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Sunday, May 19, 2013
12:30 a.m. until 4:30 a.m.
Due to system maintenance, Online Banking and Mobile Banking will be unavailable on Sunday, May 19, 2013 between the hours of 12:30 a.m. and 4:30 a.m. Thank you.
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We anticipate continued moderate expansion during the New Year, with GDP growth registering around the 2% mark. Looking back at 2011, the pace of U.S. economic growth slowly and steadily accelerated despite a series of unforeseen events, including higher commodity prices, natural disasters, supply chain disruptions, debt limit gridlock and the Euro sovereign debt crisis.
Consumer spending will continue to drive the economy in 2012. Retail sales were solid in the latter part of 2011, however they were accompanied by a decline in the savings rate. Clearly this is not a sustainable trend. Going forward, we are looking for more robust employment growth to boost household income and buying power. The unemployment rate is still high at 8.5%, but initial claims for unemployment insurance are at the lowest level since June 2008, suggesting that the jobless rate will trend lower in 2012.
High unemployment and a supply “hangover” have taken their toll on the housing market. It appears that we are at or near the trough of the residential housing cycle. Affordability is at an historic high due to the combination of falling home prices and record low interest rates. Continuing improvement in consumer debt-to-income ratios and a better employment situation will allow more buyers to meet stricter mortgage underwriting guidelines.
Against this backdrop, interest rates are likely to remain at or near current low levels. The Federal Reserve has clearly stated its intent to maintain the current low target for the Federal Funds rate into late 2014. In fact, the Fed could buy additional bonds for its own portfolio thereby providing additional support to the housing market.
The low rate interest rate environment has also benefited corporate America. Many firms have taken advantage of current borrowing levels to repay and/or refinance existing debt and improve profitability. This balance sheet improvement has allowed companies to undertake new capital spending projects, and spending on equipment and software has been growing at a double digit rate.
Positive developments in the U.S. have been overshadowed by deteriorating fundamentals in Europe. The risk of default by several members of the European Union has caused market disruption and volatility. To date, the policy response in Europe has been piecemeal and reactive. Investors lack confidence that European leaders will be able to garner support for the fiscal and monetary support needed to keep European debt markets liquid.
We are hopeful that European leaders will recognize the seriousness of the situation and support a comprehensive monetary solution that will offset the austerity programs being implemented in many nations. Meanwhile, weakness in Europe will be offset by faster economic growth in the emerging economies. China and India are forecasted to grow at an 8% clip. These faster growing developing economies will provide a market for U.S. exports in 2012.
Fiscal policy remains a question mark in the U.S. The payroll tax cut has been temporarily extended through February, 2012, but Congress may be reluctant to extend these cuts without commensurate spending reductions. In addition, the tax cuts enacted during the Bush administration will expire at the end of 2012. Without congressional action, marginal tax rates for high income taxpayers will increase and the tax rate on dividend income and capital gains will also rise. Thus, it is possible that greater fiscal austerity could restrain economic growth.
Against this backdrop, 2012 is likely to witness continued uncertainty in the financial markets. Investors will be focused on the latest headlines, with the upcoming Presidential election, debt ceiling debates, European debt negotiations and the latest economic data points all contributing to ongoing market volatility. During these volatile times, we believe that investors should focus on their long term objectives while maintaining a strategy of portfolio diversification across asset classes and market sectors.
The Tax Relief Act of 2010 had a significant impact on gift, estate and generation-skipping transfer taxes. Federal tax law has always contained provisions allowing taxpayers to transfer assets during their lives and after their deaths, however the dollar limits on these allowable transfers have been changing over time. For decades, taxpayers have been allowed to transfer unlimited amounts to spouses and charities, both during their lives and through their estate plans. In addition, there has always been an exemption from tax liability for lifetime gifts made specifically for tuition and medical expenses (if those gifts are made directly to the institution). The Tax Relief Act of 2010 effectively continues the expansion of the estate and gift tax exemption for transfers made to everyone else (i.e., other family members, friends, etc.). Through various acts of Congress over the years, the gift and estate tax exemption has increased from $600,000 to $1 million to $3.5 million. The Tax Relief Act of 2010 increases the amount an individual can transfer either during lifetime or at death to individuals other than their spouse or to charity from $3.5 million to $5 million ($10 million for a married couple). This new transfer exemption is temporary and is scheduled to return to $1 million at the end of 2012 (unless Congress votes to extend the law). So, planning is crucial because during this brief period you can transfer significant sums without paying any taxes.
Why transfer assets to your beneficiaries now? Making the gifts now allows you to pass assets free of tax and avoids future taxation on any appreciation that might accrue on those assets. Also, if you have an asset that is important to the family and you want to preserve it for future generations (such as real estate, jewelry or art work), now might be the time to make that transfer. If the asset remains in your estate, the value of the asset at your death could be subject to estate taxes. Depending upon the value of your estate, family treasures might have to be sold to cover the tax liability at death.
One must also consider some potential disadvantages to gifting an asset during one’s lifetime. First and foremost, there may be emotional ties to the asset that might make transferring it currently very difficult. Are you going to be comfortable losing ownership and (potentially) control of the asset? Also, what you paid for the asset being transferred also serves as the cost basis for the person receiving the gift. Therefore, if that person were to sell the asset, there could be significant capital gains taxes they would incur from the sale.
