"Gifting" & Things To Be Thankful For
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Gifting To Those You Love
2. Gifting: Control Is The Issue
3. A Good WayTo Gift, In My Opinion
4. A Time To Give Thanks
As we near the end of November, the current economic and stock market situation may make giving thanks the last thing that enters our minds. However, even with all of the negatives we have encountered in 2008, we still live in the greatest country in the world, and one that offers as much promise and opportunity as ever.
It is therefore with confidence that I write this Thanksgiving week E-Letter that encourages you to seek out those people and things that you can be thankful for. As the market has shown us, wealth can be fleeting, but our families, friendships and faith can always be sources of gratitude, no matter what kind of mess the world is in.
Also, since we’re entering the season of giving, I want to revisit the issue of “gifting” and how you can give up to $12,000 per year to your kids or grandkids (or anyone for that matter) with no tax consequences. A husband and wife can give $12,000 each, or a total of $24,000 a year, to each child or grandchild with no tax consequences for the donors or the recipient(s).
Gifting is one good and legal way to minimize estate taxes. You can transfer large sums of money to your kids or grandkids (or whomever) by taking advantage of gifting. Of course, there are smart ways to do this, and there are not-so-smart ways to do this. You need to be careful in how you take advantage of the “gift tax exclusion.”
The point is, this is the time of year to consider the smart ways of gifting to those that you love. I will discuss this in more detail in the pages that follow.
And given that this is the week of Thanksgiving, I will tell you what I am particularly thankful for this year. Let’s get started.
Gifting To Those You Love
Let me start this discussion with a quick bit of background. Being in the investment management business, we get questions every year from clients and prospective clients who are trying to help their kids or grandkids learn to save and invest wisely. One of the most common observations along this line is: “I would really like to help my kids with investing, but they just don’t have enough money to get started.”
This is all too true. Most young families just make ends meet and don’t have the savings to start an investment program when they really need to. Along that line, another very common comment we hear is: “I would love to give them the money to get started, but I worry they would just blow the money on wasteful things.”
Yet there are ways to gift money to your kids or grandkids that are not only earmarked for certain financial expenditures (college, medical, etc.), but can be targeted for investments that will serve them well later in life. And there are ways you can increase the odds that money you gift to your kids or grandkids will be used for the purposes you desire.
I will talk more about that below, but first let’s explore the basics of the gift tax exclusion. Current tax law allows you to gift up to $12,000 per year to a child, grandchild, or anyone, with no tax consequences to either the donor or the recipient. As noted above, a husband and wife can give $12,000 each, or a total of $24,000 a year, to an individual in 2008 with no tax consequences for the donor(s) or recipient(s). The gift tax exclusion is indexed to inflation, and the IRS has recently announced that it will be increased to $13,000 for 2009.
The annual gift tax exclusion is one of the most popular ways that individuals have to transfer a portion of their estates to their heirs over the years prior to their deaths, thus reducing the significant estate taxes their heirs will have to pay. Gifting has the double benefit of helping those you love and reducing estate taxes that go to the government.
I’m surprised that more families don’t take advantage of the gift tax exclusion. My wife, Debi, and I gift the maximum to our two kids – currently $12,000 per parent or $24,000 a year to each kid. We gift this money each year into trusts that we have set up for each of our kids.
Gifting: Control Is The Issue
One of the requirements of the gift tax exclusion is that the beneficiary must have ownership and control of the assets donated. This is a big deal when considering gifting $12,000-$24,000 (perhaps annually) to a child, grandchild or other person(s). Generally speaking, if you gift it, the money becomes theirs, and it is possible that they can just blow the money on wasteful spending if they want.
This is one reason why many people do not elect to take advantage of the gift tax exclusion, as far as I can tell in talking to estate tax attorneys. But there are ways – directly and indirectly - to effect control of the assets gifted to a child or grandchild. If the child is a minor, the gifts can be made to a trust which can designate what the money may be spent for, such as college, medical expenses or whatever.
As noted above, Debi and I have established trusts for each of our children, and these trusts are where we make our annual contributions. Trust laws vary among the states, so I won’t get into what type of trusts may be best in your particular situation, but this can be a very good way to transfer assets to minor children and maintain control over those assets, at least until they reach legal age, or whatever age you specify in the trust(s).
