A Message to Our Clients
Contributed by: Judson S. Meinhart, Wealth Advisor
As your trusted wealth management advisors, one of our roles is to lower the noise in today’s complex world. Whether it’s the latest investment news or the impact of recent tax reform legislation, as much as you need information, you also need answers.
With the first quarter of 2018 behind us, our Chief Investment Strategist Nick Boyer provides a comprehensive and thoughtful message to help us to understand recent developments in the financial markets and the economy and our outlook going forward.
While we remain cognizant of the investment landscape, the Tax Cuts and Jobs Act passed late in 2017 has left a lot of individuals wondering, “How will tax reform impact me?” As a participant in RKL’s Real Answers on Tax Reform campaign, RKL Wealth Management has been on the forefront of answering this question and providing actionable guidance to clients. In this edition of Insights, Executive Vice President Laurie Peer discusses some of the benefits of Donor Advised Funds, which have attracted interest since the recent legislative changes. In addition, RKL Tax Partner Scott Myers provides clarity on new estate and gift planning opportunities that have been unlocked by tax reform.
Of course, your circumstances are unique to you. If recent market events or tax reform questions have you in search of answers, we encourage you to speak to your RKL Wealth Management Team.
We hope you enjoy this quarter’s edition of RKL Wealth Management’s Insights.
For more information on the impact of the Tax Cuts and Jobs Act, check out RKL’s dedicated Tax Reform Resource Center at rklcpa.com/taxreform.
Market & Economic Update
By: Nicholas A. Boyer, Chief Investment Strategist
The first quarter of 2018 served as an important reminder to investors everywhere that equity prices don’t rise forever and volatility never dies (but it does tend to “cluster” as we will discuss). In a remarkable shift from 2017, equity markets sold off sharply in February as volatility, measured by the CBOE Volatility Index (VIX), spiked to levels not seen since the August 2015 “Flash Crash.” This led to negative returns on the quarter for both U.S. and global equities, as the S&P 500 returned -0.76% while the MSCI All Country World Index (ACWI) returned -0.85%. International equities showed the most weakness with MSCI EAFE dropping -1.4%, although emerging markets equities held up reasonably well as the MSCI Emerging Market Index delivered positive returns of 1.4%. Meanwhile, fixed income volatility also increased as the yield on the U.S. 10-year Treasury note ended the quarter at 2.74%, up over 30 basis points from year-end 2017, and the UST yield curve flattened further as short rates rose somewhat more rapidly.
Market Volatility Is Back And It Comes In Bunches…But, It’s Perfectly Normal
The mainstream macroeconomic narrative for this recent market reversal was that it was caused by an inflation scare in February following a strong package of employment data, which included a notable jump in average hourly earnings. This subsequently prompted new Federal Reserve Chair Jerome Powell to open his tenure with a somewhat more hawkish tone, further intensifying interest rate increases. Meanwhile, a rapid spike in volatility occurred roiling equity markets – sensationally described as the “Volpocalypse” – and while the specific cause has been passionately debated, it appears to have been due to some combination of investor complacency, financial product malfunction and market fragility.
Regardless of the catalyst, what we know from financial market research is that volatility “clusters,” or comes in bunches, and that large losses tend to group together more severely than big gains. What this likely means is that after a long period of low volatility we have entered a new regime characterized by bouts of increasing volatility. As we’ve noted previously, there has been a strong relationship between the VIX and the S&P 500 over the past few years, as equity multiples have expanded while the VIX declined, driven largely by global monetary stimulus and loose financial market conditions creating an environment of low interest rates and low inflation. This period appears to be over. Nevertheless, it’s important to note that volatility is not the same thing as risk, but rather a completely normal and integral part of functioning financial markets. Additionally, some research shows that large negative price moves in the S&P 500 which are accompanied by large changes in the VIX tend to be followed by significant reversals, especially over longer post-event time horizons. So while increasing volatility may prove a near term headwind for returns, it also may ultimately create more attractive investment opportunities for long term investors.