Another important decision to make when transferring wealth is whether the transfer should be made outright to the beneficiary or held in trust for his or her benefit. What is the effect of suddenly bestowing wealth on an individual? Is the individual able to make appropriate decisions regarding the future management of the assets that you have just transferred? Although outright gifts of cash, stocks or tangible assets are fairly easy to effectuate, there may be a number of reasons to transfer wealth using a trust. A properly structured trust might protect those assets from creditors or an ex-spouse in a divorce situation. The use of a trust offers you the opportunity to take advantage of professional wealth management and to dictate through the terms of the trust when and how much is distributed to your beneficiaries as a result of the gift. There are many different types of trusts that can help you accomplish your goals to transfer wealth to future generations.
With the $5 million exemption expiring at the end of 2012, if you haven’t already taken advantage of this window of opportunity, now is the time to look at what planning opportunities might be right for you. For further information, consult your advisor or contact one of our planning professionals at Washington Trust Wealth Management.
The American public continues to be generous to their favorite causes. It is estimated that over $291 billion was given to charities last year according to the Giving USA Foundation. Along with enabling their favorite charities to continue their good works, many include charitable giving as part of their overall income tax and estate planning strategy. This article identifies some of the issues you may want to consider as you plan your charitable giving activities. You should always make sure the charities you are considering are legitimate and you should consult with your financial or tax advisor to better understand how the tax laws apply to your situation.
Income Tax Deductions
If you itemize your deductions, contributions to qualified charitable organizations can be claimed as deductions. There has been considerable discussion as part of many tax law changes about enabling non-itemizers to also get tax relief from charitable contributions. However, at this time, only taxpayers claiming itemized deductions get this benefit.
The amount you can deduct for charitable contributions is generally the fair market value (FMV) of what you give. For cash contributions, it is simple. Your deduction is just how much you gave. If you give other property (like stocks, real estate, art or other items), determining fair market value can be more difficult. For publicly traded securities, FMV is calculated as the average of the high and low prices for that security on the date it was transferred to the charity. For illiquid or non-publicly traded securities, you may need to get an appraisal to determine the FMV. In addition, the property (or securities) must have been held for more than a year.
Limits on Deductions
The tax laws do place some limits on the total amount of charitable contributions that may be claimed on individual tax returns. For contributions of cash to public charities (not private foundations), you may claim deductions up to 50% of adjusted gross income. If appreciated securities are given, there is a limitation of 30% of adjusted gross income. Deductions in excess of these limitations can be carried forward and used over a five year period.
Why give appreciated securities?
Donating stocks (or other capital items) that have risen in value since they were acquired offers two tax benefits. As long as you have held the securities for more than a year, you can claim a deduction for the appreciated value and you avoid paying tax on the capital gain. If you have held the stock for less than a year, your deduction is limited to your cost basis. If you donate a stock that has fallen in value, your deduction is limited to the fair market value.
Consider the following:
You bought 100 shares of XYZ stock several years ago for $25 per share and it has now risen to $60 per share. In other words, your $2500 investment is now worth $6000 and you wish to give $6000 to your favorite charity.
If you donate the shares to a charity, you get a deduction for $6000 and pay no income tax on the gain. If you sell the shares, you would pay tax on the capital gain of $3500 (probably 15% of $3500 or $525) leaving you only $5475 to donate. By giving the shares you avoid the capital gains tax and the charity gets the full $6000 value. The charity could then sell the shares and have the proceeds to use.
Other Alternatives
There are more sophisticated trust strategies that some individuals use – charitable remainder trusts and charitable lead trusts. With a charitable remainder trust, a donor contributes property (usually money, securities or real estate) to a special form of trust. During the donor’s lifetime or some period, the income from that property is distributed to the donor. On the donor’s death or at the end of the specified period, the remainder goes to the charity. This type of trust allows for an immediate income tax deduction for the donor. If the Trust is funded with appreciated assets, those assets can be sheltered from capital gains taxes and the person making the gift to the Charitable Remainder Trust is paid an income stream for life. Sometimes the income generated by the Trust is greater than the income you are currently receiving on your assets. A Charitable Remainder Trust may be a way for individuals to create their own retirement income plan.
With a charitable lead trust, the effect is the opposite. The charity gets the income for the lifetime of the donor (or some period) and the remainder goes to the donor’s estate or some other beneficiary at the end. The current low interest rate environment makes the Charitable Lead Trust an attractive estate planning tool because the potential value to the charity may be higher which allows for a larger charitable deduction. This reduces the taxable gift to your beneficiaries, allowing you to transfer more wealth to beneficiaries without significant tax consequence.
If you want to be charitable but are unsure where to give, consider a donor advised fund through a Public Charity (such as the RI Foundation or the Community Foundation of Eastern Connecticut). A person donates cash or appreciated securities to the “donor advised fund.”
A donor advised fund will lock in a tax deduction for the current year and allow time to make decisions on who will receive the charitable grants. Remember, charitable gifts are irrevocable.
Summary
Charitable contributions enable many worthwhile organizations to carry out their missions. Donors can get emotional satisfaction and tax benefits through their giving. The tax laws are structured to encourage giving. Whether your strategy is to make a current or deferred gift or to utilize some of the more sophisticated planning tools such as life income gifts or charitable lead trusts, there are ways to maximize the tax benefits of giving. As with any planning you might do, please consult with your advisor or one of our Trust Planning Officers to see what strategies may be best for you.
For more information or to contact a Washington Trust Planning Officer, please call 800-582-1076.
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**The views expressed in this newsletter are those of the authors. Professional tax advice should b sought before making any investment decisions.