Tax Wealth Network, service of Boston Tax Planners

How to Legally Avoid Taxes When Selling Investment Real Estate

2020-08-04

Over the nearly thirty years of practice in financial planning and banking, I have been approached by many clients seeking to avoid paying taxes on highly appreciated real estate investments. There are a few options available to investors and some are better than others. It all depends on the facts presented and the goals of the client. In other posts, I’ve spoken about some alternative strategies. Now, I’ll focus on one of those options. Here’s how to legally avoid paying taxes when selling investment real estate. [By the way, this strategy may be used when selling highly appreciated businesses, stock portfolios, and other assets, not only real estate.]

There are several options including 1031 Exchanges, Installment Sales, newer options like Opportunity Zone bonds, and various trusts. Here, we’ll focus on one trust strategy: Charitable Remainder Unitrust (CRUT) as described in the Internal Revenue Code Section 644.

While 1031 Exchanges are a good way to defer taxes, they do not offer the opportunity to get out of real estate entirely. It is a “replacement” strategy with a way to defer taxes. But deferral is not avoidance and you still end up owning real estate even if you’re trying to get out of the business of dealing with toilets, tenants, and trash. Other options provide the ability to get out of real estate and even avoid paying taxes.

CRUT Strategy

Not all CRUTs are created equal. There are six players in the CRUT strategy: the donor, the trustee, the income beneficiary, the remainder beneficiary, the trust administrator, and the investment manager.

An Example of the CRUT in Action

Let’s use the example of a $1,000,000 piece of property with a basis of only $100,000. The potential tax the client is facing is about $300,000 by the time he factors in federal and state capital gains taxes leaving him only $700,000 to invest.

First, the Donor. If the property is owned individually or jointly there is no problem. In cases where it was owned by different family members and with larger dollars, then you’ll use different CRUTs or make gifts of an undivided interest.

Second, the Trustee. The Trustee could be any charity or university or non-profit and all are eager to fulfill that role. Here is a crucial “no-no.” Never go this route because all control will be lost. The IRS has no problem with a self-trusteed CRUT as long as you cross the “t”s and dot the “i”s properly. It’s easier to make the Trustee the client and his wife jointly. Later, as years go on, the ability to have either sign makes an adviser’s life easier. But you could have the spouse be successor Trustee if you wanted.

Third, the Income Beneficiary. This should be the husband and the wife. The period of the CRUT can be a number of years or a single life or joint lives. The best practice is to use “lives” so the CRUT will continue paying income for the life of his wife even if the donor dies soon after the gift. So, now the owner of the property has given the property to himself as Trustee, and instructed the Trustee (he and his wife) to pay an income stream to the Income Beneficiary (he and his wife) until the last one dies. Also, since the CRUT is legally a split-interest trust paying income to a human and the principal to a charity, the Trustee (himself) can sell the $1,000,000 property to the buyer totally tax-free. The CRUT functions like any church or university as the seller.

Fourth,the Remainder Beneficiary. This can be any non-profit found on the IRS list. It can be multiple charities. But here again, is a “no-no” to watch out for. When the Donor creates the Trust document, he should never make the Beneficiary irrevocable. Instead, the donor should always give the Trustee the power to change the Beneficiary from one charity to another. Personally, I prefer to even make the Remainder Beneficiary a Donor Advised Fund which we call a Perpetual Family Foundation to be advised by his children, grandchildren, and future heirs making gifts to all the non-profits the Donor had in his heart.

Fifth, the Administrator. It may seem to be too good to be true. We have a way to sell his real estate 100% tax free by giving it to himself as Trustee and instructing himself to choose whatever investments to diversify he wants and the pay himself an income stream for life. Then even after his death, he is leaving it to a so-called “Family Foundation” to be administered on behalf of his family by his children and grandchildren. Again, the IRS has no problem with the self-trusteed CRUT as long as you continue to cross the “t”s and dot the “i”s prudently. So, the Trustee is given instruction/power to hire an independent Administrator to report all transactions and produce the tax return. Of course, make sure your Trustee has the power to also change administrators if needed.

Sixth, and last, is the Investment Manager. This can be any Registered Investment Adviser like Clear View Wealth Advisors, LLC. But the Trust document gives the Trustee the power to fire and replace the Investement Manager. Now, the $1,000,000 property was sold and the $1,000,000 is in cash in the CRUT Money Market fund. A fiduciary investment adviser, like Clear View Wealth Advisors, can make suitable recommendations for this portfolio. Maybe the $1,000,000 is invested in 6 or 7 conservative mutual funds, or maybe 7 mutual funds and a non-traded income producing REIT. Or perhaps one of the MarketFlex Model Portfolios of Exchange Traded Funds and Dividend-Paying Stocks that Clear View Wealth Advisors oversees. This is an effective strategy for many different investors and situations from as small as $500,000 to as large as $30,000,000.

But the keys takeaways for clients are these:

Clients Get 100% Tax Avoidance,
Clients Get More Safety of Investments Through Diversification, and
Clients Never Give Up Any Control.

This is how to legally avoid taxes when selling investment real estate or any other highly appreciated asset through proper use of a CRUT trust strategy.

To discuss how a CRUT strategy may fit into your plans, call the fiduciary advisers at Clear View Wealth Advisors, LLC at 617-398-7494.

