Market Analysis by Financial Institutions

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Market Outlook

THIRD QUARTER 2013

U.S. EconomySigns of improvement but still subpar recovery with headwindsSubpar Recovery: Our base case (most likely) scenario continues to call for a subpar recovery (low growth compared with prior recession recovery periods), producing near-term economic growth rates of approximately 1.0% to 3.0%. •Still Substantial Headwinds: Headwinds to recovery include high U.S. unemployment, consumer deleveraging (instead of spending), fiscal spending cuts, higher taxes, recessionary conditions in Europe and Japan, and slower growth in China. •Signs of Improvement: The economy seems to have achieved sustainable growth, but not strong growth. The housing market is gaining traction, tax revenues are growing, corporate default rates remain relatively low, the stock market has rallied this year, and unemployment is trending lower.
U.S. InflationContained in 2013 but most likely on upward path thereafter•Contained in 2013: A 1.5% to 3.0% increase over 12 months in the overall Consumer Price Index (CPI, a government index derived from detailed consumer spending information) appears most likely this year. That’s largely because of modest global economic growth this year, which is expected to help contain near-term inflation pressures. •Long-Term Concerns: We believe higher inflation (a 12-month CPI change over 3.0%) could occur in the coming three- to five-year time frame. That’s because of the unprecedented monetary and fiscal policies enacted in response to the 2008 Financial Crisis and the present global economic slowdown. •Don’t Be Complacent: We believe strongly that some level of inflation protection be incorporated into investor portfolios.
U.S. Monetary PolicyAggressive stimulus continues but tapering talk roiled the markets•Aggressive Stimulus Continues: The Federal Reserve’s (the Fed’s) statements indicate that its overnight rate target should remain historically low for the foreseeable future, anchoring short-maturity U.S. Treasury yields. This should continue to create risk-taking incentives. Also, the Fed’s “tapering talk” seems more focused on possibly reducing the volume of its monthly bond purchases than on ending that program soon. •Talk of Tapering QE: The Fed’s monthly bond purchase program (aka quantitative easing, or QE) presently totals $85 billion per month. In May, the Fed began suggesting how and when QE might be tapered if economic conditions appear supportive. We think this essentially represents a policy change for the Fed. The markets responded to it that way, perhaps more than the Fed anticipated. •No Near-Term Change in Rate Target: With no near-term threat from inflation (deflation became more of a concern in the second quarter) and the economy still vulnerable to possible shocks, we think it’s unlikely that the Fed would raise its historically low overnight rate target any time soon.
U.S. Interest RatesStill range-bound but at a higher level; “Taper Tantrum” started normalization•“Taper Tantrum” Started Normalization: The Fed’s tapering talk triggered a violent market reaction— the 10-year U.S. Treasury yield jumped from 1.63% on May 1 to 2.61% on June 25. From a broader perspective, this was the start of a normalization of rate levels after years of “artificially” low long-term interest rates caused in part by QE. •Data-Driven Volatility: With the Fed having announced its intention to taper QE, with economic data as a guiding mechanism, we think the strength or weakness of economic reports will generate even more scrutiny and reaction than usual. Example: the Treasury market sell-off in response to the employment data released July 5. •Range-Bound But Higher: Given continued economic headwinds, we expect interest rates to remain in trading ranges rather than shooting straight higher. For the rest of this year, we expect the 10-year U.S. Treasury yield to trade between 2.0% and 2.85%. We think the long-term trend will be higher, assuming the economy strengthens.
GlobalSlow growth with widespread stimulative policies and low inflation•Slow Global Growth: Overall economic activity slowed in the first half of 2013 in both developed and emerging economies. Western Europe experienced the sharpest downturn, with many countries in recession. •Widespread Stimulative Policies: Central banks have responded aggressively to this economic weakness, reducing interest rates and buying government securities. We expect this trend to continue for the rest of this year. •Low Inflation: Under these conditions, we believe inflation is unlikely to be a near-term threat. However, the amount of monetary and fiscal stimulation that has been prescribed could create longer-term inflationary pressures.

Source: American Century

What ruling on same-sex marriage means for retirement accounts

Posted on by in Tax Law.

What ruling on same-sex marriage means for retirement accounts
September 12, 2013

This summer’s U.S. Supreme Court ruling on same-sex marriage means that many couples will soon qualify for certain favorable IRA and retirement plan provisions that were previously available only to opposite-sex spouses.

According to new guidance from the Treasury Department and the IRS, rules set to take effect September 16 specify that same-sex couples who marry within jurisdictions that recognize their marriages will be treated as married for federal tax and retirement plan purposes, regardless of how the jurisdiction where they live treats same-sex marriage. For example, if a gay couple residing in Virginia (which does not recognize same-sex marriage) travels to neighboring Maryland (which does) to tie the knot, their marriage would be recognized under federal retirement guidelines.

The guidance seeks to address uncertainty following the U.S. Supreme Court’s decision in June striking down a key section of the federal Defense of Marriage Act (DOMA). The section of DOMA that was ruled unconstitutional said that, for purposes of federal law, the term “marriage” must be limited to marriage between a man and a woman and that the term “spouse” must be limited to opposite-sex spouses.