Trump’s Tariffs Amount To Geopolitical Theater, Not A Trade War
Despite the melodrama prevalent in the news media, this recent slate of tariffs enacted by President Donald Trump does not mean the U.S. has declared some fresh unilateral trade war with China. Indeed, it can easily be argued that some form of multi-lateral, global trade conflict or currency war has been going on for decades among numerous countries throughout the world. As author James Rickards succinctly wrote in his 2011 book Currency Wars, “Printing dollars at home means higher inflation in China, higher food prices in Egypt and stock bubbles in Brazil. Printing money means that U.S. debt is devalued so foreign creditors get paid back in cheaper dollars. The devaluation means higher unemployment in developing economies as their exports become more expensive for Americans. The resulting inflation also means higher prices for inputs needed in developing economies like copper, corn, oil and wheat. Foreign countries have begun to fight back against U.S.-caused inflation through subsidies, tariffs and capital controls; the currency war is expanding fast.”
Certainly, the idea of nations seeking to gain advantage in international trade, whether via monetary, fiscal or trade policy, is nothing new. Remarkably, while tariffs get the headlines, in reality the massive stimulative monetary and fiscal policies of the last decade represent a far greater assault on the U.S. dollar’s purchasing power and U.S. dollar-denominated debt than any tariff could possibly produce. Still, the benefits of free trade are well-established and as former U.S. Representative Ron Paul once wrote, “No one worries about the balance of trade between Oregon and Texas. That between Mexico and Texas should be of no consequence either. It is a problem only to government planners.”  Thus it’s important to note that the true motives for tariffs or various other forms of trade protection are not economic at all, but rather political. Absent a major escalation in the amount and scope of tariffs, the impact from President Trump’s latest trade protections will be seen and felt more in the news and at the polls for mid-term elections than in global financial markets.
Despite Some Turbulence, Market Fundamentals And Economic Environment Remain Unchanged
After a strong start to the year, U.S. and global equity markets finally took a meaningful pause as interest rates moved higher and volatility increased across multiple asset classes. Despite the resulting negative market headlines, S&P earnings reporting season actually resulted in a larger than normal number of firms beating expectations on both the revenues and earnings. As we’ve noted previously, earnings were the primary driver of S&P returns in 2017 and given a continued healthy outlook for 2018 earnings at this point we see nothing to suggest that 2018 won’t bear a similar or perhaps even better result. Moreover, while inflation and interest rates have moved up they both remain low relative to history and the current global economic outlook remains strong, investor sentiment remains elevated, global monetary policy remains largely accommodative and financial market conditions are still quite favorable. As EvercoreISI’s Ed Hyman notes, “In the past, the S&P has rallied through increases in bond yields until around when a recession starts (see chart).” Our near and long term outlook for financial markets and the global economy remain positive, and we do not consider recession a likely outcome in 2018. Accordingly, at this time we see no compelling reason to recommend any major changes to investor portfolios. As always, we will be closely monitoring developments in financial markets and the economy, and encourage our clients to reach out at any time to discuss our strategy and individual circumstances in further detail.
1 Bloomberg Market Monitor
2 U.S. Department of The Treasury, Daily Treasury Curve Rates (www.treasury.gov)
3 Bauguess, Scott W., Market Fragility and Interconnectedness in the Asset Management Industry; June 20, 2017
4 Artemis Capital Management: Volatility and the Alchemy of Risk, Reflexivity in the Shadows of Black Monday 1987, October 2017
5 SEC Division of Trading and Markets, Research Note: Equity Market Volatility on August 24, 2015; December 2015
6 Tseng, Jie-Jun and Li, Sai-Ping, Asset Returns and Volatility Clustering in Financial Time Series; April 2011
7 Federal Reserve Bank of Cleveland: The US Economy and Monetary Policy; January 2016
8 Kudryavtsev, Andrey, VIX Index and Stock Returns Following Large Price Moves, Journal of Risk & Control; September 2017
9 Rickards, James. Currency Wars: The Making of the Next Global Crisis; November 2011
10 Smith, Adam, and Edwin Cannan. The Wealth of Nations. New York, N.Y: Bantam Classic, 2003.
11 Paul, Ron, The Case For Free Trade, The Free Market 1, no. 1; Fall 1983
12 Dorobat, Carmen E., Why We Learn Nothing about Trade, Mises Wire; March 2018
13 EvercoreISI: Portfolio Strategy, Early Thought; February 7, 2018
14 EvercoreISI: Afternoon Economic Report; February 8, 2018
Donor Advised Funds as a Strategic Charitable Planning Tool
By: Laurie M. Peer, CPA, CFP, Executive Vice President
Starting in 2018, tax reform’s significant increase to the standard deduction and changes to the remaining allowable itemized deductions has created interest for individual taxpayers to make the most of the deductions that are still available. Here, we will discuss how to maximize the tax benefits of charitable contributions in light of tax reform. Keep in mind that medical expenses, mortgage interest expense and state and local taxes up to $10,000 are all still viable deductions.