In some states, minors do not have the right to execute a contract, and thus cannot own stocks, bonds, mutual funds, annuities and life insurance policies in their names. In such cases, parents cannot simply transfer assets directly to their minor children, but instead must transfer the assets to a trust. The trust(s) can be a private trust you establish for your kid(s) with the help of an attorney, or a custodial account such as a UGMA or UTMA account, both of which can hold securities.
The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. The terms of UGMAs are established by state statute instead of a trust document. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance. The UTMA is slightly more flexible than the UGMA.
To establish a custodial account, the donor must appoint a custodian (trustee) and provide the name and social security number of the minor. The donor irrevocably gifts the money to the trust. The money then belongs to the minor but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 to 21, depending on the state and whether it is an UGMA or an UTMA. Most UGMAs end at 18 and most UTMAs at 21, but it does depend on the state. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor. Custodial accounts are most often established at banks and brokerages.
The bottom line is that gifting is a great way to transfer assets to those you love without tax consequences. But there must be a high degree of trust involved. If you do elect to form trusts, be sure to consult with an attorney that is familiar with the laws of your state.
Gifting To Adult Children
As noted above, you can gift to minors by establishing trusts in which the donor(s) can maintain control of the assets. But there is also a way to gift to adult children which can also be effective, at least in my experience.
Consider gifting them an investment account. Here is one way it can work. Let’s say you are the parents or grandparents of an adult child. The two of you agree to gift $24,000 (or some lesser amount) to your adult child or grandchild. But you only agree to gift the money if it goes into a specified investment account. And you may agree to gift another $24,000 in the following year (or years) if things go as planned.
This approach is only advised if you have a good relationship with the adult child (or whomever you wish to help). It should be laid out carefully at the onset that this investment account is indeed a long-term program, and that the money should be kept in the account and not withdrawn for expenses, spending, etc.
For donors who have the where-with-all to gift for more than one year, the main gamble is really the first year in regard to adult children. You make it clear that if they maintain the investment, rather than spending the money, you may (at your discretion and under certain specified conditions) continue to make gifts in future years. This provides a huge incentive for the beneficiary to keep the money in the investment account.
If they don’t, you simply stop the gifts beyond the first year. Sounds simple, but it can be very effective.
This method of gifting will also create a big incentive to the child or grandchild to become more knowledgeable about investing in general, which is what you want. If they get into investing, that means they’ll likely get more serious about saving, cutting expenses, building wealth, etc.
Another consideration in light of the market’s recent downturn is the possibility of gifting an asset or investment account that has depreciated in value. Assuming the asset is one that has a good chance of regaining lost value in the future, gifting it now at a lower fair market value would transfer any future gain to the recipient and possibly reduce the donor’s potential taxable estate. Plus, the donor would get more bang for the buck by gifting a discounted asset.
Of course, this and any other gifting strategy has potential tax ramifications for the donor and recipient that must be considered. The original cost basis for the gifted asset goes with it, as well as the potential tax consequences from any subsequent gains. In some cases, it may be more advantageous for the donor to sell the asset and take a tax loss rather than gifting it.
As always, the best course of action depends upon your individual situation, so it’s important to seek out the advice of a qualified tax professional or estate planning attorney before pursuing any gifting strategy.
A Good Gifting Strategy, In My Opinion
Let’s say that you and your spouse want to make a cash gift of $24,000 to a child or grandchild via the gift tax exclusion. And let’s say you agree with me that an investment account is the way to go. Now what? In previous issues of this E-Letter, I have discussed the Scotia Partners investment programs, and we feel that these programs may offer a unique opportunity for those who are seeking a way to gift an investment account to children and/or grandchildren.
Scotia offers two investment programs that employ a proprietary investment strategy using both long and short trades, as well as 2X leverage. The Scotia S&P Moderate Growth Strategy uses trend-line reversion to identify the best days to be in the market. Because of this selectivity, the Moderate program has historically been in the market only about 25% of the time, and in the safety of the Rydex US Government Money Market Fund the remaining 75%. Of course, there are no guarantees that these percentages will remain the same in the future.
The Scotia Growth S&P Plus also uses the trend-line reversion system discussed above, but adds another money management technique to identify “overbought” and “oversold” market conditions. This strategy overlay is the “plus” in Growth S&P Plus, and results in this program being in the market more often than the Moderate program. On average, the Growth S&P Plus program has historically been in the market apprx. 35% of the time and in the money market the remaining 65%. Again, there are no guarantees for the future.
