Diverse Companies are Designed for Success

At BNY Mellon Wealth Management, we believe we have a responsibility to improve lives through investing. Our commitment to creating an inclusive, sustainable world that encourages people to thrive informs everything we do, not just within our organization but also with our clients. Individual investors and asset managers have the opportunity to make direct social, market and global economic impacts with their investments — but that’s not the whole story. The evidence shows that in doing so, they also have the potential to generate significant financial returns, as well.

Companies that make a concerted effort to build diverse teams see gains in profitability that set them apart from the competition. Investors who recognize this have an opportunity to benefit by identifying companies that are designed to succeed in the modern marketplace.

Studies Show a Direct Tie Between Diversity and Performance

Companies in the top 25% for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians — 15% higher for gender and 35% for racial and ethnic diversity. For every 10% increase in racial and ethnic diversity on the senior executive team, earnings before interest and taxes (EBIT) rise 0.8%.1

It Starts With the Leadership

Companies that want to reap these benefits need to have leaders who recognize the potential of a diverse team. Leaders who actually seek out and appreciate the opinions, perspectives and ideas from a wide range of employees are more likely to behave inclusively and unlock the innovative capacity of their team.

Women Executives Provide Added Benefits

The presence of women executives is associated with strong firm performance as measured by both gross and net margins.2 There is also evidence that female managers are better at engaging employees, by encouraging development, fostering a positive work environment and delivering consistent feedback and recognition.3

KEY DATA

25%

Companies in the top 25% for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians.

30%

When women make up 30% of a company’s board of directors, it correlates with a higher return on investment capital and other measures of business success.

50%

The U.S. Census Bureau projects that by 2044, more than half of all Americans will belong to a minority group4

“Studies have already shown that companies with a diverse leadership team and workforce are seeing better financial performance.”

IMPLICATIONS

Investors could benefit by embracing this investment approach

Know how to evaluate a company’s commitment to diversity

For investors looking to be more hands on in their approach, there are resources available that can help them evaluate if companies are cultivating a successful, diverse workplace. For example, Bloomberg has created a Financial Services Gender-Equality Index, which includes 26 public companies in the financial services sector.

Make decisions based on measurable results

Companies should be able to measure results on issues like compensation, development opportunities and the makeup of its workforce and leadership team to show their progress toward diversity.5 Investors should focus on those that can link these strategies to employee satisfaction, performance and the bottom line.

Stay ahead of this growing trend

Demographic trends indicate that the U.S. population will only become more diverse in the future. To remain successful, companies need to reflect these changing demographics in order to better understand the point of view of their consumers and retain top talent among their employees.

FOOTNOTES

1 Vivian Hunt, Dennis Layton, and Sara Prince, “Diversity Matters,” McKinsey, February 2015.

2 According to a Peterson Institute survey of nearly 22,000 firms from 91 countries.

3 Kimberly Fitch and Sangeeta Agrawal, “Why Women Are Better Managers Than Men,” Gallup, October 16, 2014.

4 Sandra L. Colby and Jennifer M. Ortman, “Projections of the Size and Composition of the U.S. Population: 2014 to 2060,” U.S. Census Bureau, March 2015.

5 Judith Lindenberger, “Diversity and the Workplace,” Experience by Symplicity, 2017.

DISCLOSURE

This white paper is the property of BNY Mellon and the information contained herein is confidential. This white paper, either in whole or in part, must not be reproduced or disclosed to others or used for purposes other than that for which it has been supplied without the prior written permission of BNY Mellon. This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 225 Liberty Street, New York, NY 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, 160 Queen Victoria Street, London, EC4V 4LA. The London Branch is registered in England and Wales with FC No. 005522 and #BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and Newfoundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2017 The Bank of New York Mellon Corporation. All rights reserved.

Market Environment Looking More Favorable for Active Management

Ridge Powell, Terry Sylvester Charron

The relative merits of active and passive management has been a hot topic among investors for the past few years, with passionate arguments on both sides of the debate. While they each have their own strengths and weaknesses, we remain committed to an active, disciplined and dynamic approach to investment management.

An active manager uses research and analysis to choose securities that will beat a benchmark, whereas a passive solution seeks to match a benchmark’s return through an index mutual fund, exchange-traded fund (ETF) or separately managed account. Although passive solutions have outperformed in recent years, we see opportunities ahead for actively managed solutions.

Passive solutions have grown in popularity in recent years

Between 2007–2015, more than $1.2 trillion has been invested in index mutual funds and ETFs. Low interest rates, lower fees and greater availability in retirement plans have proven attractive to investors. The introduction of higher capital gains and income tax rates and the net investment income tax that was implemented in 2013 played a role as well, as active managers tend to generate higher realized gains through higher turnover.

Although market trends have favored passive management, active solutions have been more successful during volatile periods

With abnormally low interest rates and high correlation among stocks, it has been difficult for active managers to pick and choose winners. When looking at three-, five- and 10-year investment horizons, passive solutions seem like the better choice. However, during shorter, more volatile stretches (e.g., 2000–2002 and 2008), active managers were better able to generate returns that outperformed their benchmarks.

The changing market environment points to a return for active management

The Trump administration promises to cut tax rates across the board, increase fiscal spending and reduce government regulations. We may soon experience more normalized interest rates, increased earnings due to lower tax rates, less regulation and higher inflation — giving firms better pricing power and providing a more favorable environment for actively managed solutions.

In addition, correlations among companies in the S&P 500 are at their lowest in 10 years

Low correlations create an opportunity for active managers who rely on in-depth analysis and stock selection to outperform the market. We believe actively managed strategies will play a bigger role in meeting client objectives going forward.

“At BNY Mellon Wealth Management, we are and will continue to be an active manager in determining how assets are allocated, what portions of an allocation are managed actively or passively, and how this fits in with a client’s broader wealth plan.”

COMPARING PERFORMANCE OF ACTIVE & PASSIVE STRATEGIES TO LARGE & SMALL CAP STOCKS

Historically, the outperformance of small cap stocks over large cap stocks has a high correlation with active managers outperforming passive solutions. With small caps recently outperforming large, this may be a harbinger for actively managed solutions outperforming passive solutions going forward.

Keep an eye on market conditions

Passive solutions perform better when everything is highly correlated, or moving in the same direction. Active solutions have the potential to outperform when fundamentals play an important role in stock selection.

Make active decisions in asset allocation

Active decisions, such as adjusting for changes in the market, economy or investment environment, are dynamic in nature. Given that over 90% of a portfolio’s variance of investment return can be attributed to the mix of asset classes, the most important decision in generating return on investments is an active one.1

Take an active approach to a blended solution

Instead of choosing between active and passive, investors should focus on when to employ each solution, as a blend of the two is likely to offer investors the best of both worlds: enhanced performance over time and lower volatility. Determining the best combination requires a disciplined process, a long-term view and active decision making.

FOOTNOTE

1Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May-June 1991, pp. 40-48.

DISCLOSURE

This document is confidential and may not be copied, reproduced or distributed, in whole or in part, to others at any time without the prior written consent of The Bank of New York Mellon Corporation, its subsidiaries and affiliates (collectively, “BNY Mellon”). The material contained herein is not intended for distribution to, or to be used by, any person or entity in any jurisdiction or country in which distribution or use would be contrary to law or regulation. Except as otherwise permitted herein, distribution of this material to any person other than the person to whom this was originally delivered and to such person’s advisors is unauthorized and any reproduction, in whole or in part, or the divulgence of its contents, without the prior consent of BNY Mellon in each such instance is prohibited.This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: One Wall Street, New York, NY 10286, USA.In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, 160 Queen Victoria Street, London, EC4V 4LA. The London Branch is registered in England and Wales with FC No. 005522 and #BR000818.Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd.This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and Newfoundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.©2017 The Bank of New York Mellon Corporation. All rights reserved.

Four Ways to Protect Your Children’s Trusts From Divorce

Trusts play an important role in protecting assets and provide a flexible way to pass wealth to future generations. Nearly all high net worth families utilize trusts, in some form or another, when devising their estate plans. However, common trust provisions may not offer much protection for trust assets if the beneficiary and his or her spouse get divorced.

Increasingly, courts across the country are considering assets held inside trusts when determining how to equitably divide a divorcing couple’s assets, or even when calculating spousal or child support. Spendthrift provisions that are designed to protect assets from the reach of creditors may not be enough to guard against such judgements.

Whether a trust will come under judicial scrutiny during a divorce can vary widely from state to state, county to county — even from judge to judge. While there are no guarantees, there are steps you can take when creating a trust to help ensure your legacy is protected and will be there for your children and grandchildren, as you intended.

Don’t Make Distributions Seem Like an Absolute Certainty

Certainty in life is usually a good thing. However, when it comes to trust provisions governing distributions to beneficiaries, certainty can have unintended consequences.

There is a greater likelihood that a court will consider trust assets when making decisions related to a divorce settlement if it appears that the beneficiary is certain to receive distributions from it. The specific phrasing of the instructions in your trust documents may seem like a minor thing, but it can have a major impact on how a court might rule. Instructing the trustee to make distributions using phrases such as “shall distribute” or indicating that distributions “will be made” can be viewed as a guarantee that the beneficiary will receive the assets.

To reduce this risk, the trust agreement should be written so that distributions seem like a “mere expectancy,” rather than a certainty. This can be accomplished by substituting the words “shall” or “will” with the word “may.” That way, the distributions seem conditional, rather than certain.

Another strategy is to name multiple beneficiaries, including beneficiaries in subsequent generations. Doing so can demonstrate that trust assets are intended to benefit more than just the specific beneficiary involved in divorce proceedings.

It may be advantageous to skip the “ascertainable standard,” in which beneficiaries are allowed to request and receive funds intended for certain purposes, such as expenses related to health, education, maintenance and support. Instead, use a “discretionary standard,” which gives the trustee the authority to determine whether distributions are justified. This is another way to signal that the beneficiary isn’t able to treat their trust like a bank account.

Consider Alternatives to Direct Distributions

If assets are kept inside the trust and managed by an independent trustee, it is easier to make a case for why those assets should not be considered in divorce-related settlement determinations. It also ensures that the beneficiary truly benefits from the protections afforded by the trust — once the money is distributed, it’s no longer protected.

Instead of directly distributing funds from the trust to the beneficiary during their lifetime, allow the trustee to make payments on the beneficiary’s behalf, for his or her benefit. For example, if the beneficiary wants a new car, the trustee can pay the car dealer directly rather than writing a check to the beneficiary. The end result will be the same: the beneficiary will own the car outright, but they won’t have received any money that could be used to justify involving the trust in a divorce settlement.

Trustees could also loan money from the trust to the beneficiary for larger purchases, such as a house. In the event of a divorce, the house would be seen as a debt to the trust, rather than an asset subject to division.

Trusts are often written to provide for scheduled distributions based on certain events, such as a marriage or a graduation, or when the beneficiary reaches a certain age. However, it’s best to avoid this — you can’t anticipate what might be going on in a beneficiary’s life at some point in the future, and there’s a risk that a big distribution could be made at an inopportune time, like immediately preceding a divorce.

If distributions must be made, be sure that the timing and amount of the distributions are varied. A court could potentially view regular, consistent distributions as evidence that the beneficiary had more than a mere expectancy that they would receive the funds in the trust.

Empower Trustees and Trust Protectors

The less control the beneficiary has over trust assets, the less likely the trust will be endangered during a divorce.

Consider reducing your beneficiaries’ exposure by giving the trustee more control over the trust. You may also want to consider adding a trust protector — a close friend or advisor who guides the trustee in certain actions — who can make changes to the trust in order to best serve your original intentions for the assets.

Giving the trustee and/or trust protector the authority to remove beneficiaries who are involved in divorce proceedings is one way to protect trust assets. Of course, it is important to be confident that the trustee or trust protector will use this power wisely, and that they will add the removed individual as a beneficiary again after the divorce-related risk has passed.

The trust agreement should also give the trustee and/or trust protector the ability to “decant” the trust into a new trust. This allows them to move assets into a trust that’s more suitable for the beneficiary’s needs and circumstances, or into a trust that’s located in a jurisdiction with more favorable trust laws.

Work With an Independent, Institutional Trustee

When creating a trust, it is important to make thoughtful, deliberate decisions about who should serve as the trustee. While any trusted friend or family member could be named in that role, being a trustee carries a significant amount of responsibility.

Using a professional trustee gives you a level of objectivity and professional expertise that friends or family members simply cannot provide. That objectivity can be particularly important when the trustee will have discretion to make — or withhold — distributions for beneficiaries.

Naming an independent, institutional trustee can also provide peace of mind because the trustee will be paying close attention to rulings and decisions that could have an impact on your trust. If the trust agreement provides the trustee with the flexibility to take proactive measures to protect trust assets, they will be able to do so promptly in response to new laws or evolving standards.

DISCLOSURE

This white paper is the property of BNY Mellon and the information contained herein is confidential. This white paper, either in whole or in part, must not be reproduced or disclosed to others or used for purposes other than that for which it has been supplied without the prior written permission of BNY Mellon. This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2017 The Bank of New York Mellon Corporation. All rights reserved.

Are Collectibles a Good Investment?

OVERVIEW

The aesthetic allure of collectibles like artwork, fine wines and classic cars can be hard to resist. For high or ultra-high net worth investors, the ability to combine the pursuit of potential growth with their personal passions or hobbies holds a lot of appeal.

However, those who think they can invest in collectibles the same way they invest in stocks or bonds may encounter some unexpected challenges. With this in mind, here are some best practices for those interested in or currently holding significant collectible assets:

Buy What You Like and Hope for the Best

“From a financial safety perspective, it’s generally best to view collectibles more as a hobby than as a way to make money,” says Bill Johnston, Managing Director and Head of Private Banking Solutions. In essence, any potential monetary gains from collectibles are best viewed as a fringe benefit, a bonus that serves as a validation of the collector’s keen eye and good taste.

Keep a Detailed Inventory of Your Collectibles

“Collectors should absolutely have an inventory or catalog that captures important details about their collectibles,” says Jere Doyle, Senior Vice President and Estate Planning Specialist. “It should include where and from whom they bought them, for how much, and any other distinguishing features of the item.”