“This ruling provides some clarity as we sort through the issues of implementing the Supreme Court’s decision,” said Jamey Delaplane, head of Vanguard ERISA and Fiduciary Services.

Although the ruling does not specifically mention IRAs by name, the guidance presumably applies to IRA rules regarding spouses because these rules stem from federal tax laws and regulations.

The ruling examined
The Treasury Department and the IRS said that any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be recognized for federal tax purposes and by retirement plans. Under the ruling, registered domestic partnerships, civil unions, or similar relationships recognized under state law will not receive new spousal rights.

“This means that the state of celebration, not the state of domicile, controls whether a same-sex couple’s marriage will be recognized under federal tax laws,” Mr. Delaplane said. “This outcome will assist same-sex couples with their financial and retirement planning and avoid the situation where access to federal spousal rules would turn on a couple’s current state of residence.”

Currently, 13 states and the District of Columbia recognize same-sex marriage. The 13 states are California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington.

Some practical effects of the guidance include the following:

Same-sex spouse beneficiaries will qualify for the more favorable spousal treatment under required minimum distribution (RMD) rules.
Same-sex spouses will be able to transfer IRA and retirement plan assets tax-free upon divorce.
Same-sex spouses named as beneficiaries on their spouse’s IRA will be able to assume the account—that is, treat it as his or her own. A spousal beneficiary also can roll over distributions from a deceased spouse’s account in an employer-sponsored retirement plan into an IRA in his or her own name.
Qualifying hardship distributions from a 401(k) plan will include distributions to pay for medical care, tuition, and burial costs for a same-sex spouse.
Legally married same-sex spouses, regardless of which state they live in, will have spousal consent rights under certain types of employer-sponsored retirement plans that currently are available to only opposite sex spouses. This will affect matters such as consent to designate a non-spouse beneficiary; qualified joint and survivor annuity benefits; and, qualified pre-retirement survivor annuity benefits.
Key issues remain
The IRS intends to issue further guidance regarding whether the Supreme Court’s decision and the recent IRS interpretation apply to same-sex marriages and events and transactions occurring before the Supreme Court’s decision.

Source: Vanguard.com

Charitible Giving

Posted on by in Tax Law.

Getting serious about your giving?

How to decide which charitable approach might be right for you.

Cash Management

 

Are you looking for ways to make sure your charitable donations are used efficiently and effectively? Although cash or check donations remain by far the most common ways to give, planned charitable giving vehicles have become increasingly popular, especially for those who are looking for ways to maximize their generosity and establish charitable legacies.

Which is the right option if you want to be more systematic about your giving? Here we look at the advantages and potential disadvantages of the more common methods of giving, though other means may be more suitable for your specific needs. For example, the use of trusts can provide a useful structure for both current and future charitable giving.

Cash or check donation

Along with participating in volunteer activities, most individuals donate to charities through “checkbook giving”—writing a check, or donating cash, to organizations or causes they care about on an individual, case-by-case basis.

This type of giving clearly offers the maximum degree of flexibility: Each donation is an individual decision, and you give where, how, and when you want. However, it requires the individual to carry the record-keeping burden when it comes to taxes. Each household or family must keep careful track of their contributions and report them on their annual return; in the unfortunate event of an audit, recently passed laws require each taxpayer to keep a record of every charitable gift made, regardless of the amount.

If you’re planning to donate only a small amount, and to donate to just one or a few charities, then using the checkbook approach may be easier for you. But this approach can be challenging if you plan to make multiple contributions, because you will have to track exactly how much you contribute, and to which charities. Also, if you want to involve other family members in the charitable giving process, the checkbook method may make it harder, because it is such an individualized way of giving.

This approach also places much of the burden of charitable research on the donor. Unfortunately, charitable fraud among illegitimate charities is not uncommon. Therefore, each time you make a charitable donation, be sure to do so with full information. Support only charities that you recognize or have researched, confirm that the organization is a qualified 501(c)(3) charity, and do not respond to unsolicited inquiries or provide personal information.

Donor-advised fund

The donor-advised fund (DAF) is the “next step up” for those looking to approach their charitable giving more seriously and strategically. It is a program at a public charity that allows donors—with as little as about $5,000 to contribute (different DAFs have differing minimum requirements)—to use a dedicated account for their philanthropy, and to plan their giving over time in order to provide continuing support to the charitable organizations of their choosing.

There are three basic components to a DAF:

  1. Give:Donors make an irrevocable, tax-deductible contribution to the public charity that sponsors the donor-advised fund program. The charity then establishes a DAF account that the donor can name as he or she chooses. Donors can make additional, tax-deductible contributions at any time.
  2. Grow:Donors advise the DAF-sponsoring charity how they would like their contributions allocated among various investment options. Any investment growth is tax free.
  3. Grant: Donors are then able to recommend grants over time from their DAF to other selected nonprofit organizations—generally speaking, any IRS-qualified 501(c)(3) public charity.