Will Gold Continue to Shine Through Year End?

2024-10-04

In times of trouble and uncertainty, the glittering metal has been the "go to" investment. Throughout 2024, gold has climbed. What's behind this price rise? Will gold continue to shine through the end of the year? Should investors be adding it to their portfolios?

Ruminations on Monte Carlo Results and Retirement Plans

2024-09-30

Like people, every retirement plan is different. And the key takeaway is that even if using sophisticated financial modeling software, there is no one-size-fits-all rule. The “comfort zone” that a client may seek may or may not be appropriate. And for clients who are willing and able to make course corrections along the way, they will benefit from on-going guidance from advisors who can interpret the results and provide clarity about the options to be discussed – even if there is a 50% or lower Monte Carlo probability of success.

Alternative Investments to Preserve Retirement Wealth

2024-07-19

Need Stable Income? Worried About Inflation? Concerned About Stock Prices? Alternative Investments May Help

Ideally, your portfolio has a mix of investments that may allow you to build a nest egg and income stream to fund your retirement goals. You may own tried-and-true stocks and bonds. If you're like many investors, you may have several index funds spread out between large- and small-cap stocks or funds with US and international stocks. Same for different types of bonds. But everyone does. So, how much diversification are you really getting when you own an S&P 500 Index fund? Sure, this type of fund, in theory, gives you exposure to 500 stocks in the index. But the reality is that these funds have a high concentration in the "Magnificent Seven", a group of high-performing and influential technology-oriented stocks that includes Amazon, Google, Meta (formerly Facebook), Apple, Nvidia, Microsoft, and Tesla. While the stories of these stocks are compelling and they have powered the growth in stock indexes, are you prepared for the possible impact on your retirement investment goals if something happens? What if you need stable income? Or are worried about inflation or afraid that stock prices will drop? This is where alternative investments may help. Alternatives can add uncorrelated investments to your portfolio that may boost your diversification efforts and help protect your portfolio.

Protection Against Rising Prices

While inflation has moderated, we all recall the dramatic run-up in prices at the gas pump and grocery store with 9%+ year-over-year inflation. Although inflation has come down to earth and is closer to the Fed's target and the historical long-run average (<3% year-over-year changes), it can flare up at any time. One of the adverse impacts of inflation is that it adversely impacts the purchasing power of your money. A dollar doesn't go as far as it used to and buys less stuff. And increased inflation hurts the value of bonds as well as the income stream from them. How can an investor protect against this?

One way to hedge against this impact is to hold commodities. These include oil, gas, agricultural products like soybeans or wheat, timber, and industrial or precious metals. Typically, when inflation flares up, it happens when the economy is expanding. This drives demand for such commodities. By owning them, you can offset some of the negative impact of inflation in an expanding economy. While there are various individual stocks or even index funds for each of these commodities, you can make this more manageable by owning a mutual fund or Exchange Traded Fund (ETF) that combines these various commodities into an all-in-one investment.

Protection Against Income Shortfalls

Inflation can hurt the value of your bonds. The underlying prices of bonds (individual bonds, bond mutual funds, and bond ETFs) go down when inflation spikes and newer bonds that are issued have offer higher interest rates. This also means that your older holdings are paying you less income than newer offerings in these investments. So, you'll also want to protect against your income dropping during inflation spikes.

Alternative Bonds

One key way to protect your portfolio is to consider alternative income strategies that provide broader, more diversified income streams than the typical bond index fund. Alternative bond funds include more than US and corporate AAA-rated debt. They can include legal-settlement finance, reinsurance, movie financing, or collateralized lending such as real estate, equipment leasing, and accounts receivable financing. Typically, these are available through "interval funds" which are a variation on a closed-end fund and requires a lock-up period restricting redemptions to a quarterly window instead of daily. In exchange for this arrangement, yields offered are much higher (typically > 8%) than yields offered by more "plain vanilla" open-end mutual funds. There are diversified funds that include all of these strategies in one fund.

Floating Rate Note Funds

Another key bond investment that can counter inflation and income shortfalls is a floating-rate bond fund. Such funds provide higher yields and are tied to underlying bonds or notes made to companies that include terms that frequently reset how much the borrower pays tied to some index and inflation. Think of these like a variable rate mortgage, but the borrowers are companies instead of homeowners.

Closed-End Funds

Another way to boost income is to use closed-end funds. CEFs are available for both equity and bond investments. They differ from an "open-end" mutual fund in that they are issued with a set number of shares much like any company stock. Investors can buy and sell their fund interests in much the same way someone trades a stock. Price is based on supply and demand. The fund itself doesn't redeem an investor's holdings when the investor wants to liquidate. So, this means the fund has more cash available to invest in the underlying investments. The CEF itself may also use borrowed funds to invest in more of the underlying bond or stock investment. Combined, this boosts the potential yield payout you receive.

Business Development Companies

A type of CEF, business development companies (BDCs) invest in mid-size and small private and small public firms that have low trading volumes or are in financial distress. Sometimes these are companies that are backed by private equity and need cash for working capital, expansion, or R&D. The private-equity backers may not want to dilute their ownership by raising equity from investors. So, borrowing is more attractive. Since traditional banks may be restricted by underwriting requirements or regulated minimum capital needs, the BDCs fill the need and are typically highly rewarded offering their investors, in turn, high yields.