Preserve the Value of Your Collection

Even if your primary motivation for building a collection is personal enjoyment, consider taking steps to preserve and safeguard your collectibles — such as purchasing specialized insurance, having your items appraised by a certified expert and making accommodations for proper, long-term storage, whether in your home or in a professional storage facility.

Don’t Forget Your Collection When Planning

Failing to take collections into account when making decisions about your wealth and estate plans can have serious financial consequences. It’s important to recognize and account for their value as you would any other financial asset.

Consider Donating your Collection

Donating valuable collectibles to a charitable organization is a great way to support a cause you care about and take advantage of a significant tax deduction. Additionally, gifting an entire collection to a charity or other non-profit can help to avoid potential liquidity issues around the estate tax and create a lasting legacy for your life’s passion.

KEY STATS

340%

How much the price of Bordeaux wine rose between 2005 and 20111

60%

The percentage of art sales estimated to be private transactions2

28%

The maximum federal tax rate for collectible items sold after being held for more than one year3

“The people in the best position to potentially benefit from the long-term appreciation of collectibles are those who inherit existing collections from family members, or those who have amassed a collection through the pursuit of a hobby they are passionate about.”

Understand the unique risks

Collectibles expose investors to risks not commonly encountered when making traditional investments, including loss, theft, damage and counterfeiting. Collectible markets are also very volatile, and greatly influenced by pop culture trends, shifting personal tastes and even politics.

Consider the tax consequences

Profits on the sale of collectible items held for more than a year are subject to a maximum 28% federal tax rate; many taxpayers typically pay around 20% on long-term realized capital gains from traditional investments.4 There are also state-level and federal estate tax concerns associated with large, valuable collections.

Don’t lose sight of what’s important

While most investors seek financial returns, collectors reap benefits beyond their collection’s monetary value. Collectibles enable investors to pursue personal interests and develop relationships around shared cultural or intellectual curiosities. Over time, this may be more rewarding than the possible financial gain.

FOOTNOTES

1 Adam Teeter. “How China Inflated a Global Bubble in Fine Wine & Spirits – And Then Popped It,” Vinepair, April 15, 2015.

2 Tanya Powley. “How to Invest in Art,” Financial Times, February 1, 2013.

3 IRS. “Topic 409 – Capital Gains and Losses,” As of May 1, 2017.

4 Ibid.

DISCLOSURE

This white paper is the property of BNY Mellon and the information contained herein is confidential. This white paper, either in whole or in part, must not be reproduced or disclosed to others or used for purposes other than that for which it has been supplied without the prior written permission of BNY Mellon.”This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE.The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 225 Liberty Street, New York, NY 10286, USA.In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, 160 Queen Victoria Street, London, EC4V 4LA. The London Branch is registered in England and Wales with FC No. 005522 and #BR000818.Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd.This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and Newfoundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.©2017 The Bank of New York Mellon Corporation. All rights reserved.

 

 

Teaching Responsibility Through Family Philanthropy

OVERVIEW

Family philanthropy offers opportunities for family members of all ages to experience the joy of giving. It’s also one of the best methods to help family members learn to work together, which is a key component in creating a legacy that will survive multiple generations.
The benefits of family philanthropy are extraordinary. It can help to solidify family values, as family members work together, communicate with each other and learn to trust one another. Here are some key ways in which families can take advantage of this opportunity:

1  Make Gifting Decisions Communally

Doing this can help younger family members develop a variety of skills, including communication, negotiation, shared decision making, leadership, accountability, investing and financial literacy.

2  Remember That It’s More About the Giving Than the Amount

Studies have shown that individuals receive many of the same personal benefits from charitable giving regardless of the amount of money that they actually give.

3  Have a Family Meeting About Your Philanthropic Goals

Conversations about charity have a greater positive impact on children than parents simply demonstrating their own philanthropic activity.1 This conversation is worthwhile, regardless of the child’s age.

4  Make Sure Your Family Philanthropy Program Includes These Four Components

To maintain a good program over time, you should: choose projects based on shared values; involve the whole family in decision-making; measure and evaluate results; and apply what you’ve learned to future decisions.

“Family philanthropy is not just about giving money away; it is about giving money away as a family.”

IMPLICATION

You don’t need a private foundation to establish a family philanthropy program.

Consider a donor-advised fund

Donor-advised funds offer user-friendly, online experiences and can serve as an excellent resource for parents or grandparents to begin a program for younger members of their family.

It’s never too early to start giving

Children as young as five can participate in a family philanthropy initiative and get involved with the administration and investments of the program.

Think about doing more than just giving

You could encourage family members to actively volunteer with an organization or to include a small personal gift along with the donation.

FOOTNOTE

1 Dunn, E.W., Aknin, L.B., & Norton, M.I., “Spending Money on Others Promotes Happiness,” Science (2008)

Based on articles by Justin T. Miller, J.D., LL.M., TEP, CFP®, National Wealth Strategist at BNY Mellon and adjunct professor at Golden Gate University School of Law. Edited and reprinted with permission from WealthManagement.com.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2016 The Bank of New York Mellon Corporation. All rights reserved.

Navigating the M&A Market

Joan Crain

For entrepreneurs, a successful M&A deal starts long before the sale.

OVERVIEW

To successfully sell a business, an entrepreneur needs to have an exit strategy that is thoughtfully planned in advance, including building the right team, preparing the business for sale, assessing financial goals and ensuring the right structure for the transaction.

ANALYSIS

The entrepreneur needs to give careful consideration to an exit strategy well in advance of the sale, particularly in today’s environment of dramatic economic change. The business owner should consider these four important steps to selling:

1  Recruit a Skilled Team of Advisors

A dream team may include investment bankers, accountants and attorneys specializing in wealth-transfer strategies. If choosing long-standing advisors, be sure they are up to the deal’s complexities.

Put the Business on the Right Path

The owner needs to draft a timeline of activities and be mindful of factors that will impact the business valuation, such as an independent audit, a strong management team and a business continuity plan.

Assess How Selling the Business Will Affect Your Family

Sellers should determine how much is enough to accommodate immediate spending needs and the amount they wish to set aside for heirs and philanthropy goals. Plans to reduce taxes should also be made.

Choose the Most Appropriate Structure for the Deal

Private equity buyouts, tax-free mergers and buy-sell agreements are options to consider when selling. Examine the capital gains advantages of a stock sale versus an asset sale’s lingering liability.

“It is critical to prepare a business well in advance of the transaction to ensure the optimal terms for the owner and his or her family.”

IMPLICATION

Selling a business can be a smooth process provided you have the right plan

Get expert advice and proceed slowly

Business owners who lack the right advice and act hastily can derail transactions. Common missteps include flawed valuations and inadequate due diligence.

Request an independent audit of company finances

A thorough review of the company by a certified public accountant will verify its financial health for potential buyers.

Prepare the family for a sale

A plan for family wealth management must address issues of wealth education and stewardship to prepare children and grandchildren to handle the money.

DISCLOSURE

The information provided is for illustrative/educational purposes only. All investment strategies referenced in this material come with investment risks, including loss of value and/or loss of anticipated income. Past performance does not guarantee future results. This material is not intended to constitute legal, tax, invest mentor financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of the Bank of New York Mellon Corporation.©2016 The Bank of New York Mellon Corporation. All rights reserved.

Investing for a Disruptive Future

Ridge Powell

Technological advances are pointing toward a future in which markets are subject to rapid and continuous change. This presents new challenges for investors, but also new opportunities.

“Creative destruction” has long been regarded as an essential driver of economic growth. The term was coined by economist Joseph Schumpeter who, in his 1942 book “Capitalism, Socialism and Democracy,” wrote that a capitalist economy “is not and cannot be stationary… it is incessantly being revolutionized from within by new enterprise.1 “Some worry, however, that the pace of change may be close to exceeding our ability to keep up with it. The acceleration of technological innovations and the challenges associated with adapting to them seem to point toward a tumultuous future.

Disruption Is a Fact of Modern Life

That future appears to be approaching faster than ever. Companies are finding it harder to maintain their positions in industries that are increasingly subject to disruption. According to a study by Richard Foster, a professor at the Yale Entrepreneurial Institute, the average lifespan of a company listed in the S&P 500 Index has decreased significantly over the last 60 years — down from 61 years in 1958 to just 18 years in 2012.2

The rapid adoption of new technologies plays a major part in the quickening pace of change. For example, it took only seven years for mobile phone penetration to grow from 5% of U.S. households to 50%. Landline telephones needed 45 years to achieve that same feat.3

By 2004, 65% of U.S. adults owned a mobile phone, and the best-selling models that year included relatively simple phones like the Nokia 2600. By 2015, 92% of U.S. adults owned a mobile phone, and 68% of adults owned a smartphone capable of providing high-speed Internet access, GPS directions and more.4  Nokia, a pioneer in the mobile phone industry and, for many years, the world’s largest seller of mobile phones, was unable to compete with newer, more advanced offerings from Samsung and Apple despite its position in the market. The company ultimately sold off its mobile business in 2014.

It’s not just the U.S. that’s experiencing rapid change. In some cases, emerging markets are seeing even faster adoption of new technologies. Between 2007 and 2013, several countries, including China, Mexico and Pakistan, saw the number of adults who own mobile phones rise by double digits. In Kenya, mobile phone ownership increased by 49%.5

Smartphone technology is a prime example of how technologies that once seemed futuristic or revolutionary quickly become the baseline to which everything is compared. It’s an important lesson to remember as we begin to learn more about other seemingly fanciful technological advances whose impact may seem far off in the future. Uber is already testing driverless cars on the streets of Pittsburgh. Amazon is working with the British government to expand testing of its delivery drones. The Associated Press has partnered with a firm called Automated Insights, which describes itself as “an artificial intelligence platform that generates human-sounding narratives around data,” to generate reports on minor league baseball games.

An age of automation appears to be on the horizon. One study from Oxford University claims that about 47% of total U.S. employment is at “high risk” of automation or computerization, perhaps within the next two decades.6

There’s More to the Story

While such transformations may seem unprecedented, the truth is that we’ve been here before. Over the course of the 20th century, advances in technology caused employment in many labor-intensive industries to decline sharply. Between 1910 and 2000, the number of farmers and farm laborers declined by 96%. The number of mine workers dropped by 95%. This was partly due to increased efficiency and productivity in these industries — farms needed fewer people to cultivate crops as mechanized tractors replaced horses and mules, for example. However, the Bureau of Labor Statistics (BLS) points out that much of this change was, in fact, driven by the “rapid growth in demand for workers in other occupations,” such as engineering, accounting and clerical work, which offered higher pay and better working conditions.7 To focus on what was lost to technological progress and not appreciate what was gained is to tell only half the story. As some industries and jobs become more efficient or are made obsolete, newer industries and jobs tend to rise to take their place.

Indeed, we can already see this occurring today. Between 2008 and 2012, the coal industry shed almost 50,000 jobs, but the energy sector overall gained more than double that in the same time span.8 Though many of those coal jobs may never come back, the BLS projects that the fastest growing occupation in the next decade will be “wind turbine service technician.” 9

The potential for disruption is wide ranging, and while the effects of advances in areas such as the mobile Internet, alternative energy and autonomous vehicles are already beginning to manifest themselves, there are other catalysts of change still developing. The proliferation of sensors and network connectivity in everyday objects — the so-called “Internet of Things” — could provide us with a vast reservoir of data from which we can generate new ideas and opportunities. 3D printing technology might allow for the on-demand production of goods, which could greatly impact manufacturers, retailers, shipping companies and consumers. New breakthroughs in artificial intelligence may extend automation out of the realm of labor and into knowledge-based industries such as health care, legal services and finance.

You Can’t Predict the Future; You Can Prepare for It

The key words here are: could, might and may. It’s impossible to know precisely what technologies will find success and when or how it will happen. It’s also hard to determine whether they will live up to the hype and find a market among consumers. Regulations or a lack of governmental support could stifle adoption, as well. For instance, the reason Amazon is testing its delivery drones in the U.K. is because of a U.S. Federal Aviation Administration rule requiring that drones be kept within the line of sight of their operator at all times.

What we do know, however, is that change is inevitable. And while investors may not be able to pinpoint precisely which companies or industries will lead the disruption — or fall victim to it — they should do what they can to plan to take advantage of these opportunities when they arise.

Investing in private equity can provide exposure to the next wave of new technologies. Venture capital firms like Accel Partners (one of the earliest investors in Facebook) are dedicated to identifying, nurturing and capitalizing on the next big thing, with a track record of success in discovering new companies that have substantial growth potential. As an asset class, private equity is attractive because it acts as a diversifier in an investor’s portfolio. It has a lower correlation to traditional asset classes, such as stocks or bonds, potentially reducing portfolio risk. But most importantly, the inefficiency that exists in the private equity market means that there is tremendous potential for enhanced returns, particularly when working with the top firms — though, naturally, there is also exposure to significant risk. Compared to the more efficient, traditional asset classes, in which the universe of investments is mostly well understood, the focus on smaller, newer endeavors in private equity gives the most skilled managers the ability to take advantage of market inefficiencies.

That’s not to say, however, that investments in public markets cannot be positioned to take advantage of disruption. Active management can help steer investments toward companies or industries that are poised for success or away from those that seem destined to fail. Actively managed strategies employ portfolio managers who are continually looking for opportunities to get an edge on the market, choosing which securities to invest in through a combination of research, analysis and experience. If we accept that change is inevitable and that new innovations will supplant established ideas, relying solely on passive strategies that aim to replicate the return of the broader market would be passing up an opportunity to capitalize on this ever-increasing churn.

New Challenges Present New Opportunities

The change that comes from creative destruction and disruptive innovation is not without its challenges. Navigating these changes requires an effort on the part of investors, corporations, governments and individuals to address the shifting needs of the market and those affected by it. But we cannot halt the march of progress any more than the 19th century Luddites who rebelled against powered looms. As such, prudent planning is required so we can recognize and benefit from new innovations and ensure that the positive effects that could come with them — new opportunities, higher standards of living and increased personal freedom — outweigh the downsides.