People donate to charities because they care, and they will likely continue to donate regardless of the tax impact of their donations. However, the charitable deduction is the most flexible of the itemized deductions and creates additional incentive for charitable giving. At RKL Wealth Management, we are working with our clients to develop the optimal timing and method for their charitable giving to ensure the maximum tax savings. Some of the more common tools and strategies being discussed are:
- Bunching deductions: A long-time tax planning strategy is a technique known as “bunching” deductions. Using an “every other year” or “every few years” bunching strategy by prepaying charitable contributions for multiple years, creates an opportunity for taxpayers to itemize deductions in the year that the contributions are made, and then use the standard deduction in the next year or years. Every other year, or every few years, the technique can be repeated.
- Donor Advised Funds: A Donor Advised Fund (DAF) is a vehicle that can streamline charitable giving and be used in combination with the “bunching” technique. A larger donation in year one is used to fund the DAF, and to capture the tax deduction for purposes of itemizing deductions. Then distributions from the DAF to specific public charities are made according to the desired amount and timing in year two, three and so on, presumably years where the standard deduction is used. Timing charitable donations to DAFs in years where tax liabilities are projected to be highest can save tax at higher marginal tax rates, when you need it most.
- Donation of appreciated assets: Donating appreciated assets, such as common stocks, mutual funds or ETFs, can further enhance the tax savings by shifting the unrealized capital gain to a charity or DAF with no tax liability on the sale of those securities.
- Qualified Charitable Distribution: Making Qualified Charitable Distribution (QCD) from Individual Retirement Accounts (IRA) for those over 70½ years, in effect become a “charitable deduction” against their IRA Required Minimum Distribution. The maximum annual QCD is limited to $100,000 and is not able to be used to fund DAFs, private foundations or split-interest charitable trusts.
RKL Wealth Management advisors are ready to help with all aspects of how to give, when to give and what to give, so that you can maximize your tax savings while meeting your charitable goals. If you would like to learn more about Donor Advised Funds or other charitable planning techniques, please contact your RKL Wealth Management advisor.
New Estate and Gift Planning Opportunities Unlocked by Tax Reform
Contributed By: G. Scott Myers, CPA, CSEP, Partner in RKL’s Tax Services Group
For individuals considering their financial legacy, several provisions of the Tax Cuts and Jobs Act (TCJA) unlock new estate planning and gifting opportunities.
Under the TCJA, the maximum federal estate tax of 40 percent remains in place, but starting in 2018, married couples can exempt up to $22.4 million – a twofold increase from prior years. This joint exemption amount will be adjusted annually for inflation through December 31, 2025, when these provisions will sunset to half the exemption in place in 2025 without additional legislative action.
Given the temporary nature of these provisions, individuals should consult with their advisors to assess tax reform’s impact on their personal estate plans and consider the below activities to maximize potential benefits.
Review Estate Plan Documents
Periodic review of estate planning documents, like wills and trust documents, is a standard best practice, but tax reform makes the review even more essential. Between the scheduled federal sunset and the potential for changes on the state level, estate planning documents should be flexible and allow tax-planning adjustments and decisions to be made after a spouse’s death.
Increase Gifting to Family Members and Trusts
Operating under the assumption that the federal estate tax exemption will revert back to the pre-tax reform level of $5.49 million after 2025, individuals have a limited but significant opportunity to make large, estate tax-free gifts to family members, either directly or into trusts, between 2018 and 2025 when the exemption is doubled to $11.2 million (annually adjusted for inflation).
The doubling of the exemption provides a unique chance for high net worth individuals to remove more of their assets from their taxable estate, particularly when coupled with other discounting techniques.