Hedging Equity Market Risks

If you're invested in the stock market, you'll have to expect that market prices can go down as well as up. After all, trees don't grow to outer space. And gravity applies as much to the stock market as the physical world.

From peak to trough, US stocks declined in nominal dollars between 45% and 55% in multiple time periods: 1973-1974, 2000-2002, and 2007-2008. Market corrections of lesser amounts are not unheard of as well: 34% during the CORONA Virus sell-off; 20% during the tech bubble sell-off in early 2000; 10% during the Asian and Long-Term Capital Management crises near the end of the 1990s. So, during poor markets, investors should expect the risky portion of their portfolio to decline by up to half. The “risky asset portion” is everything that is NOT investment grade bonds or cash. For example: An investor with a $1M portfolio with 60% in stocks and 40% in bonds and cash should expect to experience a decline to $300,000 periodically. This is the necessary pain to achieve the higher returns that are expected from risky assets. This is not a “worst-case” scenario but an expected periodic case. If stocks did not occasionally experience losses, they would cease to be attractive to earn superior returns over the long-term.

Buffer ETFs: Define Your Outcome

So, what to do when your crystal ball is cloudy? This is where new financial products may help. Since late 2020, Wall Street has launched an expanding array of so-called "buffer" ETFs that incorporate derivatives using various hedge strategies to generate extra dividend income and/or protect against stock market losses. Such products are ideal in allowing investors to continue to participate in the market without just staying on the sidelines in cash potentially missing out on market upswings.

These funds work by holding a basket of securities or using one "reference asset" such as the S&P 500 Index in the form of the SPDR S&P 500 Index Trust (SPY) while also selling (or "writing") call options on those same underlying assets. If the market value of the basket or reference asset goes up, the investor gets the upside gain limited by some cap. If the market value of the basket or reference asset goes down, the options provide a hedge to buffer against the downside. In either case, there may be income generated for the investor from the writing of the call option. In addition to providing a market hedge, these ETFs can be combined to create a target income for retirement while limiting the need of selling off assets.

While generally a good tool for hedging equity market risk, they can also be used to draw investor cash from the sidelines that would otherwise not earn anything significant in a brokerage cash account. Some firms are offering ETFs with 100% downside protection against the equity basket. Sure, there's a cap on the upside (say, 9.8%), but that's still higher than what any cash account is paying.

Other hedge strategies combine investing in an index with hedge strategies such as "managed futures" typically reserved for higher-cost separately managed accounts (SMAs) or "hedge funds."

Last Word: Investors Win When They Don't Lose

The role of diversification is to help investors reach their individual goals. In the right proportion for a client's risk profile and income need, a combination of alternative strategies can help a client stay on course, increase the stream of income for lifestyle needs, and reduce the risk of drawdowns inherent with equities. Adding alternative strategies as part of an individualized portfolio program may help.

For more information on how this approach may work for you, please reach out to Steve Stanganelli, CFP at Clear View Wealth Advisors, LLC.

Laid Off? What to Do to Keep Your Financial Head Above Water

2024-02-27

What do you do if you get laid off? What financial moves can you do to keep your head above water? What do you do next to bounce back? Laid off, reduction in force, terminated. It doesn't matter what term is used. It almost always hurts. Whether the layoff was expected or not, you still need to make smart money moves to avoid falling behind.

It can and has happened to all of us. Sometimes it's a result of issues with the company. Sometimes it can happen because of broader forces in the economy.

There's an old saw: Recession is when your neighbor loses his job. Depression is when you lose yours. And it can happen at any point in the business cycle. Right now, the US economy is in "full employment" mode. According to the US Department of Labor, the overall unemployment stands at about 3.7%, which is about where it was in February 2019. This is a far cry from where it was during the COVID-19 era when it was over 15% of the workforce or 10% during the Great Financial Crisis peak in 2009.

Regardless of how or when it happens,you need to be prepared to deal with a layoff.

Here are some ways to deal with the next steps after any layoff.

Cash Flow

1.) Emergency Fund: In some cases, the company may signal layoffs are coming. If you have time to prepare, then review your expenses, cut what you can, and increase your emergency reserves before you lose your job. Regardless of whether you know about a layoff, you should target to save an emergency fund to cover at least three months of expenses.

2.) Flexible Spending Account: If you have a Flexible Spending Account (FSA), you should consider spending the money while still employed or while covered under COBRA for items you may need when unemployed.

3.) Workplace Benefits: Be sure to get copies of all benefit summaries and discuss with HR to confirm details of benefits, compensation, treatment of sick pay, personal time off, vacation days, or any severance package. If you have stock options, you'll want to confirm details of the type and dates of grants and vesting.

4.) Unemployment Benefits: You may be entitled to unemployment benefits depending on the terms of your termination. Benefits are determined based on your state of residency, your earnings record, and family status. You can get an estimate of benefits by visiting your state's unemployment insurance website.