1. Schumpeter, Joseph. “Capitalism, Socialism and Democracy” (1942)

2. Foster, Richard. “Creative Destruction Whips Through Corporate America” (2012)

3. DeGusta, Michael. MIT Technology Review. “Are Smart Phones Spreading Faster Than Any Technology in Human History?” (2012)

4. Anderson, Monica. Pew Research. “Technology Device Ownership: 2015” (2015)

5. Pew Research. “Emerging Nations Embrace Internet, Mobile Technology” (2014)

6. Frey, Carl Benedikt and Osborne, Michael A. “The Future of Employment: How Susceptible Are Jobs to Computerization?” (2013)

7. Wyatt, Ian D. and Hecker, Daniel E. The Bureau of Labor Statistics. “Occupational Changes During the 20th Century” (2006)

8. Mooney, Chris. The Washington Post. “Study: Coal Jobs Lost Nearly 50,000 Jobs in Just Five Years.” (2015)

9. The Bureau of Labor Statistics. “Fastest Growing Occupations, 2014–2024” (2015)

DISCLOSURE

This document is confidential and may not be copied, reproduced or distributed, in whole or in part, to others at any time without the prior written consent of The Bank of New York Mellon Corporation, its subsidiaries and affiliates (collectively, “BNY Mellon”). The material contained herein is not intended for distribution to, or to be used by, any person or entity in any jurisdiction or country in which distribution or use would be contrary to law or regulation. Except as otherwise permitted herein, distribution of this material to any person other than the person to whom this was originally delivered and to such person’s advisors is unauthorized and any reproduction, in whole or in part, or the divulgence of its contents, without the prior consent of BNY Mellon in each such instance is prohibited.This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.The Bank of New York Mellon, DIFC Branch (the “Authorized Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorized Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Center, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE.The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorized by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: One Wall Street, New York, NY 10286, USA.In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, 160 Queen Victoria Street, London, EC4V 4LA. The London Branch is registered in England and Wales with FC No. 005522 and #BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Center, 160 Queen Victoria Street, London EC4V 4LA, which is registered in England No. 1118580 and is authorized and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd.This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and New Foundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.©2016 The Bank of New York Mellon Corporation. All rights reserved.

Using Credit to Build and Maintain Your Wealth

Are there benefits to taking out a loan? There are times when an effective use of credit is the best way to seize an opportunity.

If you own substantial liquid assets, either in a business or in your investment portfolio, you might not see any reason to borrow money. Why take out a loan when you already have funds available to you?

There are a number of situations, however, where there could be a distinct advantage to utilizing a line of credit, even if you have sufficient personal resources available:

  • To cover large or unexpected personal expenses
  • To help grow your business without incurring additional expenses
  • To take advantage of an investment opportunity

Though it may seem counterintuitive, borrowing can be beneficial to your overall wealth plan and investment strategy.

Covering Big Expenses

Dealing with large or unexpected expenses can be challenging, whether you need to pay for a major tax bill, an emergency medical expense or fund an investment opportunity. Your first inclination may be to draw from your savings or sell off some investments to raise the funds. While this may seem straightforward, there can be hidden costs that aren’t immediately obvious to you.

By liquidating investments, you are likely to incur brokerage fees and may expose yourself to additional tax consequences in the form of capital gains. Right away, the transaction is costing you money. And it doesn’t end there. By liquidating investments, you also risk throwing your asset allocation off balance, which can impact your long-term wealth plan.

Studies have shown that over 90% of a portfolio’s variance of investment return can be attributed to how assets are spread across different asset classes.1 A properly tuned asset allocation ensures that you’re able to pursue the level of growth you want while exposing yourself to a level of risk you are comfortable with — and selling investments can upset that balance.

Furthermore, rebalancing may require you to sell off more assets in order to get back to your desired asset allocation, thus incurring more fees and capital gains tax. On top of all this, you have to consider the opportunity cost of taking money out of the market — you’ll miss out on any potential growth that you would have enjoyed had the money remained invested.

Leverage Your Portfolio, Don’t Liquidate It

Rather than selling investments, you may want to consider using your portfolio as collateral for a loan. That way, you can borrow against your assets while allowing them to continue to generate returns, which could more than offset the overall cost of the loan given the current interest rate environment is still relatively low.

This strategy isn’t just for unexpected or obligatory expenses. You can use it to pay for major purchases, as well. For example, you may have your eye on an expensive work of art or the vacation home you’ve been dreaming about, but don’t have the cash on hand to buy it. Perhaps you’re expecting a big bonus in several months, and are worried that you’ll miss out on a unique opportunity if you wait. If that’s the case, you could leverage your portfolio to secure a bridge loan that provides the cash you need immediately, allowing you to make the purchase now and repay the debt later when your cash flow improves.

Borrowing for a Business

You can also borrow against your personal investment portfolio to help your company make an acquisition, purchase equipment or buy real estate to house the firm.

Consider this scenario: Tom is an entrepreneur who has a $10 million portfolio of diversified stocks and bonds. He also owns a controlling interest in a booming company that makes audio components. He would like to acquire another company in a complementary business that makes hardware to connect computers with stereos to play back digitally recorded music.

Tom was tempted at first to just liquidate a portion of his portfolio and buy the company outright with the resulting cash. But after crunching the numbers, he realized that this would be quite costly. For one thing, capital gains tax would be due on the profits from the sale of stock. He also worried about the cost of being out of the stock market for any length of time and missing out on potential growth.

On the other hand, if Tom’s audio company borrowed money to make the acquisition, there would be other hurdles. Because its assets are less diversified than the investment portfolio, the company may have to pay a higher interest rate for the loan. The company would also face costly legal and accounting fees to complete the transaction.

Ultimately, Tom took out a personal loan using his $10 million investment portfolio as collateral. He was able to obtain a low interest rate and loan the proceeds to the company, which then bought the target firm.

He now stands to earn a handsome profit as the company repays the loan. And because Tom kept his investment portfolio fully invested in the market, he was able to capitalize on the market’s recent rise.

Capitalizing on Investment Opportunities

A secured line of credit can also allow you to expand into new investment opportunities, such as purchasing a piece of property. The property not only has the potential to appreciate in value, but could also provide you with a steady stream of income were you to rent it out.

Investing in commercial real estate is another way to utilize a personal line of credit. Consider this example: David is an investor who owns two apartment buildings, both of which are performing well, and he is interested in purchasing a third in a depressed market. David already has a secured line of credit in place, which gives him a competitive edge over other potential buyers.

David decides to use his line of credit to make a cash offer, which is much more efficient than going through the typical process that’s required for a commercial real estate loan. His cash offer is attractive to the seller, who has the opportunity to make a quick sale. The seller doesn’t have to worry about another buyer who may be waiting on financing, or the deal falling through if the loan is not approved.

Once the transaction is complete and David owns the property, he can set up a permanent financing structure. He can still secure a traditional commercial real estate loan with longer terms and a fixed interest rate, and use the loan proceeds to pay down the line of credit.

With his line of credit, David was able to act quickly and capitalize on an opportunity to expand his investments.

The Convenience of a Credit Relationship

Wealthy investors value a credit relationship with a strong financial institution, as it provides them with peace of mind. With a secured line of credit, they know that they have convenient access to liquidity in the event they need it. Whether the objective is to pay off a large expense, grow a business or pursue an investment opportunity, the effective use of credit is one way to seize an opportunity without disrupting your long-term investment plan.

1Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May-June 1991, pp. 40-48.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. Credit services, which are subject to credit approval, are provided by BNY Mellon N.A., a wholly owned subsidiary of The Bank of New York Mellon Corporation. Member FDIC.Mortgage services, provided by BNY Mellon, N.A., are subject to credit approval.
©2017 The Bank of New York Mellon Corporation. All rights reserved.

Managing Your Wealth Through Divorce

Going through a divorce is more than just change in your personal life — it also can have a profound impact on the legal status and financial situations of everyone involved.

Marriage fundamentally changes each spouse’s rights to wealth and property, creating a complicated “yours, mine and ours” set of claims. In this respect, a divorce is not only an emotional trauma — it is also a complex, court-supervised unraveling of those claims, one that can be made easier to navigate with some thoughtful preparation.

Prenuptial Agreements

One way to prepare for the possibility of divorce is by creating a prenuptial agreement — a legal contract defining each spouse’s rights to the combined assets and support in a marriage in case of divorce. This agreement determines whether assets are held as community property, joint tenants, tenants in common or as the separate property of one spouse.

A complete and equitable picture of assets is essential. It’s important to go beyond the “lump sum” approach and instead define the present and future value of significant assets. What might appear to be an equal distribution can change dramatically when tax and retirement consequences are considered.

A complete financial picture should also take into account the risk and volatility of any assets, especially when one person may end up with too many post-divorce eggs in one basket.

Finally, a settlement should aim to maintain both spouses’ living standards and provide for their short- and long-term needs for income.

Real Estate

The division of real estate, particularly the family home, is often the most contentious issue in a divorce. But careful analysis can ease the way. You need to know the tax implications of property sales or transfers. In addition, if you or your spouse wants to buy a new home, the ability to qualify for a mortgage should be determined.

Retirement Plans

The rules governing division of IRAs and qualified retirement plans are complicated. Professional advice may be essential. For example, splitting a pension or qualified retirement plan may require a court to issue a formal qualified domestic relations order.

Taxes

Income, gift, estate and generation-skipping transfer tax planning can be significantly impacted by a divorce. Proper tax planning is essential to avoid mistakes that may not become apparent until years after the divorce, and that could lead to substantial taxes, penalties and interest.

Managing Your Wealth After Divorce

Divorce can dramatically affect your finances. You may need help in managing your assets or crafting a financial plan. If your spouse had been primarily responsible for your finances, you might feel unprepared to make financial decisions, especially during the wrenching experience of dissolving a marriage. As a newly divorced person, you might need help and advice — whether related to something as simple as opening a new investment account or as complicated as setting up a trust.

After a divorce, it’s especially important to review your estate plan. Among the things to look at are:

  • Changes in income, gift, estate and generation-skipping transfer tax laws
  • State laws and the potential elimination of provisions that favor the former spouse
  • Changes to spousal designations as executor or personal representative, trustee, attorney-in-fact or health care agent
  • Beneficiary designations
  • Estate liquidity
  • Gifted or inherited assets, or beneficial interests, whether vested or contingent

Wealth Planning for Families of All Kinds

Families today come in many different varieties. Although the financial benefits of marriage are not available to people who have children but don’t marry, they frequently can be replicated for such families. Trusts, for example, can play a critical role. They are more durable than wills and less prone to challenge, which is particularly important if other family members object to the estate arrangements.

When the financial benefits of marriage are not available, families need a legally recognized estate plan. This plan is often supported by:

  • Durable powers of attorney
  • Health care proxies
  • Wills and trusts
  • Living wills
  • Partnership/co-habitation agreements
  • Beneficiary designations

An Experienced Partner

BNY Mellon Wealth Management has a long history of helping individuals and families manage their wealth and protect their assets. We can show you how to navigate life events in ways that meet your specific needs, and work with your legal and accounting advisors to develop comprehensive wealth management plans. Whether it’s designing a prenuptial agreement, a divorce settlement, or a trust to provide for your family, BNY Mellon will work collaboratively with your other advisors to help you make the right decisions at the most important moments in your life.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. ©2016 The Bank of New York Mellon Corporation. All rights reserved.

Driving Toward Success: Creating an Objective-Driven Investment Strategy

With your goals and risk tolerance as guides, you can identify the right combination of asset classes to create a portfolio that fits your objectives.

When going on vacation, you probably wouldn’t just hop in your car and start driving, hoping that you’d end up somewhere nice. You certainly wouldn’t just follow the other cars on the road, assuming that they were going somewhere you wanted to go.

First, you’d think hard about the kind of vacation you wanted to take and choose a destination that best fits your needs and desires. Then, you’d map out the best way to get there, taking into account how much time you have and any potential obstacles that might get in your way – traffic, road work or weather. You would do this because you know that thorough planning is essential to ensuring that you get to your destination, and because it gives you the confidence that you’re on the right path.

Investing works in much the same way. Making investments without a clear sense of your ultimate goal is like driving without a destination. You’re liable to make snap decisions about your next move, encounter challenges you aren’t prepared for and find yourself going around in circles while everyone else passes you by.

Having a Plan Provides Peace of Mind

What you need is a plan that’s tailored to your needs, aimed toward your goals and mindful of potential risks. A plan that is driven by your objectives, allowing you to stay focused on your destination and that keeps you from overreacting to the short-term, day-to-day fluctuations in the market.

Objective-driven investing is a framework for thinking about your portfolio. We believe that a long-term approach to managing your wealth provides the structure to help you best achieve your goals and avoid making emotional decisions that can undermine performance. When you know that your portfolio is constructed in a way that is customized to meet your lifestyle needs, wealth-transfer goals and tolerance for risk, you’ll be less inclined to deviate from your plan during volatile periods in the market. You can’t control how the market behaves, but you can control how you react to its behavior.

Know What You Want

Before you invest your assets, you need to know why you’re investing them. Perhaps you’re interested in achieving a particular type of lifestyle, or looking to leave a legacy for subsequent generations. Maybe it’s a combination of the two. Whatever your goals, it’s crucial that you identify and articulate them – this is the foundation for your plan. Here are some common objectives that we see when talking to investors:

Lifestyle Needs

  • Maintaining a certain standard of living in retirement
  • Generating income to cover current expenses
  • Preserving wealth by keeping pace with inflation
  • Creating wealth to pay for travel, a vacation home or a grandchild’s education
  • Funding charities and causes that are important to you

Wealth-Transfer Goals

  • Transferring assets in a tax-efficient manner
  • Designing charitable bequests to be passed on after death
  • Pursuing growth in order to leave a legacy to your family

The relative importance of these needs and goals informs how you invest your assets. For example, an investor who is more interested in satisfying their current lifestyle needs may benefit from more conservative, income-generating investments, whereas those looking to build wealth and leave a legacy may want to take on more risk in pursuit of higher overall returns. Those who put a particular emphasis on their wealth-transfer goals may not just be planning for the next generation, but potentially for several generations beyond that. This means that the time horizon for investing assets could be well beyond their lifetime, which would have a significant influence on how assets are allocated and monitored.

