are adding a stake in the Pimco Emerging Local Bond Fund (PELBX), as our ConValTM process has identified emerging market bonds as undervalued. Expect to hear more about our investments in emerging markets in an upcoming blog post!
If you have any further questions please feel free to contact your wealth advocate or our investment department.
Everyone agrees that the tax code is too complex. While the need for tax reform is a common refrain in Washington, the likelihood of a substantial change is low. Too much is invested in the status quo. While everyone complains about the other guy's deduction, they are loathe to give up their own.
Remember that our complex, often confusing tax code benefits those who take the time to learn its details and use it to their advantage. I will offer occasional tax planning tips designed to help ensure that you pay only the taxes you owe.
Tip #1: Remember that tax planning is a year-round exercise
In some ways, tax planning is similar to maintaining real property: Proper diligence ensures that repairs are kept small, with minimal damage.
Tax planning and actions to reduce taxes can be made throughout the entire year — January through December — to ensure you pay only the taxes you owe.
If you are self-employed, or if your income fluctuates, you should consider using quarterly tax payments requirements to review your investment assets and each asset's impact on gross earnings; as well as your current income from self-employment.
For example, you might want to sell securities to establish short-term losses or long-term gains, alter or fund retirement plans, or incur or defer medical expenses based upon balances in a flexible medical savings accounts.
Don’t wait until April of next year to make decisions! Instead of being reactive, proactively plan now to take advantage of all the possibilities.
From Tom Brunberg, head of Wade Financial Group’s Year Round Tax Planning Service.
Markets continue to react to Federal Reserve Chairman Ben Bernanke’s comments last week, in which he said that the Fed could start reining in its stimulus policies if the economy continues its slow improvement. As 10-year Treasury bond yields rose to a two-year high, mortgage rates surged—also reaching their highest level in two years, and threatening to slow down the housing market’s recovery. 30-year fixed mortgage rates have risen almost a full percentage point since their record low this winter.
Mortgage buyer Freddie Mac said last Thursday that the average rate on the 30-year fixed loan jumped to 4.46%, the highest level since June 2011 and the largest weekly increase since April 1987. That's up from 3.93% from the previous week
The average rate on the 15-year mortgage jumped to 3.50% from 3.04%. That's the highest since August 2011. A year ago, the rate on the 15-year mortgage was at 2.94%.
Not only is this unwelcome news for homebuilders, home buyers, and those looking to refinance, these higher rates will also increase costs for public projects such as bridges and roads.
We have been expecting that interest rates will rise eventually, which is why we have emphasized bonds with shorter maturities in our LifeStyle Income Bond (LIB) accounts. Bonds with shorter maturities have the benefit of flexibility—if interest rates continue to rise, we can reinvest in bonds with higher yields. We have also hedged against rising interest rates by investing in funds focused on floating rate loans, which increase their interest payments as rates rise.
Experts differ on what rising interest rates will mean for the broader economy. We will continue to monitor the situation and keep you updated!
From Bob Smrekar, AIF®
Think of the people for whom you are an emergency contact: a spouse; a parent; a child; a close friend….Do you have the knowledge you might need to help these people in a crisis?
In many situations, you would need immediate access to key documents.
That’s why it’s wise to locate and organize these materials proactively,
rather than waiting until an incident or situation makes it imperative
to find them. When you’re dealing with a crisis, you certainly don’t
want to be in a dusty attic, frantically shuffling through an enormous
box of papers, or at the back of a long line at a government office,
trying to replace a critical document that has gone missing.
Download and fill out this checklist of your critical documents, and ask your close friends and family to do the same. Finally, make sure that everyone knows the location of these key checklists.
This is just one of the organizational tools we use as part of our Estate Planning Service. If you’re concerned about how to organize, protect, and transfer your legacy to your heirs, talk to your Wealth Advocate today. An investment in estate planning now can prevent stress-filled chaos later on.
From Bob Smrekar, AIF®
#1: We’re Here to Help
Before going into the details about the new developments in gift and estate taxes, I want to let you know that your Wade Financial Group team is here to help sift through the new laws and their implications for you. There is still a great deal of uncertainty surrounding these new laws. We are expecting future clarifications and refinements. We will continue to monitor developments as they occur and consider implications for your personal situation.
If you have questions about your planned gifting, please call your Wealth Advocate. Your Wealth Advocate will guide you through your options and their tax impacts, so you can make an informed choice.
About the Law
This spring, Minnesota enacted a gift tax. Effective July 1, “taxable gifts” over a lifetime credit of $1 million per individual will be taxed at 10 percent. A taxable gift is a gift amount over the federally set exclusion amount, currently set at $14,000 for individual gifts.
Under this new law, individuals may continue to make nontaxable gifts of up to $14,000 per recipient, per year, without being subject to any tax or reporting requirements. Gifts made directly to spouses, charities, and medical and educational institutions remain not taxable. Spouses may continue to make joint gifts (known as gift splitting), and have a joint lifetime credit of up to $2 million in taxable gifts before they have to pay the Minnesota gift tax.
Minnesota estate tax laws have also changed. The new laws will be in effect for individuals dying after December 31, 2012. Adjusted taxable estates will now include taxable gifts made within three years of death. The legislature left unclear whether this means taxable gifts made on or after January 1, 2010, or those made after June 30, 2013. This question will likely be resolved by either future legislative or court action.
Further, the new estate tax extends to non-Minnesota residents who die while owning interests in “pass-through entities” (e.g., S-corporations, single-member limited liability companies, partnerships, and grantor trusts), which hold real estate or tangible personal property located in Minnesota. The non-residents will be deemed to own the property outright and will be required to file a Minnesota estate tax return.