5.) Budget: Even in the best of times, this word is disliked by most folks. Right now, though, you'll need to get a handle on your spending. You'll need to determine the "must have" items that you can't change in the near term (like your mortgage or rent and loan payments) and your "nice to have" but discretionary items (like club memberships, streaming services, hobbies, vacations, and dining out). You should review your credit card and bank statements for at least the last quarter. You may find services or subscriptions that you don't use regularly. Consider cutting these items first.

Assets & Debts:

6.) Creditors: Reach out to creditors, explain your situation, and ask to either lower interest rates, defer payments, accrue interest or otherwise change loan terms. If you carry credit card balances, consider finding 0% interest rate promotional deals. Transfer balances from higher interest rate cards to the 0% promotional cards but try to stay at or below 40% of the total credit line of the new card. You'll want to do this to help maintain your credit. It's important to make at least your minimum payments during this time on all loans and keep the "utilization rate" of credit cards at 40% so that your credit score won't be adversely affected. Remember, new employers will likely be pulling a credit report as part of your employment application process. What you DON'T want to do is accept any loan or credit card forgiveness because this will be counted as taxable income when you file your tax returns.

7.) 401k Loans: If you have an outstanding loan on your workplace retirement plan, you'll have to either pay back the loan by a due date set in your plan documents or pay taxes on this as income. For most plans, the due date is the due date of your tax return for the year you leave your employer. So, you'll need to plan ahead to find a way to either pay this loan back by tax filing date or be prepared to have funds to pay taxes on it.

8.) Roth IRAs: You may want to consider using any Roth IRA balances to supplement cash needs if you get desperate. At least the principal portion of what you contributed will not be subject to income taxes.

9.) Home Equity Line of Credit (HELOC): If you have a HELOC, you can consider this as a back-stop to supplement covering your "must have" items or other emergencies that may come up during your unemployment period (such as home or auto repairs). If you have capacity on your line, you might even consider using it to pay down a portion of any higher interest credit cards. Even though most HELOCs are tied to the Prime Rate which has gone up sharply as the Federal Reserve has increased rates, the single-digit HELOC rate will likely still be less than many retail store credit cards that are in double digits. If you don't have a HELOC before getting laid off, you won't be able to get one when you do. So, try to have one in place. And, if there are any rumblings about layoffs, consider reaching out to apply long before you get that pink slip.

10.) Unvested Stock Options: Review your equity plan documents to determine your vesting schedule of stock grants. Try to coordinate your departure with your vesting schedule.

11.) Vested Stock Options: If your departure occurs after unvested stock options become vested, then consider exercising these options. You'll want to use the exercised options to provide cash to supplement what you'll need to cover hour "must have" items as well as add to your emergency fund.

12.) Retirement Plans: Whatever you've accumulated in your employer-sponsored retirement plan, you'll want to consider rolling these funds over into your own personal IRAs. You'll likely have more choices at lower costs. And if you do this, consider opening a "rollover" IRA which will help you preserve the option to roll the funds back into any future employer's plan. You should also be aware that not all retirement accounts are created the same. So, if you have pre-tax money in your company plan, you don't want to roll that into your individual Roth IRA. If you do, you'll cause the pre-tax money to be "converted" to the post-tax Roth. This will trigger a tax on the amount of the retirement funds converted. When you're trying to conserve cash, you don't want to create an unforced error resulting in a nasty tax surprise that will drain your cash.

Living Trust Myths Debunked

2024-01-27

What are the benefits of a living trust? Should you consider adding a living trust to your estate plan and why? Let's explore how a living trust can help you and your family. Read on to see how living trust myths are debunked.

What is a Living Trust?

A living trust is established as part of your estate plan to be the owner of record for your assets. It allows you to retain control over the trust property until death. When you pass away, the trust is turned over to the successor trustee, who is chosen by you, to distribute the trust property according to your wishes.

By setting up a living trust, you'll find that your estate avoids probate of your assets. This results in faster, easier distribution to your beneficiaries without additional costs. You'll also maintain your privacy because trust provisions stay confidential.

This is in sharp contrast to a last will and testament, which becomes a matter of public record that has to go through the court probate process. Finally, you can change a revocable trust at any time during your lifetime. Revocable living trusts are used to protect property until your beneficiary is mature enough to make wise decisions about his or her inheritance.

Myth No. 1: Living trusts are only for the wealthy. While many wealthy people set up trusts, it doesn't mean that this option is only for the rich. Many people with average incomes find living trusts to be beneficial. Whether or not you have millions in investments, you'll probably benefit from a living trust since it will provide easier control of the distribution of your assets after your death while protecting your privacy.

Myth No. 2: Living trusts benefit only beneficiaries, not the people making the trusts and not you, the grantor. In fact, a trust can allow for easier handling of your affairs should you become incapacitated, and make things much less stressful for loved ones left to care for your affairs when you're unable to do so.

Myth No. 3: You can't access funds once they're in a living trust. This ignores the "living" part of the living trust. Funds and assets can be made as accessible as you wish, to you or to whomever you desire. If you want the trust primarily for your own benefit, you can set it up so that everything is accessible to you until your death. In addition, you can make sure the funds do not end up with those you don't want to get them. Aside from changing the title on your accounts or real estate to reflect the transfer from you to the living trust, you can operate your financial affairs as you did prior to setting it up.