Understanding Risk

Typically, we speak of risk in terms of the potential loss of assets. However, it’s also important to consider the risk that an improperly allocated portfolio might not achieve its intended goal. While investing primarily in fixed income can protect against short- and near-term losses, as well as inflation, such a strategy won’t generate the returns necessary to satisfy long-term growth of principal or wealth-transfer goals. In order to do that, an investor must be willing to venture into asset classes that meet those specific needs, and might be exposed to more risk.

When constructing a portfolio, we consider the role that different types of investments can play in helping you reach your goals. If you’ve decided that you’re looking to fulfill your lifestyle needs, you may need to rely on these types of investments:

  • Investments in cash, fixed income and other structured products can provide stability, liquidity and even income
  • Treasury Inflation Protected Securities (TIPS), commodities and real estate investments can provide a hedge against inflation
  • Investments in domestic and international equities or absolute return strategies offer growth and assume more risk

For those aiming for wealth-transfer goals, these types of investments may be more advantageous:

  • Investments in international fixed income, hedge funds and real estate investment trusts (REITs) provide opportunities for diversification while seeking growth
  • More focused investments in value or growth equity, private equity and private debt target high returns, but also carry substantial risk

However, whatever your objective, it’s important to manage risk by spreading investments across a variety of asset classes. Depending on your objective, your portfolio can be diversified in a way that favors asset classes that are complimentary to your goals, while maintaining smaller allocations in other asset classes intended to offset risk.

In order to achieve the necessary returns to fund long-term wealth-transfer goals, an investor would most likely have to rely on riskier strategies, which may include investments in domestic and international equity, as well as private equity. However, a portion of the portfolio could also be invested in international fixed income or hedge funds. These types of investments generally have a low correlation to equity asset classes, meaning their performance typically does not move in the same direction, which serves to lower the portfolio’s overall volatility. Smaller allocations to cash or fixed income investments can help, as well.

Start By Devising a Plan

By clearly articulating your goals and fully appreciating the risks that come with trying to reach them, you can arrive at an investment plan that gives you the confidence to stay on course and avoid overreacting to market volatility. Consider working with a wealth manager who has the tools and experience necessary to help you craft an investment plan that is specifically designed to get you where you want to go. A good wealth manager will work with you to evaluate your current investment plan (including cash flows, liabilities and the tax impact of each decision) and provide you with projections based on your personal investment situation.

DISCLOSURE

This document is confidential and may not be copied, reproduced or distributed, in whole or in part, to others at any time without the prior written consent of The Bank of New York Mellon Corporation, its subsidiaries and affiliates (collectively, “BNY Mellon”). The material contained herein is not intended for distribution to, or to be used by, any person or entity in any jurisdiction or country in which distribution or use would be contrary to law or regulation. Except as otherwise permitted herein, distribution of this material to any person other than the person to whom this was originally delivered and to such person’s advisors is unauthorized and any reproduction, in whole or in part, or the divulgence of its contents, without the prior consent of BNY Mellon in each such instance is prohibited.The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.The Bank of New York Mellon, DIFC Branch (the “Authorized Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorized Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Center, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorized by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: One Wall Street, New York, NY 10286, USA.In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, 160 Queen Victoria Street, London, EC4V 4LA. The London Branch is registered in England and Wales with FC No. 005522 and #BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA, which is registered in England No. 1118580 and is authorized and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd.This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and New Foundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws.Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.©2016 The Bank of New York Mellon Corporation. All rights reserved.

What’s Happening With the Fiduciary Rule?

President Trump has asked the Department of Labor to review its fiduciary rule, which required that financial advisors act in the best interest of the investors they serve when working with retirement accounts.

In a memorandum issued on February 3, 2017, President Trump ordered the U.S. Department of Labor (DOL) to take a closer look at the fiduciary rule, which was set to take effect on April 10. In response, DOL officials announced on April 4 that they have decided to delay the implementation of the rule for 60 days. As a result of this decision, certain aspects of the rule are now scheduled to become effective on June 9.

President Trump’s request and the DOL’s corresponding reaction indicate that further delays, or possibly even an outright reversal of the policy, may still be in store.

What Is the Fiduciary Rule?

The fiduciary rule provides enhanced protections to investors by imposing greater accountability standards on financial advisors.

It expands the definition of a fiduciary to include anyone who receives compensation for providing investment advice for tax-advantaged retirement accounts. Advisors who operate under the fiduciary standard must avoid conflicts of interest and are prohibited from making trades for a client for the sole purpose of obtaining a higher commission. They must charge reasonable fees and refrain from making misleading statements. The rule’s provisions do not, however, extend to non-retirement plan accounts.

“BNY Mellon has always operated as a fiduciary,” says Kathleen Stewart, Senior Director and Family Wealth Strategist at BNY Mellon Wealth Management. “But there’s definitely a recent trend throughout the broader industry toward the fiduciary standard.

“What the rule will do is help reassure customers that their advisors are acting in their best interest when helping them make decisions about their IRAs, 401(k)s or retirement plan rollovers. People want to work with someone that they trust, and they generally expect their financial advisor to be working in their best interest. When they discover that’s not the case, it can be eye opening.”

What’s Next?

The DOL has been charged with determining whether the fiduciary rule may “adversely affect the ability of Americans to gain access to retirement information and financial advice.”

Specifically, President Trump has asked the DOL to examine whether the rule would cause disruption in the retirement services industry or hinder investors’ ability to access retirement savings products. Should the DOL find evidence that those types of negative consequences could result, the agency is directed to rescind or revise the rule.

“There’s nothing to support the idea that people wouldn’t be able to get advice,” according to Stewart. “This is a rule that’s meant to help the average investor.”

Indeed, there is some evidence that the implementation of a fiduciary rule would not have an adverse effect on the availability of services. Some states already require that broker-dealers act as fiduciaries, or at least impose standards that exceed the basic suitability rules.

In 2012, a study was conducted that surveyed broker-dealers in these states to determine whether these regulations had a negative impact on the types of products and services they were able to offer, relative to broker-dealers in states with no fiduciary requirements.

Researchers found “no evidence that the broker-dealer industry is affected significantly by the imposition of a stricter legal fiduciary standard on the conduct of registered representatives.”1

At this point, the DOL has delayed the rule’s implementation and will continue to analyze whether it should be modified or rescinded. Though the existing rule may bring changes to the way services are provided and to how fees and commissions are charged, it may also bring peace of mind to investors. Without the rule, the burden would remain on investors to determine whether or not their advisor is truly working in their best interests.

1Michaele Finke, Ph. D, CFP® and Thomas Langdon J.D., LL.M., CFP®, CFA; “The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice,” The Journal of Financial Planning, March 9, 2012.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2017 The Bank of New York Mellon Corporation. All rights reserved.

The Tax Benefits of Investing in Small Businesses

Pam Lucina, Justin Miller and John Welsh

The Qualified Small Business Stock exclusion is an extremely valuable incentive for entrepreneurs and investors. If certain requirements are met, this tax benefit can provide significant savings.

OVERVIEW

Recognizing that small businesses drive the economy, produce jobs and lead innovation, Congress has enacted several laws over the years designed to encourage investments in small businesses. The Qualified Small Business Stock (QSBS) exclusion1 allows qualified investors to exclude a portion of gains from sales of QSBS if certain requirements are met, which can provide significant savings and ultimately increase the after-tax cash proceeds.

ANALYSIS

The QSBS exclusion allows investors to exclude up to 100% of their gain on the sale of QSBS (depending on the date the stock was acquired), capped at the greater of $10 million or 10 times the investor’s tax basis in the stock.

Issuer Must Be Engaged in a Qualified Trade or Business

The company issuing the stock must be a domestic C corporation, and must use at least 80% of its assets conducting a qualified trade or business. Financial and service-oriented businesses generally do not qualify.

Investor Must Acquire Stock Directly From the Issuer

To qualify for the QSBS exclusion, the investor cannot be a C corporation. In addition, the investor must have acquired the stock directly from the issuing company, not the secondary market.

There Is a Five-Year Holding Period

Investors must hold QSBS for at least five years to qualify for the exclusion, although exchanging stock in certain circumstances (e.g., a gift or inheritance, stock options) may also qualify.

No Special Tax Filings Are Required

When an investor’s stock purchase and subsequent sale or exchange meet the requirements for the QSBS exclusion, the investor only needs to indicate on his or her tax return that transactions are eligible for the Section 1202 exclusion. It’s important to remember, however, that not all states follow the federal tax treatment of QSBS.

KEY DATA

10

Investors may exclude the greater of $10 million or 10 times their tax basis in the qualified small business stock.

100%

For stock purchased on or after September 28, 2010, investors can exclude 100% of their gain, up to the $10 million/10 times basis cap.

$50 M

To qualify, QSBS issuers must have maintained aggregate gross assets of less than $50M from August 10, 1993 through after the stock issue date.

DETERMINE THE EXCLUSION AMOUNT

The amount of capital gains that can be excluded depends on when the QSBS was acquired.

IMPLICATIONS

Understand the potential benefits and risks of the QSBS exclusion

Gifting or transferring QSBS may help maximize its impact

QSBS received as a gift or inheritance retains its qualified status, so using QSBS for lifetime gifting or transfers through trusts may increase tax savings.

Consider potential implications of business formation

Establishing a C corporation to qualify for the QSBS exclusion can have other tax implications beyond QSBS; another type of business entity may be more advantageous.

Coordinated planning is key

Before starting a business, making investments or selling stock, be proactive. Financial and tax professionals can help you decide if the QSBS exclusion is right for you.

FOOTNOTES

1The QSBS exclusion was established as part of Internal Revenue Code (IRC) Section 1202 and is also known as the Section 1202 exclusion.

DISCLOSURE

This document is confidential and may not be copied, reproduced or distributed, in whole or in part, to others at any time without the prior written consent of The Bank of New York Mellon Corporation, its subsidiaries and affiliates (collectively, “BNY Mellon”). The material contained herein is not intended for distribution to, or to be used by, any person or entity in any jurisdiction or country in which distribution or use would be contrary to law or regulation. Except as otherwise permitted herein, distribution of this material to any person other than the person to whom this was originally delivered and to such person’s advisors is unauthorized and any reproduction, in whole or in part, or the divulgence of its contents, without the prior consent of BNY Mellon in each such instance is prohibited.This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.The Bank of New York Mellon, DIFC Branch (the “Authorized Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorized Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE.The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorized by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: One Wall Street, New York, NY 10286, USA.In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, 160 Queen Victoria Street, London, EC4V 4LA. The London Branch is registered in England and Wales with FC No. 005522 and #BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Center, 160 Queen Victoria Street, London EC4V 4LA, which is registered in England No. 1118580 and is authorized and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd.This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and Newfoundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.©2017 The Bank of New York Mellon Corporation. All rights reserved.

Basics of Estate Planning: Wills and Other Essential Documents

Jere Doyle

Your estate plan should include these essential documents to guide your executor, beneficiaries and the court on decisions about your health care and management of your estate, to ensure your wishes are carried out.

Preparing the right estate planning documents is critical to making sure your wishes are carried out when you die or if you become incapacitated. Properly drafted documents ensure that you get the medical treatment and end-of-life care you desire, that your family is cared for and that your assets go to the beneficiaries you choose.

A will is an important part of your estate plan, but prudent preparation doesn’t end there. You should also have a durable power of attorney designating who will manage your affairs if you’re no longer able to do so yourself. Additionally, it’s a good idea to prepare documents that spell out your preferences for medical treatment and end-of-life care in case you’re unable to communicate your wishes.

The Purpose of a Will

Your will is the legal document that states how you want your assets distributed when you die. It becomes legally valid when you “execute” it by signing it in front of witnesses. You may change it at any time, provided you’re legally competent. A will greatly simplifies the process of settling your estate, and allows you to:

  • Name an executor to administer your estate
  • Appoint a guardian for your minor children
  • Pay debts, expenses and taxes, or fund your legacy
  • Specify who will inherit your assets

The Role of Your Executor

Your estate’s executor plays a critical role. He or she:

  • Speaks for you in the probate process
  • Makes sure your assets are properly identified
  • Settles your debts, expenses and taxes
  • Distributes the balance of your estate to your beneficiaries

It’s usually a good idea to give your executor broad administrative powers so that he or she doesn’t have to seek court permission to take action.

The Perils of Passing without a Will

If you die without a will, a probate court will use the laws of your state to determine who inherits your assets. Depending on how those laws are written, the probate court may distribute your assets in ways you wouldn’t have wanted.

Preparing a will lets you choose who will administer your estate. If you die without one, a probate court appoints your executor — and it might be someone you would not have selected. The same holds true for the guardian of your minor children. Without a will, the court decides who cares for them and who supervises their property.

The probate process can be expensive and time-consuming if there is no will to guide the court. In addition, legal and tax problems could arise. For example, without a will, you may lose the opportunity to make inheritance arrangements that avoid estate taxes.

How to Prepare a Will

Your will should be prepared by an attorney who can ensure that it meets your state’s technical requirements. In general, a valid will requires that you:

  • Are competent and of legal age
  • State clearly that the document is your last will
  • Sign the will or, if physically unable to do so, have someone sign the will at your direction, generally in your presence
  • Have two or more eligible individuals witness the signing

In some states, a will is deemed valid if you also prepare a “self-proving affidavit” when you sign it. A self-proving affidavit is a notarized statement, signed in the presence of two or more witnesses, stating that you followed the legal requirements for executing a valid will. With this affidavit, your executor may not need to provide other evidence in court to prove that your will is legally binding.

Protecting Your Estate Before You Pass

Ensuring that your wishes are carried out while you’re alive is just as important as arranging what happens after you die. Several documents can make sure that happens.

Create a Durable Power of Attorney to Manage Your Finances

A durable power of attorney is a legal document naming someone, known as your “attorney-in-fact,” as your financial agent. A durable power of attorney is the easiest and least expensive way to manage your financial affairs if you become incapacitated. Without the document, a prolonged and costly proceeding may be needed to appoint a guardian to manage your affairs.

A durable power of attorney can take effect when the document is properly signed, or it can come into force only when a defined event occurs, such as incapacity. In that case, your attorney-in-fact has authority to handle your finances.