By employing a DAF, donors are able to engage in more thoughtful charitable planning. For example, if you are nearing retirement, selling a business, receiving an inheritance or bonus, or simply experiencing a high-income year, contributing to a DAF allows you to “front-load” your giving—enabling you to potentially offset the one-time income effect on your taxes. Subsequently, this single contribution could support multiple charities for years to come.

Many DAF programs also have internal processes in place to make it easy for donors to forgo cash contributions and instead donate long-term appreciated securities—either publicly traded (stocks, bonds, or mutual funds) or non–publicly traded (private stock, business partnership interests, or other personal assets). Contributing long-term appreciated securities directly to charity typically allows donors to take a full fair market value charitable deduction for the donated asset, and eliminates capital gains taxes on the appreciation—with those tax savings being passed on to charity.

Once the initial contribution is made, DAFs have virtually no overhead costs to donors apart from an annual administrative fee (most often 0.6% or less, though many DAFs have balance-based fee schedules that are considerably higher than 0.6%). Making all your annual contributions to one charity (the DAF sponsor) consolidates your recordkeeping for income tax purposes, often eliminating paperwork for the donor and simplifying compliance with IRS requirements. Most DAF-sponsoring charities also confirm that the charities you ultimately decide to support are in good standing with the IRS. Also, in most cases, DAFs allow donors to create a charitable legacy by passing their account on so that family members can continue the philanthropic tradition.

DAF programs can be local or national in their purpose. They can be found at community foundations and at national charitable organizations started by financial services firms. Fidelity Charitable®, established in 1991, was the first national DAF program in the United States.

Private foundation

A private foundation is a free-standing entity, a corporation or trust, and must apply for and obtain its own tax-exempt status. The foundation is “private” in that it receives its funding from one or very few donors (usually an individual, family, or business) rather than from a broad segment of the public. As a result, a private foundation comes with certain administrative responsibilities and requirements; foundation managers must rigorously follow IRS reporting and compliance requirements. But private foundations also have certain freedoms that can be advantageous.

The primary advantage of a private foundation is the ability of the donor to maintain some level of control over it. If a family, for instance, establishes a private foundation, that family can determine the foundation’s mission, and decide how the assets are managed and granted—within the laws that govern such foundations. For example, a private foundation has the ability to grant money to individuals or for-profit organizations for charitable purposes, which would be outside the type of grants donor-advised funds can make.

Like DAF donations, foundation donations are irrevocable, but foundations may pay a family member (or other employee) a reasonable salary for management of, or other services provided to, the foundation.

Given the ongoing and considerable management responsibilities, establishing a private foundation is typically reserved for the wealthy, or for someone who has the time and energy to devote to philanthropy. Typically, the establishment of a foundation involves a $1 million (or more) charitable donation.

How a donor-advised fund can complement a private foundation

In recent years, many individuals or entities who had previously established private foundations have found it advantageous to set up a donor-advised fund to work in concert with the foundation. On a practical level, making certain of the foundation’s grants to a DAF may relieve the foundation of some paperwork and due diligence, as well as potentially lessening the expenses of the foundation.

The other advantages of maintaining a DAF to complement a foundation stem from the different rules and regulations that govern contributions to each. The tax deduction limit for gifts of cash to a DAF is 50% of the donor’s adjusted gross income (AGI); for a private foundation, it is only 30%. For DAFs, the deduction limit for gifts of long-term appreciated securities is 30% of AGI, while the limit is 20% for the same contribution to a foundation.

Donor-advised funds also afford more privacy to donors than foundations do. Grants from a DAF can be made without reference to the recommending donor, while foundations must report their grants to the IRS on a return that is publicly available. And because the returns of private foundations are a matter of public record, information about the foundation’s contributors may be revealed, rather than kept private.

The table below compares three methods of charitable giving.

Comparing methods for charitable giving

Private FoundationDonor-advised FundsCheckbook Giving
Do you have $1 million or more to contribute?✔✔✔
Do you want investment management flexibility?✔✔1✔
Do you want control over grant making?✔
Do you want to hire family members to oversee your philanthropy?✔
Are you looking for simplicity when it comes to recordkeeping and taxes?✔
Do you want more control over where, how, and when to donate?✔✔
Would you like the ability to remain anonymous?2✔✔
Are there start-up fees?3✔
1. Certain donor-advised funds allow you—or your client—to recommend a qualified independent investment advisor to manage your charitable contribution.
2. When granting through a private foundation, one can grant anonymously; however, grants will ultimately be reported on the publicly available IRS Form 990-PF.
3. Charities with donor-advised fund programs generally assess ongoing administrative fees, but there are no start-up fees for establishing the donor-advised fund, beyond the initial contribution.

In conclusion

How you approach your charitable giving is largely dependent on personal considerations and preferences. For some, simple “checkbook giving” provides maximum flexibility with no fixed costs. Donor-advised funds offer philanthropically minded people who have a relatively modest sum to donate—as little as $5,000, depending on the DAF program—a way to plan and prioritize their giving, thoughtfully and strategically. Private foundations are an option for individuals or families with more time and resources to devote. In the end, each giving vehicle has its own advantages, and for many serious philanthropists, the best strategy may be a combination of strategies.

Source: Fidelity Viewpoints 06/12/2013