Myth No. 4: Creating a living trust is complicated and expensive. Not true. Setting up a trust may cost a bit more up front than simply writing a last will and testament, but the cost savings later on can make up for these expenses in the long run. Why? The probate process can cost anywhere from 2% to 5% of the value of an estate. Setting up a living trust now avoids paying that cost later. Through the power of technology and a nationwide network of attorneys, a living trust package with a complete set of related documents like a health care proxy, durable power of attorney, and pour-over will can cost as little as $650 for a married couple. For more information, you can check out the Estate Plan Navigator program that we use with clients here.

Myth No. 5: Even if you have young children, a will can do anything a trust can. A living trust can do some things a will cannot easily accomplish, and can become a vital part of your estate plan. It allows you to give your hard-earned money and property to those you care about while protecting it for them. If you have beneficiaries who are not quite able to handle large sums of money on their own, for example, then a revocable living trust is a necessary component of your estate planning. Your beneficiary may not be mature enough to handle large sums of money. This can be handled by implementing rules on how, when, and under what circumstances distributions may be made. For instance, the living trust can specify that your chosen trustee can make distributions to support the health or education of a minor beneficiary. Or if you're worried about a beneficiary unwisely spending their inheritance or of the adverse impact of an addiction, you can specify for the trustee to release money at certain ages or after proof of being in recovery and addiction-free for a period.

Some people are spendthrifts, others are in not-so-good marriages and still others are going through bankruptcy. Then there are those who are just too frail and incapacitated to manage property on their own. You'd rather not be giving money or property to someone under these conditions. That's when a living trust can be relied on.

Hopefully, you can see that the common living trust myths are debunked.

Is a trust right for you? Is the Estate Plan Navigator program the best choice for your family? We can help you decide.

How to Legally Avoid Taxes When Selling Investment Real Estate

2024-01-27

Over the nearly thirty years of practice in financial planning and banking, I have been approached by many clients seeking to avoid paying taxes on highly appreciated real estate investments. There are a few options available to investors and some are better than others. It all depends on the facts presented and the goals of the client. In other posts, I've spoken about some alternative strategies. Now, I'll focus on one of those options. Here's how to legally avoid paying taxes when selling investment real estate. [By the way, this strategy may be used when selling highly appreciated businesses, stock portfolios, and other assets, not only real estate.]

There are several options including 1031 Exchanges, Installment Sales, newer options like Opportunity Zone bonds, and various trusts. Here, we'll focus on one trust strategy: Charitable Remainder Unitrust (CRUT) as described in the Internal Revenue Code Section 644.

While 1031 Exchanges are a good way to defer taxes, they do not offer the opportunity to get out of real estate entirely. It is a "replacement" strategy with a way to defer taxes. But deferral is not avoidance, and you still end up owning real estate even if you're trying to get out of the business of dealing with toilets, tenants, and trash. Other options provide the ability to get out of real estate and even avoid paying taxes.

A CRUT strategy can eliminate taxes on the sale. Assuming that a property doesn't have a mortgage on it (or can have the mortgage paid off from other resources prior to the property's sale), then the CRUT can be a powerful tool.

CRUT Strategy

An Example of the CRUT in Action

Let's use the example of a $1,000,000 piece of property with a basis of only $100,000. The potential tax the client is facing is about $300,000 by the time he factors in federal and state capital gains taxes leaving him only $700,000 to invest.

First, the Donor. If the property is owned individually or jointly there is no problem. In cases where it was owned by different family members and with larger dollars, then you'll use different CRUTs or make gifts of an undivided interest.

Second, the Trustee. The Trustee could be any charity or university or non-profit, and all are eager to fulfill that role. Here is a crucial "no-no." Never go this route because all control will be lost. The IRS has no problem with a self-trusteed CRUT as long as you cross the "t"s and dot the "i"s properly. It's easier to make the Trustee the client and his wife jointly. Later, as years go on, the ability to have either sign makes an adviser's life easier. But you could have the spouse be successor Trustee if you wanted.

Third, the Income Beneficiary. This should be the husband and the wife. The period of the CRUT can be a number of years or a single life or joint lives. The best practice is to use "lives" so the CRUT will continue paying income for the life of his wife even if the donor dies soon after the gift. So, now the owner of the property has given the property to himself as Trustee, and instructed the Trustee (he and his wife) to pay an income stream to the Income Beneficiary (he and his wife) until the last one dies. Also, since the CRUT is legally a split-interest trust paying income to a human and the principal to a charity, the Trustee (himself) can sell the $1,000,000 property to the buyer totally tax-free. The CRUT functions like any church or university as the seller.

Fourth,the Remainder Beneficiary. This can be any non-profit found on the IRS list. It can be multiple charities. But here again, is a "no-no" to watch out for. When the Donor creates the Trust document, he should never make the Beneficiary irrevocable. Instead, the donor should always give the Trustee the power to change the Beneficiary from one charity to another. Personally, I prefer to even make the Remainder Beneficiary a Donor Advised Fund which we call a Perpetual Family Foundation to be advised by his children, grandchildren, and future heirs making gifts to all the non-profits the Donor had in his heart.