A durable power of attorney can sometimes cause problems and should be considered only a temporary fix. The attorney-in-fact is not supervised, third parties may be unwilling to recognize the durable power of attorney, and when you die, your assets must still go through the probate process.

Document Your Health Care Wishes

Three distinct documents help ensure that your health care wishes are carried out if you are unable to communicate. These documents are particularly helpful to family members, who might otherwise be forced to guess what you want:

  • Health Care Proxy: This document, known as the “Durable Power of Attorney for Health Care,” lets you designate one or more people to make health care decisions for you.
  • HIPAA Authorization: This authorizes your doctors to discuss your medical situation with people you name.
  • A Living Will: This specifies your wishes regarding health care and end-of-life preferences, including whether you want medical personnel to take aggressive measures to keep you alive.

The Importance of Being Prepared

A will, a durable power of attorney, and documents expressing your health care wishes can help to ensure you will be cared for and that your estate will be managed and passed on the in the way you want. Additionally, they can minimize the cost and delay of the probate process. In the next part of our series on the basics of estate planning, you’ll learn the ins and outs of navigating this probate, and how your assets and property may be affected by it.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. ©2016 The Bank of New York Mellon Corporation. All rights reserved.

What Role Does Long/Short Equity Play in a Portfolio?

Charles Ray Sidwell

Though long/short hedge funds have under-performed in recent years, many indicators seem to point toward a new market phase in which they would be well positioned to deliver value in a portfolio.

The underwhelming performance of long/short hedge funds in recent years has led some to question their value as a strategy. While it’s true that performance has been disappointing, it’s important to understand the role that long/short strategies are meant to play in a portfolio and how they can be used most effectively to achieve investment success. We feel strongly that long/short equity is poised to prove its value given the potential changes in the market, and encourage investors to not prematurely abandon the strategy without first looking ahead at what’s coming.

What Are the Benefits of Long/Short Equity?

Given its ability to provide strong, risk-adjusted returns in periods of higher volatility, long/short equity can be useful as a diversifier. Hedge fund managers have the flexibility to limit their overall market exposure by reducing their long positions, or by shorting individual stocks that they expect to underperform.

Historically, long/short equity has been only moderately correlated to U.S. stock and bond markets. This would be a desirable characteristic in a portfolio were interest rates to rise, or were equity markets to fall.

While diversification is perhaps the primary function of long/short equity, it’s important to not overlook the potential they have for generating additional returns. Hedge fund managers can capitalize on opportunities by shorting stock, timing the market through changes in their net exposure, and taking advantage of corporate actions that traditional long-only investors may overlook.

Why Has Long/Short Equity Underperformed in Recent Years?

Since 2009, U.S. stock and bond markets have experienced unusually high returns. Market conditions have rewarded risk-taking, while risk-mitigating strategies like long/short equity have suffered.

It’s important to recognize how unusual these conditions have been. The recent positive performance in U.S. equities, and in particular large cap stocks, has largely been propelled by monetary policy. Stimulus policies like quantitative easing, coupled with declining interest rates, have pushed return-seeking investors into riskier assets. Furthermore, volatility has fallen to near-record lows. These factors have contributed to an optimistic market environment in which lower correlated, risk-mitigating strategies have lagged.

Hedge fund managers have faced significant challenges due to the high correlations in equities since 2009. With everything moving in the same direction, it became difficult to identify opportunities that would generate additional returns. Furthermore, the increased frequency with which investors buy into and sell out of index and ETF products has led to a distortion in the relationship between a company’s fundamentals and its stock price.

However, we caution investors not to give up on long/short equity prematurely. Just as you wouldn’t rely on yesterday’s weather forecast to decide whether or not you need an umbrella tomorrow, we advise focusing on what lies ahead in the markets rather than dwelling on the recent past. Investors who rely too heavily on asset classes that have been strong performers in recent years risk missing their exit when a new market phase begins.

What is the Current Outlook for Long/Short Equity?

We expect this optimism in the market to dissipate somewhat as changing conditions lead to more moderate returns and higher volatility. Simply put, the markets likely cannot continue at their current pace, and with an interest rate hike on the horizon, investors should be looking toward asset classes that can weather the transition.

Furthermore, while equity correlations are still historically high, we’ve recently seen more of a downward trend, which should provide hedge fund managers with more opportunity to add value in their portfolios through stock selection.

We strongly encourage that investors consider long/short equity when seeking better risk- or volatility-adjusted returns in the coming market environment. In particular, we believe that long/short equity can fill this role better than diversification across traditional asset classes, due to its more moderate correlation to traditional stocks.

While there will be periods where this return relationship breaks down, we feel it’s important to focus on the long-term benefit of long/short equity.

Why We’re Confident in Long/Short Equity

We’re continuing to have a slight overweight to long/short equity in our model portfolios, both to complement our long equity position and to offset our underweight fixed income position. We’re confident that this is a sound strategy in spite of the recent underperformance in long/short equity for two important reasons.

First, when the disappointing returns of the last three years are viewed into a wider context, the picture changes dramatically. Historically, long/short strategies have offered attractive returns with lower risk. Over the last 20 years, the HFRI Equity Hedge Index has outperformed the S&P 500 — and done so with 40% less volatility.

Second, long/short equity’s resilience in periods of higher volatility seems tailor made for what we expect for the markets going forward. The risk-mitigating characteristics offer the potential for achieving higher returns in what could be an increasingly volatile market, especially considering the various uncertainties that still loom on the horizon.

Conclusion

Many indicators seem to point toward a new market phase in which long/short strategies would be poised to deliver value in a portfolio. While other considerations, such as investment goals, risk tolerance, the need for liquidity and taxes must always factor into any decisions about how assets are allocated, investors who have found success with traditional asset classes since 2009 would be wise to consider how long/short equity could fit into their portfolio, and those who are considering selling  the long/short positions they currently hold may want to reconsider in light of the expected shift in the market environment.

DISCLOSURE

This document is confidential and may not be copied, reproduced or distributed, in whole or in part, to others at any time without the prior written consent of The Bank of New York Mellon Corporation, its subsidiaries and affiliates (collectively, “BNY Mellon”). The material contained herein is not intended for distribution to, or to be used by, any person or entity in any jurisdiction or country in which distribution or use would be contrary to law or regulation. Except as otherwise permitted herein, distribution of this material to any person other than the person to whom this was originally delivered and to such person’s advisors is unauthorized and any reproduction, in whole or in part, or the divulgence of its contents, without the prior consent of BNY Mellon in each such instance is prohibited.This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.The Bank of New York Mellon, Hong Kong branch is an authorized institution within the meaning of the Banking Ordinance (Cap.155 of the Laws of Hong Kong) and a registered institution (CE No. AIG365) under the Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong) carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.The Bank of New York Mellon, DIFC Branch (the “Authorized Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorized Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Center, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorized by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: One Wall Street, New York, NY 10286, USA.In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, 160 Queen Victoria Street, London, EC4V 4LA. The London Branch is registered in England and Wales with FC No. 005522 and #BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Center, 160 Queen Victoria Street, London EC4V 4LA, which is registered in England No. 1118580 and is authorized and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd.This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and New Foundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. BNY Mellon, National Association is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. BNY Mellon is not licensed to conduct investment business by the Bermuda Monetary Authority (the “BMA”) and the BMA does not accept any responsibility for the accuracy or correctness of any of the statements made or advice expressed herein. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.©2016 The Bank of New York Mellon Corporation. All rights reserved.

 

Basics of Estate Planning: Understanding Estate Taxes

Jere Doyle

Estate taxes can create headaches for wealthy families. Fortunately you can take steps to minimize estate taxes or eliminate them altogether.

If you want to be sure that you’re able to pass on the bulk of your assets to your spouse or children, it’s essential that you fully understand how estate taxes, both at the federal and state levels, may affect your plans. While the rules may seem complex, there are several useful strategies that can be used to minimize taxes on your estate — or eliminate them altogether.

What is the Federal Estate Tax?

The federal estate tax is an excise tax imposed on the transfer of your assets at death. It’s based on your “gross estate,” that is, the fair market value of all the assets held in your name, including real estate, stocks, bonds, cash, life insurance, retirement benefits, business interests and other property.

Most estates aren’t affected by the tax, thanks to an exemption written into the tax law. In 2017, estates with a value of $5.49 million or less do not have to pay the federal estate tax. The exemption amount is adjusted annually to compensate for inflation. If the value of your estate exceeds the exemption amount, however, your assets (minus the amount covered by the exemption) will be subject to a flat 40% tax. This tax must be paid by your estate within nine months of your death.

This exemption amount also pertains to two other federal taxes: the gift tax, which is levied on wealth you transfer during your lifetime, and the generation-skipping tax on transfers to grandchildren or great-grandchildren. Using the exemption to lower gift or generation-skipping taxes reduces the size of the exemption that you can apply to your estate when you pass away.

State Estate & Inheritance Taxes

Some states impose their own version of the estate tax, an inheritance tax, or both. Rates vary from state to state. Inheritance taxes are different from estate taxes in that they are not levied on your estate at death. Instead, each of your beneficiaries must separately pay an inheritance tax based on a percentage of the value of the property you leave them, above the exemption level.

Reducing Your Estate Tax Bill with Deductions

Two major deductions can reduce or eliminate your estate tax: the marital deduction and the charitable deduction. Your estate can also deduct certain expenses, such as professional fees and administrative costs, from the assets used to figure your tax bill.

The Marital Deduction

The law gives you an unlimited deduction for whatever assets you leave to your spouse, as long as he or she is a U.S. citizen. Taxes on your estate are deferred until your spouse passes away. It’s possible to avoid federal estate taxes completely by leaving your entire estate to your spouse, if you so desire.

The marital deduction has several advantages:

  1. A larger nest egg. Avoiding the estate tax gives your spouse more money to invest or put toward living expenses.
  2. Hard-to-sell assets can be kept. If the estate tax bill is large, your spouse could be forced to sell assets to pay it. That can be a real problem with illiquid assets like businesses, farms, real estate or art. The marital deduction makes such sales unnecessary.
  3. More opportunity for distributing your assets. The IRS allows individuals to make tax-free gifts of up to $14,000 (as of 2016) each year to whomever they wish. Since the marital deduction keeps your estate intact, your spouse has more resources to give out as gifts after you’re gone.

Non-Citizen Spouses

You can’t use the marital deduction if your spouse is not a U.S. citizen. However, there is an alternative that allows you to leave your estate to your spouse without paying the estate tax: a qualified domestic trust. If you set up a qualified domestic trust, the estate tax won’t be owed until your non-citizen spouse dies or withdraws assets from it. For more on this, read part one of our series on wealth planning for multinational families.

The Charitable Deduction

Like the marital deduction, the charitable deduction is unlimited. Donations that your estate makes to charity are subtracted from the value of your assets. Unlike the marital deduction, the charitable deduction doesn’t merely postpone tax liability — it reduces it permanently. That creates a strong incentive to leave part of your estate to causes that you care about.

Portability: Passing on Your Exemption

The $5.49 million combined exemption from federal estate and gift taxes is considered “portable.” In other words, if you fail to use the entire exemption, your executor can transfer any unused amount to your spouse on your death. Your spouse can then apply this remaining exemption to his or her own estate tax bill.

This is a recent change. Before 2011, any part of the exemption that was not used was lost. Be aware, though, that the generation-skipping tax exemption does not have this portability feature. Your spouse can’t apply your unused exemption to this tax. In addition, exemptions for state estate taxes are generally not portable.

Portability was designed to simplify estate planning for smaller estates, but it has made the estate planning process more complicated. It’s up to you to determine whether relying on portability or creating a trust is the best way to minimize the estate tax burden. Seek professional advice on the best tax strategy for your estate.

Next: Using Trusts to Transfer Assets

For wealthy individuals interested in leaving a legacy for their families, the estate tax can be a challenging hurdle. But it’s possible to minimize or entirely avoid the impact of the tax with smart planning and an efficient use of the available deductions. Beyond that, there are also several kinds of trusts that can be used to transfer assets tax free. These methods also often have the advantage of allowing you to avoid probate. In the next part of the estate planning series, we’ll take a closer look at these trusts, and how you can best use them to achieve your wealth transfer goals.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2016 The Bank of New York Mellon Corporation. All rights reserved

Retirement Planning from All Angles

Planning for retirement isn’t as simple as it once was. But with a solid plan and a clear understanding of the opportunities and challenges ahead, you can set yourself up for success.

OVERVIEW

When it comes to retirement planning, it’s not enough to simply “set it and forget it” anymore. To achieve your long-term goals, you’ll need a flexible plan that incorporates your needs and is ready for the potential challenges that lay ahead. We call this “objective-driven investing.”

ANALYSIS

As life gets more costly and complicated, most people are saving less, or putting off saving altogether. Here are some of the most significant challenges facing retirement savers today:

Cultural and Economic Changes Have Transformed Retirement Planning

When people stayed in one place or in one job for most of their careers and could rely on a pension plan for income, retirement planning was relatively simple. Today, that level of stability is hard to come by.

Saving Has Become Harder Due to Tax Increases

In the U.S., legislation passed in 2013 that raised long-term capital gains taxes on higher-income taxpayers by 59%, which affected many sources of investment income, including interest, dividends and capital gains.

Low Interest Rates Have Negatively Impacted Returns on Fixed Income Investments

Rates have been at historic lows for the last few years and uncertainty over U.S. Federal Reserve policy has had a dramatic impact on the total returns for these investments.

Global Unrest Continues to Weigh on the Markets and Investors’ psyches

Turmoil in the Middle East and elsewhere has resulted in increased volatility, making it difficult to stay focused on retirement planning and long-term goals.

KEY DATA

$500K

What the AARP estimates a healthy 50-year old couple will pay in health care costs if they retire at 65.

80-90

Life expectancy for a healthy person in the developed world today.

59%

How much capital gains tax rates for higher income taxpayers increased in 2013.

IMPLICATIONS

The key to addressing these challenges is remaining open to new ideas

Know what retirement is really going to cost you

People may need as much, or even more, money in retirement than they did when they were working. Make sure you continually refresh your expectations.

Understand that debt can be an asset

In a low-interest or rising-tax environment, it may be wiser to borrow funds to pay expenses rather than to sell assets to pay them immediately.