Lifetime Gifts and Generation-Skipping Transfers
The generation-skipping transfer (GST) exemption is linked to the lifetime estate tax exemption, which doubled under tax reform. This could provide taxpayers with several opportunities to maximize GST, such as:
- Revisiting irrevocable trusts that previously faced GST-related issues and consider making a late allocation of GST-exempt funds, where appropriate.
- Making additional $5 million irrevocable GST gifts, which shifts future appreciation and locks in use of the increased exclusion.
Keep in mind that portability of a deceased spouse’s unused exemption remains in effect and the step-up in basis on inherited property is unchanged.
Although the increased exemption will greatly reduce the number of estates subject to transfer tax, there are still many considerations that make estate planning important, like asset preservation, family business succession, guardianship of minor children and providing for family members with special needs.
Visit RKL’s Tax Reform Resource Center at rklcpa.com/taxreform for more insights, context and answers on the impact of the Tax Cuts and Jobs Act of 2017.
Firm Updates & Accolades
RKL Wealth Management Surpasses $1 Billion Threshold
Our team is proud to announce that RKL Wealth Management crossed the $1 billion threshold for assets under management/advisement earlier this year. RKL WM achieved significant growth in new and expanding accounts in recent years thanks to close collaboration and cross-disciplinary approach with its parent company, RKL. We’re especially proud of what this milestone represents – the trust you, our valued clients, place in us to help achieve a more secure financial future and the dedication and skill of the RKL Wealth Management team.
Market Update: Navigating Volatility and Opportunity in Today’s Market
Join RKL Wealth Management at 6 p.m. on Wednesday, May 9, 2018 at the Country Club of York for a practical and engaging session to gain a better understanding on how macro-economic issues such as global trade, market structure and liquidity are impacting portfolios. Discover the risks, rewards and potential outcomes for investors in this changing market environment and gain greater confidence in your investment approach. For more information or to RSVP, contact Diane Loftus at 717.399.1637 or firstname.lastname@example.org by May 1.
RKL Wealth Management Welcomes New Operations Associate
Please join us in welcoming Debra Pfautz to the RKL Wealth Management team! Deb serves as Operations Associate for RKL Wealth Management in the Lancaster office. She is responsible for coordinating the day-to-day operational processes, including all aspects of new client on-boarding. She also specializes in maintaining the client management and billing systems. Deb brings over 18 years of client service experience to her role. She is a member of the Pennsylvania Association of Notaries. Deb resides in York with her husband, daughter and three dogs. In her free time, she enjoys boating, watching football and attending her daughter’s soccer games.
Meinhart Passes CFP Exam
Judson Meinhart recently passed his CFP® exam and has been provisionally accepted as a CERTIFIED FINANCIAL PLANNER™ Certificant. The road to becoming a CFP® Professional includes completion of an approved educational curriculum, covering tax planning, employee benefits and retirement planning, investment management and estate planning, comprehensive examination and hands-on professional experience.
According to the CFP® Board, CFP® Professionals have completed extensive training and experience requirements and are held to rigorous ethical standards. They understand the complexities of the changing financial climate and know how to make recommendations in their client’s best interest.
Hinerdeer Holds Fundraising Fiesta for Lancaster Hospice
RKL Wealth Management Trader Mike Hinerdeer recently continued a delicious and charitable tradition, holding the 12th annual Taco Soup Lunch on March 22, 2018 at the firm’s Lancaster office. Proceeds from the sale of Mike’s homemade taco soup and all the trimmings raised over $1,200 for Lancaster Hospice & Community Care.
New Schwab Implementation
Any clients that are registered with Schwab Alliance and elected e-delivery will no longer receive any paper statements, confirmations, etc. Schwab will be sending out email confirmations of transactions that have occurred.
A Schwab system delay has resulted in the email confirmation going out to the client for activity that happened in their accounts last month. Once everything is in place, email confirmations will go out right after the activity has occurred.
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. The information and data contained herein was obtained from sources we believe to be reliable but it has not been independently verified. Past performance is no guarantee of future results.
RKL Wealth Management LLC is a registered investment adviser. To learn more about how we can help you meet your goals, please contact our office at (717) 399-1700 or via our website, rklwealth.com. Additional information is available upon request.
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