Fifth, the Administrator. It may seem to be too good to be true. We have a way to sell his real estate 100% tax free by giving it to himself as Trustee and instructing himself to choose whatever investments to diversify he wants and the pay himself an income stream for life. Then even after his death, he is leaving it to a so-called "Family Foundation" to be administered on behalf of his family by his children and grandchildren. Again, the IRS has no problem with the self-trusteed CRUT as long as you continue to cross the "t"s and dot the "i"s prudently. So, the Trustee is given instruction/power to hire an independent Administrator to report all transactions and produce the tax return. Of course, make sure your Trustee has the power to also change administrators if needed.

Sixth, and last, is the Investment Manager. This can be any Registered Investment Adviser like Clear View Wealth Advisors, LLC. But the Trust document gives the Trustee the power to fire and replace the Investment Manager. Now, the $1,000,000 property was sold and the $1,000,000 is in cash in the CRUT Money Market fund. By using this strategy there is more to invest because less was lost to taxes.

A fiduciary investment adviser, like Clear View Wealth Advisors, can make suitable recommendations for this portfolio. Maybe the $1,000,000 is invested in 6 or 7 conservative mutual funds, or maybe 7 mutual funds and a non-traded income producing REIT. Or perhaps one of the MarketFlex Model Portfolios of Exchange Traded Funds and Dividend-Paying Stocks that Clear View Wealth Advisors oversees. Or, better yet, we can use a dividend-income model based on higher-yielding Closed-End Funds to generate 5%, 6%, 7% or more in dividend income. This is an effective strategy for many different investors and situations from as small as $500,000 to as large as $30,000,000.

But the keys takeaways for clients are these:

Clients get 100% tax avoidance,
Clients get more safety of investments through diversification, and
Clients never give up any control.

This is how to legally avoid taxes when selling investment real estate or any other highly appreciated asset through proper use of a CRUT trust strategy.

To discuss how a CRUT strategy may fit into your plans, call the fiduciary advisers at Clear View Wealth Advisors, LLC at 617-398-7494.

Your Personal Plan to Deal with Uncertainty in Global Markets

2024-01-27

You’ve likely been keeping a close eye on the news as the crisis in Ukraine continues and tensions in the Middle East escalate. Above all, our thoughts go out to the Ukrainian military and citizens as well as the civilians in both Israel and Gaza as they navigate their unfathomable respective tragedies . Aside from the terrible human toll, the invasion of Ukraine by Russia and the recent attacks and retaliations between Hamas and Israeli Defense Forces are an important reminder that geopolitical risk is a part of investing in global markets. While external events are beyond our individual control, you are not powerless. As long as you have a plan in place and control your emotions, you can weather the impact of market swings on your nest egg. Here is what you need to know for your personal plan to deal with uncertainty in global markets.

You may also be wondering what the far-reaching impacts of the situation may be on your personal situation especially as you see an increase in market volatility adversely impacting portfolio values. I thought I’d pass along some insights to help you stay informed and be prepared.

Investing always has risk. Some risks are known. And diversification mitigates them. Geopolitical risks are a risk. And in the near term, there is very little anyone can do to protect from near-term and temporary corrections. Remember: You are investing for the long-term and this recent crisis will pass and appear as a blip on a long-term chart.

What You Can Do to Protect Your Money - Your Personal Plan to Deal with Uncertainty in Global Markets at ANYTIME:

Control what you can: Like the weather, there isn't much you or I can do about a geopolitical event. You can control your emotions though and follow your plan. Timing the market rarely works. An emotional response now only makes things worse in the long run.
Hold cash: Sure, it doesn't pay much and loses purchasing power to inflation. But it provides a needed buffer during uncertain times.
Diversification works: You need a globally diversified portfolio that includes cash, real estate, US Treasuries, gold, commodities, and alternative investments.
Value stocks add protection: Owning well-established, large company stocks of profitable businesses is a time-tested way to protect a portfolio.

These investment elements are already a part of the MarketFlex Portfolios I directly manage for clients. And to a lesser amount, they are already included in investment advice provided to self-directed investors to use with their own portfolios wherever they may be.

Big Takeaway During Market Uncertainty:

The best thing you can do during volatile markets regardless of the spark or underlying cause: Stay Calm. Do Nothing.

History is on the side of the patient. This link to a Market Perspective may provide historical context. While this is from Q1 2022, it offers a concise historical review.

While history rarely repeats, it certainly does rhyme. Whether it was a Greek debt meltdown, US Government shut down, terrorist acts, or military responses, we've been here before with other geopolitical events. The advice I have shared in earlier blog posts on my website is equally relevant now:

This is how I responded when asked on NBC Boston 10 TV earlier on February 23, 2022: Financial Impact of Crisis in Ukraine with Bianca Beltran .

As I said in this interview, if you have a plan, stick to it, stay calm, and rebalance, if needed. As long as you are globally diversified with a portfolio that includes alternative assets (like gold, natural resource and commodities, real estate), dividend-paying stocks, and a cash allocation to cover your expenses for a period that will help you sleep (3 months to 3 years), you will be OK.