Align your investment strategy with your goals

Any good plan begins with a thorough understanding of your needs and wants, so you can evaluate potential trade-offs appropriately.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

Pursuant to IRS Circular 230, we inform you that any tax information contained in this communication is not intended as tax advice and is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. ©2016 The Bank of New York Mellon Corporation. All rights reserved.

What’s the Difference Between a Traditional and a Roth IRA?

Both traditional and Roth IRAs offer tax advantages that can have a substantial impact on your retirement savings, especially if contributions are made over a long period of time. But in order to figure out which account is right for you, you first have to understand how they differ from one another.

First Things First: How Much Can You Contribute?

If you’re under age 50, you may be eligible to contribute up to $5,500 to traditional and Roth IRAs. Those age 50 or older may contribute an additional $1,000 catch-up contribution, bringing heir maximum contribution up to $6,500.

It’s important to note that it’s a combined limit. So you can’t contribute $5,500 (or $6,500) per account, it’s $5,500 (or $6,500) total for all your traditional and Roth IRAs combined.

Crucial Questions: How Old Are You and How Much Do You Make?

To contribute to a traditional IRA, you must be under the age of 70 ½ and earning taxable income. Roth IRAs, on the other hand, do not have any age restrictions. As long as you are earning taxable income, and meet certain income requirements, you can contribute.

How much money you earn determines how much you can contribute to a Roth IRA. In 2017, single filers must have a modified adjusted gross income (MAGI) of less than $118,000 to make full contributions. If your income falls between $118,000 and $133,000, you can contribute a reduced amount. Single filers with a MAGI of $133,000 or more cannot contribute to a Roth IRA at all.

Married couples filing jointly must have a MAGI of $185,000 or less to make full Roth IRA contributions. Contributions are limited for married couples with income at or over $186,000. Married couples who have a combined MAGI of $196,000 and above are not allowed to contribute at all.

If you’re single and covered by an employer-sponsored retirement plan, like a 401(k), the deduction you can claim for a traditional IRA contribution is reduced once your MAGI exceeds $61,000, then is eliminated at $71,000. For married couples filing jointly, the deduction is reduced once your MAGI exceeds $98,000, and is eliminated at $118,000.

Married couples without an employer-sponsored retirement plan are not subject to income limitations on tax-deductible contributions. However, if you are not covered by an employer-sponsored plan, but your spouse is, your contribution is fully deductible only when your combined income is less than or equal to $186,000, partially deductible for incomes below $196,000 and not deductible for incomes beyond that.

The Key Difference: Pay Taxes Now or Pay Taxes Later?

With traditional IRAs, taxes are paid upon withdrawal. Your contributions are generally tax deductible up to the maximum annual limit, and normal income tax rates apply. While Roth IRA contributions are not tax deductible, withdrawals are tax free provided you’re over the age of 59½ or meet some of the special criteria detailed in the next section.

If you think that your income and, therefore, your income tax, is likely to be higher as you approach retirement than it is now, you might prefer a Roth IRA. If you think that your income will be lower as you approach retirement, a traditional IRA may offer more of an advantage.

Happy Half Birthday: The Rules for Withdrawals

Once you reach age 59½, you can withdraw money from both traditional and Roth IRAs without running afoul of the 10% early withdrawal tax penalty.

There are situations where you can withdraw funds before the age of 59½ without incurring any tax penalties. This includes, but is not limited to, situations in which you:

  • Intend to pay for college tuition for you or a dependent
  • Intend to pay for a qualified first-time home-purchase expense
  • Become disabled
  • Need to pay for qualified health insurance premiums and medical expenses

On top of all that, you can’t take a tax-free distribution from a Roth IRA until five years have passed since your first contribution.

According to IRS rules, you’re generally required to start taking required minimum distributions (RMDs) from traditional IRAs when you reach age 70½, on or before April 1 of the following year. Failure to do so will result in an excise tax on the amount that should have been distributed.

You’re not required to take distributions from Roth IRAs, however. You can leave the funds in the Roth IRA throughout your lifetime and other income tax deferral opportunities may be available to your beneficiaries.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. This reflects the law as of June 14, 2016. Such laws may change in the future. ©2016 The Bank of New York Mellon Corporation. All rights reserved.

What’s Better: Buying a Home With Cash, or Taking Out a Mortgage?

Are you thinking of paying cash up front for your next home? If so, you may want to reconsider. Taking out a mortgage can actually be more beneficial for your overall financial situation.

If you’re in the market for a new home and are considering paying for it in cash instead of taking out a mortgage, you may want to think twice before getting out your checkbook. Paying in cash may expose you to risks you hadn’t considered, and taking out a mortgage might be more beneficial than you realize.

You May Need Cash for an Emergency

Tying up your cash in the purchase of a house could present a challenge in the event of an emergency. It’s much more difficult to sell your house quickly than it is to pull money out of other investments, such as mutual funds or bonds. There is also no guarantee that you could sell the house for what you need — or at all, depending on the strength or weakness of the housing market in your area. Furthermore, the time required to complete the sale of a house can be lengthy, which makes it a poor option for fulfilling immediate needs in an emergency. There’s also the emotional aspect to consider. Most people would likely consider selling their home to be a last resort or worst case scenario, even in the event of an emergency. Selling other investments that you’re not as emotionally attached to may be easier.

In some cases, you could tap into your home equity for a loan. However, if you’re in a tough financial spot — after a job loss or a business setback, for instance — banks may be less willing to lend you money. These obstacles would be much easier to overcome if, instead of paying for your home entirely in cash, you made a sizable down payment and invested the rest of your money in assets that are more easily converted to cash.

There Are Better Ways to Use Your Cash

Mortgage financing also offers tax benefits that could minimize the overall cost of borrowing. The interest paid on the mortgage for your primary residence is tax deductible up to $1 million; home equity loan interest is deductible up to $100,000.

Once you factor in the savings from the mortgage interest deduction, a pre-tax interest rate of 3% is reduced to 1.81% after tax (assuming a top federal income tax rate of 39.6%, as of 2017). In addition, in New York, California, and 30 other U.S. states, mortgage interest is also deductible on state income tax returns.

There is a caveat that’s worth mentioning: If you don’t take out a mortgage at the time of your home purchase, or within 90 days of it, you won’t be able to deduct your mortgage interest, unless you’re using the money to directly improve your home. If you think you may ever want a mortgage, you should make that decision sooner rather than later.

If you do decide to take out a mortgage, you can use the rest of your cash for other investments to grow your total portfolio. For example, suppose that instead of paying 100% cash for a home, you put 20% down, get a mortgage to finance the home purchase, and invest the remainder of the cash in a diversified portfolio that averages at least a 4–5% return. Your investment returns may offset the cost of the mortgage debt and offer the potential for additional growth.

In the meantime, as you pay down your mortgage debt you’re building equity in your home. That equity becomes an asset that you can exchange for cash — as long as it remains positive. You can calculate your equity by subtracting your loan balance from the value of your home. If you end up with a negative number, the home is worth less than what you owe on it. However, assuming your home is worth more than what you owe, that difference (the equity) is the value that you will receive if you sell your house. If you’re interested in buying a new home, you can use the equity in your current home to help fund that purchase, which allows you to borrow less. Or, if you ever need cash, you can borrow against the equity in your home with a home equity loan.

Buy Low and Sell High

Investing by using borrowed funds — as through a mortgage — can boost potential gains. For instance, if you purchased a $1.25 million home with a $250,000 down payment, and five years later the property is worth $1.5 million, you’d be looking at a 100% return on your investment, less interest and other fees. Of course, the leverage offered by a home mortgage is most effective when prices are expected to go up.

This being the case, it should be noted that the U.S. housing market does seem very attractive compared to other investments over long periods of time. In an economy that we believe will continue to see moderate growth and relatively low inflation and interest rates, a home is an appealing asset.

Experience the Upside of Debt

The potential upside associated with taking out a mortgage shows that debt isn’t always necessarily bad. When used properly, it can help you generate income and increase your total net worth. In addition, a mortgage is also one of the most inexpensive kinds of debt. Interest rates are low and federal and state tax breaks make it possible for you to pay even less after taking the mortgage deduction. Instead of putting all of your cash into the home purchase, you can invest it wisely in long-term, diversified assets; and in the event of an emergency, you’ll have easier access to cash if it’s not all tied up in your home. There are also advantages of leveraging a good investment by borrowing to buy a home that may appreciate in value. With a little bit of forethought and some careful planning, you can use mortgage financing to turn the purchase of a great asset into an opportunity to strengthen your overall financial situation.

DISCLOSURE

The information provided is for illustrative/educational purposes only. All investment strategies referenced in this material come with investment risks, including loss of value and/or loss of anticipated income. Past performance does not guarantee future results. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
Pursuant to IRS Circular 230, we inform you that any tax information contained in this communication is not intended as tax advice and is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Mortgage services, provided by BNY Mellon, N.A., are subject to credit approval.

 

Managing Your Trusts in Divorce

Joan Crain

Your trusts may not seem like a high priority when you’re getting a divorce, but it’s important to thoroughly review your plan with your advisors to avoid any unforeseen problems.

If you’re in the midst of a divorce settlement, it’s natural to focus on dividing property and maintaining income. Too often, wealth “planning” ends with cancelling joint credit cards and closing joint checking accounts — rarely does it involve a thorough review of other important estate planning elements, like trusts.

Dissolving your marriage is likely to change how you want to distribute your assets and dispose of your estate. A vital step in any divorce is updating relevant documents to reflect your new circumstances.

A number of points should be kept in mind when revising your trusts.

  • Legal considerations. State law may impose requirements and limitations on how trusts may be treated in a divorce. Provisions favoring one party could be revoked.
  • Minor heirs. Trusts may need modification to protect the interests of minor heirs.
  • Official designations. You should revise trust documents if you don’t want your former spouse to continue as your trustee.

It’s important to address these issues at the time of divorce, rather than risk the consequences of overlooking them.

Family Trusts: An Evolving Area of Law

Family trusts raise several issues that should be addressed in a divorce. In many states, laws governing the disposition of trusts in a divorce are changing, so it’s important to get legal advice.

Gifted and Inherited Assets

Treatment of gifted and inherited assets is often a charged issue in a divorce. Many people going through divorce believe that what they’ve received from family members is theirs alone. They are therefore surprised to discover they may have to share those assets with a former spouse. If gifted or inherited assets were commingled or used to pay your living expenses during marriage, both parties may have a claim. What’s more, courts in many states have broad discretion to consider those assets when determining settlement terms. You may be expected to pay spousal or child support based on the assets.

Spendthrift Provisions

Trusts commonly have spendthrift provisions — protections for beneficiaries that shield assets from creditors. Increasingly though, state laws are changing to allow former spouses and children to attach or make other claims on trust assets.

Future Inheritances

Courts generally don’t consider future or contingent inheritances as marital assets when determining divorce settlements. Nonetheless, such inheritances can affect the financial picture of the divorcing spouses. Your spouse’s attorney may ask to see your parents’ estate plans — even if they are still alive.

Charitable Remainder Trusts

Charitable remainder trusts provide an income tax deduction and defer capital gains taxes, which makes them useful for holding securities that have appreciated significantly. For married couples, these trusts often provide lifetime payouts until the second spouse dies. But if the couple divorces, they may face unpleasant surprises. When the person who funded the trust dies, the former spouse may have to pay federal income taxes on their interest in the trust, and the grantor’s estate may owe estate taxes.

However, the IRS has issued private letter rulings that provide a remedy. While private letter rulings may not be relied upon by taxpayers other than the one who requested the ruling, they do provide an indication of how the IRS may treat a specific transaction. And, in the case of charitable remainder trusts, they indicate that the simplest solution in divorce may be to divide the trust in two. Each ex-spouse receives a life interest in a new trust, with the remainder going to the original charitable recipient. Gift, income and estate taxes are treated the same as in the original trust.

Trusts Created During Divorce

Sometimes it’s useful to create a trust during the divorce process. For instance, if you have broken off contact with your former spouse, a support trust may be preferable to periodic alimony payments. In such plans, assets are segregated and supervised by an independent trustee, guaranteeing regular support payments. However, support trusts may require a large initial contribution, which makes them impractical in many cases.

Under federal tax law, support trusts are treated similarly to other trusts. For example, the same conduit rules for distributions from non-grantor trusts continue to apply. As the trust makes distributions from income, the recipient must pay income taxes. Any distributions above the trust’s net income are tax free. Any net income retained or accumulated by the trust is taxed at the trust level.

For grantor trusts, on the other hand, the grantor typically is subject to taxation on all of the taxable income, regardless of any distributions. Fortunately, there is a special exception for divorce that requires the former spouse to be subject to tax on the income when receiving distributions from the trust, rather than the grantor.

If you fund a support trust, you don’t get an income tax deduction, but the trust income that isn’t distributed to you isn’t included on your personal tax return. However, if you have a large current or carry forward tax loss, it may make sense to structure the support trust as a grantor trust. You are then taxed on the trust’s income and capital gains, but the tax loss offsets some of this income.

Trusts can also be created during divorce proceedings for estate planning purposes. For instance, a divorcing couple can set up an irrevocable trust to leave funds for heirs. Such an arrangement may make sense if you worry that your former spouse won’t provide enough resources for your children.

In some situations, a grantor retained annuity trust (GRAT) may be a winning strategy. These are irrevocable trusts created for a specified period that can reduce tax liabilities when assets are transferred to heirs. It may be possible to set up a GRAT with limited gift tax consequences. An annuity is then paid annually for the life of the trust. When the trust expires, the beneficiary receives assets free of any gift or estate taxes.

Divorcing a non-citizen may raise a special issue. Significant gifts and inheritances given to a non-citizen spouse are subject to a transfer tax unless a qualified domestic trust (QDOT) has been established, even if the spouse is a long-time U.S. resident. However, in a divorce, funds potentially may be transferred tax-free to a non-citizen spouse. This is an important advantage that can be helpful when negotiating settlement terms.

Don’t Forget Your Trusts

Your trusts may not seem like a high priority when you are dissolving a marriage, but it’s important to thoroughly review your plan with your legal and wealth management advisors during divorce proceedings. You should make sure your documents are up to date and that they reflect your wishes and your new status. If you overlook them when negotiating a property settlement, you may be vulnerable to unpleasant surprises at tax time, when trusts make distributions and when estates are settled. Addressing these issues in a timely way will prevent headaches down the road.