Let’s look at some sample situations to clarify these complicated gift rules.
Example Scenarios
Scenario 1
In 2014, Tom and Rita wish to give their four adult children $10,000 each. What gift taxes will apply?
Answer: None. Each gift is under the $14,000 annual exclusion amount set by the federal government, so there is no “taxable gift” as determined by the federal government or Minnesota’s new gift tax law. This also means that these gifts will not be included in Tom and Rita’s taxable estates.
Scenario 2
In December 2014, Tom and Rita wish to give $1 million to each of their four adult children. Earlier that year, they had already made gifts of $28,000 to each child. What gift taxes would apply?
Answer: Since Tom and Rita already have used their $14,000 annual exclusion amounts for the year, the entire $4 million ($1 million per child) is considered “taxable gifts.” Tom and Rita will need to file federal and state gift tax returns and note they are splitting the gift—they have each made total taxable gifts of $2 million.
They are still within the $10.5 million joint federal estate and gift tax credit, so no federal gift tax is payable. However, with the $4 million taxable gifts, they have exceeded their $2 million joint lifetime credit for the Minnesota gift tax, triggering a 10 percent tax on the amount that is above the credit. They pay $200,000 to the state of Minnesota (10 percent of $4 million, minus $2 million credit).
Furthermore, should Tom and Rita pass away within three years of making the gift, the $4 million will be included as part of their Minnesota taxable estates for tax calculation purposes.
Scenario 3
Tom and Rita wish to pay for their grandchild’s college tuition, which totals over $44,000 yearly. What gift taxes would apply?
Answer: None. As long as Tom and Rita pay the college directly, this is not a taxable gift for federal or Minnesota purposes, and thus would not be subject to the gift tax or included as part of their taxable estates.
(Important notes: If they made the mistake of giving the grandchild the money and had the child pay the school, the amount over $14,000 would be considered a taxable gift. Also, the exclusion only applies to amounts paid for tuition, not room and board, or other fees.)
Scenario 4
Rita wishes to make a large gift to her favorite charity, which is a registered nonprofit. What gift taxes would apply?
Answer: None. As long as Rita gives the gift directly to the charity, this would not be considered a taxable gift. It would not be subject to the gift tax or included as part of her taxable estate. One important note here is that the law has left unclear whether taxable gifts (e.g., over $14,000 in a calendar year) to political organizations would be subject to the gift tax.
Again, remember that we are here to help guide you through these laws and how they impact your estate plan. Call your Wealth Advocate if you’d like to discuss your personal gifting and how the new law might apply to you.
By Tammy Davis Cownie, J.D.
Manager, Estate Planning Services; Wealth Advocate
As your Chief Wealth Advocate, it’s always been my belief that those who prepared a comprehensive, written financial plan were more likely to reach their goals…and a recent survey has now confirmed it.
A survey of American consumers by the Consumer Federation of America and the Certified Financial Planner Board of Standards revealed that those people who had a comprehensive financial plan were more likely to
- Save more of their income
- Accumulate more in investments
A comprehensive financial plan provides a firm foundation as you work towards achieving your financial goals.
This is exactly why we’ve chosen to focus on comprehensive, customized financial plans as an crucial component of our Wealth Management service.
Some firms use a “financial plan” as a quick, freebie service designed to get clients in the door (or, worse, into high-commission-paying products!).
At Wade Financial Group, we work with you to develop a highly personalized, detailed plan around your unique goals and financial situation…so that you can have confidence that you’re on the right financial track!
From Jerry Wade, CFP®, CFS
Chief Investment Officer
Chief Wealth Advocate
Tammy Davis Cownie: Outstanding Wealth Advocate, Estate Planner
Wade Financial Group is proud to announce a strong new addition to our team: estate planning lawyer Tammy Davis Cownie. This expansion of our talent base reinforces our commitment to you, our clients, as well as to providing our hallmark “You First” client service.
Tammy joins us as a Wealth Advocate, with exemplary credentials in creating and defending client wealth. Her previous experience includes:
- Building and preserving client assets during her 19 years as a Vice President and Personal Trust Relationship Manager at the Private Client Reserve of U.S. Bank.
- Intensive estate-planning expertise, with experience as an estate tax attorney for the Internal Revenue Service.
- Significant income tax planning experience.
- Licensed to practice law in Minnesota and Wisconsin since 1988, with a law degree from Marquette University.
Tammy’s hiring was the result of an intensive, months-long vetting process. Our requirements for the position were that the individual possess extensive estate-planning experience and exceptional advisory skills, as well as fit seamlessly with our foundational “You First” values. Also of critical importance was the ability to make a long-term, full-time commitment to serving our clients. Tammy emerged as a perfect match.
“In making my decision to join the Wade Financial Group team, I was looking to join a culture of creativity and integrity, with a founder strongly committed to attention to detail and excellence. Having been in my previous position 19 years, I was looking for a firm where I can become a principal and make a long-term commitment,” Tammy says.
About Tammy, Wade Financial Group founder Jerry Wade says, “I was impressed with what Tammy has done to move forward in her career. The fact that she sought and achieved a master’s degree in Clinical Psychology and a Mediation certification is extremely impressive. Tammy chose to enhance her financial advisory skill set with additional communications skills that can greatly enhance the client satisfaction experience. While we are already one of the most exceptional estate planning firms in the Twin Cities, having an on-staff estate lawyer will take our service to the next level.”
Attracting the level of talent that Tammy brings is a strong affirmation of our firm, and of the vibrant, client-centric culture here at Wade Financial Group.
As always, thank you for choosing us as your steadfast protector of wealth. We look forward to continuing to provide you with the rock-solid wealth management advice required to navigate today’s financial markets.
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