Financial Impacts of the Current Russia-Ukraine Crisis:

The most immediate impact investors can expect as a result of these types of crises can be summarized as follows:

Higher prices at the grocery store. During the early stages of any crisis, the most likely impact is on supply chains and groceries. When Russia invaded Ukraine, we saw this play out over the years since Russia and Ukraine are significant exporters of wheat, rye, barley, and other grains to Central Asia and the Middle East. Although the crisis hasn't widened, any further escalation would drive global food prices higher when many are already struggling to reconcile their grocery budget with checkout line sticker shock.
More pain at the pump. With Russia producing 10.5 million barrels of oil a day and attacks occurring near the Strait of Hormuz along oil transport routes, such disruptions in production would send oil prices soaring even higher. If Russia responds by halting oil exports or tensions in the Middle East lead to fighting along sea routes through the critical Strait of Hormuz, there could be additional pain at the pump as well as higher oil and natural gas prices that would also drive up heating and electricity bills.
More supply chain issues. Russia produces just under half of the world's palladium and smaller amounts of platinum, titanium, and nickel—critical components in smartphones, laptops, and countless other products. Ukraine is Europe's top producer of uranium. Any bottlenecks in production could exacerbate semiconductor shortages and further push up the prices of cars, electronics, and other high ticket items.
Potential cyberattacks. Recalling the disruption caused by the Colonial Pipeline cyberattack in May 2021, additional cyberattacks—especially on the U.S. financial system—are a growing concern for experts as the Russia-Ukraine plays out.
Stock market volatility. We’ve already experienced (and are currently rebounding from) a sell-off, and investors can expect for volatility to continue as the crisis unfolds.

I know you’re already weary from the pandemic or previous inflationary spikes in goods. Unfortunately, global news events even in obscure parts of the world can have a big impact at home. So, they rate as just one more factor to watch. But the first and best thing to do when confronted with any crisis - at home or abroad - is to stay calm and not panic.

Please know that I will be here to help you and your family weather the economic effects of whatever comes our way. If you have concerns or want to talk about updating your plan or investment strategy, please reach out to me.

NOTE: This post was initially published by Steve Stanganelli, CFP® on 2/28/2022 after the initial invasion of Ukraine.

What is a Safe Withdrawal Rate for Retirement?

2023-11-13

What is your retirement safe withdrawal rate? Do you really need to limit it to the 4% Rule or is there a better way?

Reasons to Expect a Market Pullback and What to Do About It

2023-05-11

The essence of Buddhist philosophy as I understand it is that everything is temporary. Night follows day. Good times follow bad times. And the cycle continues. We see that when it comes to the economy and economic data. A recent Bureau of Economic Analysis report (June 11, 2021) noted first-quarter Growth Domestic Product (GDP) up at an annual rate of +6.4%. This was on top of strongest readings in forty years for manufacturing and service sector indices. And corporate earnings continue to show positive surprises. Coronavirus cases continue to drop in the US and state and federal government restrictions continue to ease leading to the Great Reopening.

On the other hand, it was just about a little over a year ago (March 2020 to May 2020) that we saw pandemic-induced lows. Are we out of the woods? Is it really business as usual? As much as I want to be back to “normal” there are still many reasons to expect a market pullback and here’s what to do about it. Should you worry? That depends. If you have a plan and remember that everything is temporary, you should be alright.

#1. Stock Valuations Are Lofty

The total return adjusted stock Price/Earnings ratio for the S&P 500 is now above 38 on the global economic re-opening. Although not quite at pre-tech 2000 bubble levels, this leaves valuations in their 98th historical percentile, placing continued growth and contained inflation under the microscope each quarter ahead. Other metrics, like the Price-to-Sales ratio and the 200-day moving average suggest that valuations are at the extreme high end of the scale. According to the Buffett Indicator, the ratio of US stock valuation to US GDP, we are in “strongly over-valued” territory.

#2. Frenzied Nature of the Market

Just check your local real estate listings. Residential real estate is soaring in value over the past year. Offers significantly higher than list price are now the norm. Commodities are also very expensive. (Have you tried pricing new wood floors or a home improvement?) There are also these financial entities called Special Purpose Acquisition Companies (SPACs) designed to be a way to finance or acquire start-ups. While around for decades, more than 311 of these SPACs were launched in 2021 alone. In addition to this there are high valuations and a lot of IPOs over the past year. Add to this the trillions in various federal government stimulus packages putting cash in the hands of individuals, companies, and even local and state governments. All of this is leading to concerns about inflation.

#3. Earnings Comparable Will Get Tougher

Year-over-year comparisons of stock metrics look great now. Coming off the lows brought on by the pandemic, things like sales, inventories, and earnings have shown huge bounces. But as time goes on, this effect is going to wane. Stock prices are designed to factor in things like earnings and expectations of revenues and profits. A stock price reflects the net present value of future cash flows. Right now, it seems that prices reflect “perfection” so any disappointment will likely be met by a swift reaction by investors.

#4. VIX Levels Suggest an Unprepared Market

The CBOE Volatility Index (VIX) measures volatility and is known as the “fear index” because it is a gauge of implied volatility of S&P 500 index options. So, it is used by traders to trade on the current and expected volatility in S&P 500 stocks. Right now, the VIX is well below twenty indicating expectations of low volatility. At these levels it signals that investors are comfortable with where the market is which may be giving false hope to many. Investors may not be prepared for unexpected bad news. And market corrections can happen with or without a “trigger.”