DISCLAIMER

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2016 The Bank of New York Mellon Corporation. All rights reserved.

Succession Planning For Second Homes

If you’ve ever considered purchasing a second home, now might be the time to act. Historically low interest rates make this an opportune time to borrow inexpensively.

The labor and housing markets are continuing to improve, but the market’s shaky start to 2016 has caused the Federal Reserve to slow the pace of its plan for a series of interest rate hikes this year. As a result, interest rates remain at historically low levels — for now. So, if you have always wanted to own a second home, now may be an opportune time to take advantage of relatively low financing options. Depending on what you want to accomplish with your second home, there are tax and planning strategies to consider.

To Everything There is a Season…

A second home can provide a place for an extended family gathering. It can be a future retirement home in a more favorable tax state. Or, it can serve as a recreational retreat for favorite family activities. Whether seeking sun in the sand, fishing and boating at the lake, or swooshing down the slopes in the winter, the decision to purchase a vacation property involves a number of considerations. In addition to understanding your family’s motives for owning a second home — vacation property, retirement home, investment opportunity — you should also consider location, type of home and the impact on your financial situation when thinking about fulfilling this dream.

A Time to Buy…

If you have decided that owning a second home is one of your goals, and that you’re ready to take the next step, now may be a particularly good time to do so. A number of factors make buying a second home now desirable.

Prices Are Down and Sales Are Up

According to a National Association of Realtors (NAR) 2015 Investment and Vacation Home Buyers Survey, the median sales price of the typical vacation home is down approximately 11.1% from the previous year.1 Conversely, the same NAR survey reported a 57.4% increase in vacation home sales during the same time period. Additionally, with a number of popular retirement areas of the United States still recovering from the overspeculation of the housing boom, there is an even better pricing opportunity for many properties.

Mortgage Rates Remain Attractive

While many people expected interest rates to move higher in early 2015, the Fed kept its zero interest rate policy unchanged for most of the year, with rates rising only 0.25% in mid-December. Although the Fed has indicated plans to gradually increase rates in 2016, the market’s expectations are for a slower pace than projected. Therefore, even if you had the ability to make a cash purchase, a low-interest mortgage may be a better financial strategy, often resulting in income tax savings.

The Tax Code is Still Friendly

When thinking of acquiring a second home, understanding the tax code can help. A mortgage on a secondary residence is tax deductible, just as it is on a primary home. For your first and second homes combined, you can deduct all of the interest you pay, up to $1.1 million, for acquisition or improvement indebtedness. You can also deduct property taxes on your second home, but generally can’t write off other expenses like utilities.

A Time to Rent…

For many, owning a vacation home can be a dream come true. If you decide to rent the cottage when unoccupied, it can also offer an additional stream of income. The extra money in your pocket however, may come at a price if you fail to consult with a trusted accountant.

In addition to property management considerations, there are tax implications to renting your vacation home. Different tax rules apply when you rent the vacation home, depending on the breakdown of personal and rental use. Simply put, if you rent your home for 14 or fewer days during the year, you don’t have to pay tax on the income. Alternatively, if you rent your house for more than 14 days, you must report all of the rental income. You can deduct rental expenses, but you need to accurately allocate costs between the amount of personal and rental use.

A Time to Sell…

Once a second home is acquired, many investors consider it like a family heirloom — hoping it will stay in the family, grow in value and pass to future generations indefinitely. However, that may not always be the case and you may decide it’s time to sell.

The tax code that allows you to take up to $500,000 profit ($250,000 for single taxpayers) tax free on the sale of a primary residence does not apply if you sell your second home. However, if you make your second home your primary residence for two or more years prior to selling it, you may garner some tax benefits. Following the Housing and Economic Recovery Act of 2008, the IRS uses a ratio of the years the home was occupied as a primary residence after Jan. 1, 2009, versus the years it was rented after this same time period, to calculate the amount of capital gains that would be excluded from the sale.

1031 Exchanges

Also known as a like-kind exchange or tax-deferred exchange, 1031 exchanges involve a seller swapping a rental or investment property for another rental or investment property of equal or greater value, on a tax-deferred basis. You may be able to avoid or defer paying capital gains tax on the exchange, provided the property is considered a rental property and not a personal-use residence.

A Time to Transfer…

Your family cottage is one of your most cherished assets and not only has it grown in economic value, it continues to grow in sentimental value. Therefore, proper and early planning is essential to keeping the cottage in the family and ensuring a smooth and tax-efficient transition to the kids and grandkids. It is also important to acknowledge that your wishes and desires may not be shared by the children. As a result, frequent dialogue with family members is the first step to understanding each person’s long-term goals and views on the second home.

Once you have established a basic plan for your overall estate, including your primary residence, you should work with your accountant or attorney to review options for dealing with your second home. There are many choices for passing the property on to future generations. However, some are more complex than others and depend on variable factors such as the number of individuals in the next generation and their interest in the property, your charitable intentions and your time horizon.

Gifts—Outright or to Irrevocable Trusts

Gifting the property to the next generation is fairly simple, especially if taxes are not a concern. However, if your second home represents a significant percentage of your assets, gift and estate taxes may be incurred upon the transfer. A transfer at death gets a “stepped-up basis,” which means that when the heirs sell the home, only the appreciation, if any, from the date of inheritance is subject to capital gains tax. There is however, a $5.34 million federal gift exemption. Amounts above that are subject to gift and estate taxes.

Qualified Personal Residence Trust (QPRT)

Another option is to transfer your property into an irrevocable qualified personal residence trust (QPRT). Sanctioned by the Internal Revenue Code, QPRTs offer several tax advantages, especially if you expect a federal estate tax obligation upon death. Using a QPRT, you make a taxable gift of your vacation home to your children or other beneficiaries but retain the right to live in the home for a set number of years. If you survive the trust term, the trust terminates and the cottage passes to the beneficiaries, free of any additional federal or state estate or gift taxes. One possible concern with this option is the possibility that if you fail to survive the term of the trust, the property will revert to your estate at its then fair-market value. In this scenario, you would lose the estate-reducing benefit of the QPRT, essentially voiding the entire transaction.

The benefits of a QPRT are only realized if the donor survives the term of the trust; therefore, it is critical to carefully structure the trust around life expectancy. Like many estate planning tools, a qualified personal residence trust may provide significant tax savings but can be complicated to execute. Individuals should consult with their attorney and other advisors to determine whether a QPRT is an effective strategy for their particular situation.

Limited Liability Company (LLC) or Family Limited Partnership (FLP)

Through the creation of a limited liability company (LLC) or family limited partnership (FLP), you contribute your property and assign a manager or general partner to handle maintenance and property management activities. Acting as general partner of the LLC or FLP, you can retain some control over the property. Use of this strategy also allows gifting of fractional interests in the home to the next generation, which may even qualify for the annual gift tax exclusion.

A Time to Act…

While a number of estate planning strategies exist for handling the transfer of a second home, none can be implemented without first deciding to take action. Interest rates are still near historic lows; though the Fed has clearly indicated its plan to begin to normalize interest rates later this year. With mortgage rates expected to remain relatively low near term, it is an opportune time to borrow relatively inexpensively and at a potentially tax-advantaged interest rate. With home prices down and inventory still available, that cottage can be in your family in a matter of months.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. ©2016 The Bank of New York Mellon Corporation. All rights reserved.

5 Reasons Families Fight Over Wealth

Donna LeBlanc

We’ve identified five common dynamics that cause family disagreements and disputes. Understanding them is key to mitigating the problems that can develop into a full-blown family breakdown.

When families feud, nobody wins.

What causes reasonable human beings to defy the advice of trusted advisors and lose sight of the costs of family fighting, not only in terms of money but vital family relationships and peace of mind? A best-case scenario is exemplified in the Wall Street Journal article, “Inside the Breakup of the Pritzker Empire.” In that situation, the family experienced years of fighting and lawsuits but was ultimately able to successfully navigate the succession and keep the companies intact. In fact, the value of the businesses doubled to $30 billion by 2011, a decade after the restructuring.

The critical ingredient for a positive outcome in the Pritzker case was that skilled advisors provided a guiding influence to manage the intense emotions and competing needs of the beneficiaries.

“By resisting the impulse to dispose of the assets in a fire sale to quell a family feud, people involved in the process kept the companies intact and helped boost their value,” Tom Pritzker said. Yet, all too often we have seen the opposite happen, where family differences can derail the process and destroy a family’s legacy.

We have identified five common dynamics that cause family disagreements and disputes that can develop into a full-blown family breakdown.

The Five Feudal Dynamics

Some advisors tend to categorize emotional issues as “soft” issues, when in fact they are critical. It is imperative the industry reframes “soft” issues as entirely relevant, front-end problems. It is extremely important that advisors and their clients are comfortable navigating strong human emotion, from rage and bullying to guilt and martyrdom.

Family feuding takes many forms and can be looked at through several different lenses, but for the purposes of this article we’ll look at family feuding as it relates to the adult siblings settling the estate.

1. The desire to “win” at any cost

Wanting to win means one family member feels right, so someone else has to be wrong. Winning is the only goal, yet it is often a Pyrrhic victory. In one situation, a woman lamented that she would have to share her inheritance with her father’s second family.

“I would rather spend all the money in legal battles than let them get any of it. I don’t care how bad I feel, I have to win. If I give in, I lose, and I just can’t let that happen.”

Although the woman’s response was somewhat understandable, she failed to realize the consequences to her own financial health. By seeking to win at any cost, she was throwing away her own inheritance.

2. A parent’s need to “punish”

Some adult siblings never forget lifelong squabbles or rejection. Often these problems are caused by parental neglect or favoritism.

Consider the case of “Ben,” who never felt accepted by his father. He had always been his mom’s favorite. In a way, his mom preferred him to his dad. So, when Ben got older, his father waged a war of ongoing criticism. Holidays were nightmares for Ben.

Ten years later, Ben was left out of the estate. His dad left his money to Ben’s two older siblings. Their mom had passed away some years earlier.

The siblings fought it out in court. The estate, which began at $75 million, dwindled to $35 million after legal costs.

3. The fear of losing perceived gains

Often, family possessions take on heightened emotional value and become the focal point of a family’s battle. In some cases, the actual value of these items — beyond sentimental importance — is relatively modest. In other cases, millions could be at stake.

In one scenario, siblings sought to hide millions in jewelry from the Internal Revenue Service (IRS) after their mother’s death. Fighting erupted over who would get the mother’s wedding ring. Then the brother gave the ring to his wife, triggering a family meltdown in the trustee’s office. The trustee, who wasn’t aware of the plan, filed an amended tax return and the siblings ended up paying steep fines and penalties. In the family’s desire to hang onto the jewelry they ended up paying dearly.

In another family, the siblings were divided over whether to sell $120 million in stock that their grandfather had purchased for pennies on the dollar back in the 1920s. Two siblings wanted to hold on to the shares, and two wanted to sell. The dispute escalated, with each side rigid in their beliefs. Their advisors encouraged the family to begin to sell to reduce the concentrated position, but no amount of discussion could break the stalemate. Ultimately a legal battle ensued, the stock fell in value and the family lost 95% of their money.

4. The desire to be “right”

There may be two sides to every argument, but when families fight, both sides feel they are right. Adult siblings may feel the need to be right at any cost, or they may feel a certain moral superiority. In either case, the desire to be “right” will make the stakes go up considerably.

In one situation, an aunt who was the trustee for her late parents’ estate didn’t approve of her niece’s lifestyle. Even though the niece was named in the will, the aunt tried to prevent the niece from inheriting. The niece sued, ultimately receiving her share of the estate, but the court case cost thousands of dollars and the two never spoke again.

In another family, the father was an entrepreneur who had created a business worth $250 million. He had three adult children with his first wife and a 12-year- old daughter with his second, younger wife. After he passed away it became necessary to sell the business to distribute the assets.The families sought qualified appraisers yet continued to stalemate over the price. Feuding between the siblings and two families became so intense that forward movement was impossible.

One side wanted to take the bid, while the other side wanted to get more. Feuding erupted, communications ground to a halt and everyone hired their own legal counsel. Both families watched as the fees mounted and the value of the business diminished until ultimately it was sold off for its parts.

In an attempt to be “right,” both sides lost sight of what they were losing in the battle. For years after, each side blamed the other for the outcome, never seeing they both held some responsibility.

5. A sense of entitlement

In many families, the children of first generation wealth can be inadvertently cast with a profound sense of entitlement. The benefactors are often self-made men and women who overcame hardships growing up. Incredibly focused and self-motivated, they want to provide a better life for their families and descendants. The result is second and third generations are raised in what is sometimes called a “luxury bubble.” These younger family members may be more likely to want to rely on the family wealth rather than build their own careers.

Consider the case of “Jane,” the great-grandchild of a cyber mogul. She has been feuding with her sister for 25 years. Her sister has two grown daughters. Jane never married and has no descendants, so she knows that when she dies, the joint trust funds will be distributed to her sister’s children. Jane, it would appear, has been determined to spend liberally, going through over $200,000 a month. She is waging her family feud through the trustee, whom she approaches regularly for an increase in her monthly disbursement.

Preventing Family Breakdowns

An empowered advisor can play a crucial role in preventing a family breakdown. It requires, however, a deep understanding of the relationship dynamics involved and a toolkit of sophisticated defusion techniques that can help create the sense that everyone’s opinions have been heard and that their needs can be addressed.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

©2016 The Bank of New York Mellon Corporation. All rights reserved.

Preserving Your Family Legacy With Strategic Philanthropy

Avery Tucker Fontaine

We’ll show you how establishing a strategic, flexible and functional approach to philanthropy can help ensure long-term family unity and legacy preservation.

Long seen as the exclusive purview of the ultra-high net worth client, strategic philanthropy is now a mainstream concept. For those families and individuals involved in philanthropy, even at modest asset levels, conversations between donors and recipients are changing dramatically. Families are evolving in how they view their philanthropic efforts and goals, as they seek to have more of an impact on the causes that are important to them. Establishing a strategic, flexible and functional approach to philanthropy is also essential for long-term family unity and legacy preservation. An experienced wealth manager can assist you in developing a plan that puts your philanthropic vision into action and helps your family achieve its goals.

The Evolution of Philanthropy

Philanthropy has grown in both size and scope since the 1970s. Total philanthropic giving in the United States stands at $373 billion annually (as of 2015), compared to $125 billion 40 years ago. Interestingly, individual givers represent the largest set of donations, with 71% of the total giving.1

In the past, donors typically spread their wealth around by giving smaller grants to multiple organizations. These days, donors have become more skilled and tend to give larger grants to a few select organizations. Donors now take a greater interest and role in the organizations they give to, and are more interested in focusing on those that have the greatest impact within their specific community, or that address the issues that they care about the most. In many cases, the impact they are looking for may involve finding new ways of funding and structuring philanthropic solutions.

Instead of simply writing a check, donors are asking, “What am I funding and why?” Strategic philanthropists think of their donations as investments in a project, and seek greater control over how they are used.  Rather than trusting the operational capacity of public charities, many families opt to establish private foundations. They seek to use their capital to drive change, both in grant-making (the minimum requirement is 5% of the foundation’s annual market value) and in the investment policy of the foundation’s assets.

When strategic philanthropists do work with public charities,  they ask more incisive questions than donors have in the past. They want to know how the public charity operates, what works well, what needs improvement, and how to measure both success and risk. They are not afraid to fund overhead costs for the right model and goal.

A Way to Unite a Family

Strategic philanthropy presents families the opportunity to create a unifying legacy. Studies show that 70% to 75% of wealthy families lose their wealth within three generations of building it — and that  90% of those losses can be attributed to poor communication within the family rather than poor financial planning.2

Allowing children and grandchildren to contribute to the family’s philanthropic vision can help to foster the trust and communication skills necessary to avoid such an outcome. It is a great way to ensure that the younger generations feel connected to the family’s values and makes it more likely that they will preserve and maintain the family’s legacy in the future. Younger family members should be involved as early as possible, as philanthropic planning can serve to educate them about the importance of entrepreneurship and how critical it is to grow and replenish the family’s wealth.

It’s never a good idea for older family members to establish philanthropic goals on their own or to choose goals that are important solely to them. When it comes time for the next generation to take control, they may not be interested in maintaining what the older generation started. Family unity dissolves because the next generation has no stake in the core philanthropic values or in the methods of managing the foundation or philanthropic efforts. The inevitable result of such limited thinking is the abandonment of the foundation, neglect of the management of assets and returns, and, potentially, permanent discord between family members.

The Role of Your Wealth Manager

A wealth manager can work with you to shape your approach to philanthropy and develop a plan for strategic giving that also preserves your family’s wealth. Wealth managers working with philanthropic families do more than just determine the most appropriate vehicle for family giving. They can become a long-term partner, working with your family to discover appropriate philanthropic opportunities and to implement your plan.

Part of this process involves educating your family on the state of philanthropy today, why it is significant, and how they can help. A wealth manager guides the entire family and helps build the vision from the ground up. He or she may offer potential paths to take, recommend best practices and suggest other individuals in the community with whom you can collaborate. A wealth manager serves to direct the practical application of your values. For many families, strategic philanthropy becomes a way to feel good about their wealth, to become more comfortable with it and to better understand it.

To accomplish this, a wealth manager must understand your family’s values well enough to make sound recommendations for networking opportunities in your community. He or she should be able to introduce you to non-profit and foundation executives or social entrepreneurs, and point you toward helpful academic resources.

Some important questions your wealth manager may ask to start this conversation include:

  • What issues in your community would you spend money on to change and improve?
  • What topic or problem most angers you?
  • Where do you find the most joy in life?
  • What innovations or threats do you see impacting the quality of life of your grandchildren and great-grandchildren?

Building a personal relationship with a wealth manager who you can trust and rely on sets your family up for long-term success in reaching your philanthropic goals.

Profile: Marie and Robert

Marie and Robert Morgan, a married couple in their 60s, sold their company to a private equity firm. Despite their success in the business, the Morgans never thought of themselves as wealthy. Overwhelmed by the $75 million windfall they earned from the sale, the Morgans worried that their newfound wealth might have a negative impact on their family’s values.

The Morgans sought the advice of their wealth manager, Craig, who was also working with their lawyers and CPAs to craft a long-term financial plan. Craig suggested they consider establishing a family foundation. He believed that this would allow them to reinforce their values through philanthropy during their lifetime and ensure that their children and grandchildren would be able to continue this work after they’re gone.

Education is very important to the family. Two of Marie and Robert’s children are teachers. Therefore, education became a cornerstone for The Morgan Family Foundation, with a focus on how to impact local and state education reform and how to help each child and grandchild’s community and school.

First, they set aside $15 million to start the foundation. Then, they placed $2 million in a donor advised fund (DAF) to support a local camp that their children enjoyed attending when they were younger. They also started a $3 million scholarship fund. Because of his deep, personal involvement in his clients’ community, Craig was able to facilitate many of these actions and help the Morgans build relationships with like-minded members of the community who are now integral supporters of their foundation.

Luckily, the Morgans understood the benefit of involving their children before making any final decisions. Even in a family that seems to share the same values, new wealth can strain relationships. When the entire family sat down to discuss their strategic philanthropic vision, they chose to increase the foundation asset level to $35 million. Because the decision was made before the money could change their lifestyle or influence their values, no one in the family felt like they were missing out by allocating these funds to philanthropic endeavors.

The foundation has been successful for the past 10 years, and as the next generation comes of age, the family will begin to include them in the process. This type of ongoing communication and education about wealth prevents younger generations from being overwhelmed by it; involving them in the decision-making ensures the continued legacy of the family’s philanthropic values.

Building a True Partnership

Opening a philanthropic conversation with your wealth manager will reveal values, goals and issues that you wouldn’t typically discuss when speaking with an investment advisor or private banker. When determining the best ways to help preserve wealth and strengthen familial relationships, the philanthropic conversation takes this assessment to a deeper level.

It is also important to select a wealth manager who can go beyond the typical rhetoric of traditional philanthropic discussion in banking and investments, which focuses solely on identifying and setting up the appropriate charitable vehicles (e.g., DAF versus private foundation, which charitable trust type is best in certain situations, etc.). A wealth manager who can bring real knowledge of this sector and execute on it is best equipped to serve your family’s long-term, philanthropic vision.

At BNY Mellon Wealth Management, we are already taking this approach to strategic philanthropy. We are building relationships with our clients and their families, and working closely with them as they craft their philanthropic vision. By thinking beyond the numbers and risk analysis, we are tapping into the driving force behind philanthropy — to make a positive, lasting impact on the legacies of our families and communities.

FOOTNOTES

1Latest data are as of 2015, per Giving USA.

2Williams, Roy and Preisser, Vic. Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values. Robert Reed Publishers, 2010.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2017 The Bank of New York Mellon Corporation. All rights reserved.

Selling a Business: Preparing for the Windfall

There are no hard-and-fast rules on what to do with the wealth from a business sale — it’s more of an art than a science. But careful planning is key to ensuring a successful transition.

Selling a business is more than just a financial decision — it’s also an emotional decision, one that can overwhelm even the most seasoned business owner. When you’ve owned and run your own business, it becomes a part of your identity. You’re not just selling the company, you’re letting go of a part of yourself.

Suddenly, a significant portion of your net worth goes from being concentrated in a single asset that you control to a more diverse, liquid collection of assets that must be invested in the market. It can be difficult to navigate so much change all at once.

We frequently guide clients through the steps necessary to prepare for the financial ramifications of selling their businesses. This includes assisting them in understanding the tax liabilities associated with the sale, negotiating well-structured deals, helping them exit their businesses on favorable terms and preparing the business itself for the transition of ownership.

But we also pay special attention to the personal impact of selling a business. We encourage business owners to think hard about what comes next. Do they intend to retire or find a new job? Have they considered how their assets will be invested?

Perhaps the most important factor to consider is the effect that the sale will have on the business owner’s family — particularly if any of the owner’s children work in the business. How involved will the family be in the transaction? Will they personally benefit and, if so, are they ready for that responsibility? Should a governance plan be put in place to protect the family from this wealth?

While it may seem like there’s an endless number of possibilities, a thoughtfully conceived plan will make this process much more manageable.

Profile: James & Lisa

James and Lisa are in their early 50s, with three children — two in college and one a senior in high school. They have a comfortable lifestyle, owing to the successful electronics distribution company that James founded. The cash flow from the business has been substantial enough to allow James and Lisa to purchase a second home. It’s also given them the opportunity to get involved in their community by pursuing charitable endeavors that are important to them. They have done some estate planning, having transferred a portion of the business into trusts for their children.

James wasn’t looking to retire, but after receiving a number of potential offers on the business, he and Lisa began to think it might be time to seize the opportunity to focus on something new. After much consideration, they sold their business for an after-tax profit of $25 million.

Now that James and Lisa have a significant amount of liquid assets in their trusts, they’re suddenly struck by the feeling that they are truly “wealthy” for the first time — and by the responsibility that comes with it.

With so much money sitting in cash, they need to make decisions about how it should be invested. Friends and investment advisors are coming out of the woodwork, offering advice about how to invest the money.  James and Lisa   spent their lives building a business and were comfortable with how economic factors affected their industry, but never spent much time in the public markets.

They’re excited by the opportunities that this money will provide for their children, but also concerned about the impact that this very sudden, very liquid increase in wealth might have on their motivation to succeed. They want to make sure that their children are prepared to handle not just the financial aspects of the wealth, but the psychological aspects, as well.

What they need is a plan.

Preparing Your Family for the Money

Your wealth management plan should include steps to educate your family about the importance of thoughtful wealth management and the impact that this newfound wealth may have on them. In working with wealthy families, we’ve found that the best way to ensure that children and grandchildren are able to handle their family’s wealth responsibly is to get them involved in its management early.

Begin by holding regular family meetings to define current needs, common values and a vision for future generations. Make sure each family member knows his or her role and responsibilities, and is willing to work together to come to a shared sense of risk and reward. You will also want to involve trusted advisors and fiduciaries that you have appointed in these meetings.

Ideally, these discussions should start long before the sale of your business and address important questions, such as:

  • How much will we need to maintain our lifestyles as we grow old?
  • How much will be enough for our children and grandchildren in the future?
  • Will our children and grandchildren be able to handle receiving our wealth?
  • How much will we want to devote to our charitable goals?

The answers to these questions will help drive your family’s wealth management strategy, which in turn will influence the type of deal you strike when you ultimately decide to sell your business.

What you learn in this process may help you answer more sensitive questions, as well. For example, you may need to decide whether a child who was active in the business should have a greater share of the profits than a child who was not interested in participating. While the decision is up to you, the meetings may provide additional context for your choice and give you the opportunity to be transparent about your thinking on the matter. Failing to address such questions in an open and honest way could be an impediment to sustaining family wealth and promoting family harmony.

Finally, don’t forget to discuss the meaning behind the money and the importance of managing it thoughtfully. Lay out a strategy and timeline for ensuring that future generations will be properly educated on both key financial issues and the core values that underpin your wealth.

Outlining these objectives can be difficult, but diligent preparation in the present can set up smoother transitions in the future. As your family’s perspective on wealth begins to take shape, so too will your perspective on how best to manage that wealth. With your family’s needs and desires in mind, you can begin to make decisions about when and how to move forward with the sale of your business, and how the money you receive should be handled.

Putting Your Life’s Work to Work

While your instincts may be telling you that the best thing to do with your windfall is to invest it all right away and put it to work for you in the market, that may not be the case. You may not consciously realize it at first, but this money represents your life’s work. The emotional impact of seeing that large sum of money fluctuate along with the market can be more harrowing than you might expect. It’s only natural to view any loss in the value of your investment in terms of the effort and time it took for you to earn that money, or how challenging it may be to earn it back again — it’s more than just money, it’s years of your life.

A more prudent course of action may be to slowly ease into the market using a dollar-cost averaging strategy, investing a smaller, fixed amount on a regular schedule over a certain period of time, spreading out your investments to reduce the impact of volatility. That way, you’ll be less inclined to overreact to any large swings in the market.

To start, you can place the funds in a cash management access account at a bank that’s known for working with high net worth clients. This should serve as a safe place to hold your funds and earn some degree of interest income while you plan your next steps. At this point, it may be a good idea to engage with a wealth manager who has experience working with transitioning business owners like you. The wealth manager can help you craft a long-term wealth plan that takes your needs into consideration and integrates the appropriate wealth-transfer strategies for achieving your goals, such as trusts or estate tax planning. If you still crave the excitement of betting on riskier ventures, you may want to set 5 to 10% of your capital aside to invest personally, while leaving the bulk of your funds with your wealth manager in less volatile, long-term strategies.

Depending on the complexity of your family’s new wealth, and whether or not your family is interested in devoting personal time to managing it, you may want to consider starting a family office. A family office can allow you to retain control over major decisions, while delegating the intricacies of managing your wealth to a team of seasoned investment professionals who work for you.

In addition to single family offices that are dedicated entirely to one family, a number of global wealth managers and specialty firms offer multifamily office type services.  They provide a wide menu of services in a cost-effective way, including coordination of advice, consolidated investment management and reporting, trust and estate planning,  and philanthropic guidance.

Careful Planning Is the Key to Success

You should approach the sale of your business with the care and thoroughness with which you approached its creation.  Consult with your family, enlist the help of trusted, experienced advisors and create a detailed plan that guides your actions and decision-making. The skills that aided you in growing your business to this point can be just as useful in managing your newfound wealth going forward.

We know very well that there are no hard-and-fast rules on what to do with the wealth from a business sale — it’s more of an art than a science. We encourage our clients to create a plan tailored to meet their particular situations, and caution them to resist the urge to take swift action. Proceeding slowly and judiciously ensures that both the financial side and the familial side of the deal are sorted out, before any changes are made. We have found this to be a key to success for our clients after the sale of a business, and would be delighted for the opportunity to assist your family in reaching that same success.

DISCLOSURE

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2016 The Bank of New York Mellon Corporation. All rights reserved.