While we’ve had our share of “black swan” events which can happen without warning, there is also the still real possibility that COVID infection rates here or abroad could spike or even a separate spike in interest rates could raise the VIX and lead to sharply lowered expectations of the prospects for stocks.

Given the recovery from pandemic lows and the good economic news, the VIX seems to indicate that investors are ignoring the potential for risk and are being lulled into a sense of complacency.

#5. The Market Has Had at Least One 6.5% Pullback Each Year Since 2000

One of the longest bull markets was born on March 9, 2009. It was born in the midst of a deep and seemingly existential crisis. While that bull market lasted for about eleven years, it wasn’t a constant straight line up. And history has shown that a 5% to 10% pullback in the S&P 500 index at least once each year is very normal. And we’ve seen at least such a pullback each year for the past twenty. In fact, the average pullback is about 6.5%. While history rarely repeats, it does rhyme. So, it would be a surprise if the bears didn’t come out at some point during 2021.

#6. Seasonal Tailwinds May Become Headwinds

There is an old saying when it comes to investing: Sell in May and go away. Historically, this pattern does exist. May 1st through October 31st represents the weaker half of the year for stock market performance. And 2021 is the first year of a presidential cycle which is often negative. And as infrastructure and tax policies wend their way through Congress, we may see adverse market reactions to such policies. Analysis provided by Ned Davis Research Group shows the historical patterns of one-year, 4-year Presidential, and Decennial cycles. Their projections call for a continued run-up with a summer rally through mid-August 2021 in line with the “sell in May” phenomenon followed by a short, sharp drop before another significant drop near Labor Day lasting through early October.

#7. Everyone Is on the Same Side of the Trade

The largest concern has to do with investor sentiment. Everyone from Main Street to Wall Street is optimistic about the outlook for US stocks. Individual investors are pretty bullish with a one-year bullish high of about 57% according to the AAII Investment Sentiment Survey ending April 7, 2021. Professional investor surveys show a similarly bullish sentiment. A net 78% of professional investors expect global profits to be up over the next twelve months. Nearly 70% of the same group of professional investors expect above-trend growth, the highest reading ever. When every market participant has the same sentiment, it can often end with disappointing results. See #4 above.

#8. Inflation May Not Be Transitory

As noted in #2 above, lots of “things” are moving up in price. Lumber prices are higher than at the end of last year. Gasoline is over $3/gallon as demand has increased coupled with supply issues. Copper hit its highest level in 10 years. Home prices are gaining at the fastest rate in 15 years. The Fed’s preferred measure of inflation (Personal Consumption Expenditures – PCE) saw the biggest monthly move since 2009. And Employment Cost reports showed the best quarterly wage growth since 2021. Good news for workers but a potential impact on consumers.

The Fed has announced that they see these moves as transitory and temporary as pent-up demand is met after a pandemic. But some economists disagree.

#9. All Good Things Come to an End, Eventually

Just as the Buddha has said, everything is temporary. Despite strong economic data which has been helped by various federal stimulus programs, this can’t last forever. Current growth rates are not sustainable just on stimulus alone and pent-up demand. Eventually, stimulus checks end and pent-up demand is satisfied. At some point, the forward-looking stock market will have to adjust its view as everything reverts to the mean and slows down. Eventually, the Fed will begin a concerted effort at raising interest rates. The view now is for that to be around November 2022. When that tapering begins, it’s likely that the prospects for stock prices will change as well.

What to Do About a Market Pullback

So, there are plenty of reasons to expect a market pullback. And now what to do about it.

Generally, the second year of a bear market recovery is still positive even if muted. And we are in that second year. And as has happened before, the market can continue to go up – for up to two years – even with warnings of “irrational exuberance” as happened after then-Fed Chairman Greenspan made that famous comment.

Risk Management Makes Sense

Reading tea leaves and crystal balls is not my specialty. Since I cannot predict when a market pullback, correction, or worse may hit, I will stick to commonsense risk management principles.

First, investors need a plan that includes an estimate of how much they are willing to put at risk and potentially “lose” in the short term. While you only really lose if you sell, the mere fact that an investment statement shows a lower value in subsequent months is unsettling. To avoid making emotionally-charged decisions (like “sell everything, raise cash”), you need to know what is the optimal allocation to risky (i.e. stock) assets that aligns with your risk tolerance, capacity, and timeline. This allocation will be coupled with an allocation of cash to cover fixed overhead for a chosen time period (ranging from six months for the more risk tolerant or younger client to three years for the more risk averse or older client). To further mitigate the impact of a correction, we will continue to use a select number of quality dividend-paying stocks from the list of Dividend Aristocrats because these provide income and tend to do better when there is a correction. Another risk control device is to include an allocation to alternatives like gold, natural resources and real estate. Finally, we believe that being agile helps. For us, that means being willing to shift allocations among sectors using specific sector ETFs as market conditions may dictate.

By having a core allocation supported by allocations to overweight specific sectors and buffered by allocations to cash and alternatives, our MarketFlex Portfolios are designed to adapt to ever-changing market conditions.

While there are many reasons to expect a market pullback, you now know what to do about it. Employing a risk-managed approach to your portfolio can provide an investor with good reason to not panic about inevitable corrections in the stock market.

NOTE: Originally posted 6/14/2021 by Steve Stanganelli, CFP®