Both programs are somewhat unique in the money management business because they will exit the market immediately upon experiencing a gain, thus reducing the possibility of being “whipsawed” by volatile market action. The Moderate program also limits initial trade allocations to 50% of the account value, but will move to a 100% allocation on subsequent days. The S&P Plus program, on the other hand, always uses 100% allocations.
Our analysis has shown that both Scotia programs have thrived on the increased market volatility that began in mid-2007. The table below shows both programs’ recent performance as compared to broad market indexes:
Best of all, Purcell Advisory Services (Scotia’s back-office and trading platform) has agreed to reduce their normal $25,000 account minimum to $24,000 in order to accommodate gifts from two parents or grandparents to a single recipient.
In order to do this, we will help you establish an account at Rydex Funds through Purcell Advisory Services, and grant Scotia the authority to manage the funds on your (or the recipient’s) behalf. You will receive copies of the monthly account statements if you are the custodian for an UTMA or UGMA account.
As always, I have my own money invested in both of these programs. However, keep in mind that these are moderate to aggressive investments, so only pursue this idea if you and the recipient of the gift are comfortable with the risks involved. If this sounds like something you are interested in, or if it may be a suitable gift for someone you love, give us a call at 800-348-3601 and we will send you the necessary paperwork to review and get started.
A Time For Giving Thanks
At times like these, we often come into the Thanksgiving season feeling anything but thankful. I have to admit that the prospects of a global recession, plummeting stock markets, decimated retirement savings, growing unemployment, etc., etc. can take our eyes off of the people and things around us to be thankful for. We sometimes prefer to mutter “why me” instead of giving thanks.
However, the Bible counsels us “In everything give thanks…,” even though we as humans often have a hard time following this directive. During the Thanksgiving season, I think it’s important to find the silver lining around the dark clouds, hard as it may be. In doing so, we sometimes better realize the things that are really important in life.
What follows is a collection of things that I am thankful for this year.
Thanks For Long-Distance Relationships
One of the benefits of writing a nationally distributed E-Letter is that I have business relationships spread all across our great country. Sometimes it is easier to express thanks to those that you see and talk to in person than those who are only available via e-mail or telephone. However, I want to take this opportunity to thank the various long-distance relationships that mean so much to me personally.
First, I want to express appreciation for my clients, who really make all of this possible. Were it not for those who have entrusted us to manage their investments, there would be no E-Letter. My companies currently have over 1,100 clients representing every state in the Union, and many of these individuals have been our clients for over a decade. In many cases, what began as client/advisor relationships have now developed into warm friendships.
Next, I want to express my sincere appreciation to all of you who regularly read my E-Letters. Since its start in September of 2002, I have continued to be impressed at the quality of most responses to my writing. While there have been a few abusive responses, even most readers who did not agree with me offered reasoned arguments that respected the right to have a different opinion. These comments, both those that agree as well as those that disagree, help me to put out a better E-Letter.
I also want to say “thanks” to all of the staff at Investors Insight for providing a platform for me to get my message out to you. As I have said before, the E-Letter grew out of periodic e-mails to my clients after the 9/11 tragedy. There was so much mis-information out there that I wanted to try to help sort through the stories. A year later, Investors Insight saw some of my writings and requested permission to publish them as a weekly E-Letter and the rest, as they say, is history.
Other long-distance relationships to which we owe a debt of gratitude are our consultants, which include accountants, legal counsel and those that help us evaluate and track money managers. It has become a fact of life that good counsel is necessary for a successful business, and I think ours are among the best in the industry.
The final long-distance relationships I’d like to thank are the Advisors we recommend. Since we perform due diligence on each of them, we are well aware of all of the work it takes to formulate and implement a market strategy designed to manage the risks of being in the market. We also appreciate the hard work of each of their staff members who diligently process account paperwork that we send to them.
Thanking Those Close To Home
I would be remiss if I did not extend a hearty “thanks” to my internal staff. I am very fortunate in that most of my employees have been with me for over a decade. There are members of my staff that help me research topics for the weekly E-Letters, while others process information requests and speak to readers who call with questions or comments. And all of this is over and above their regular duties required in our investment management business.
During this time it is important to never forget to be thankful for your family. My wife, Debi, works in the business and is an important sounding board for many of the ideas that make their way into the weekly E-letters. She is also the CFO of the company and handles all of the detailed financial duties that allow me to concentrate on writing and overseeing our investment management business. She does all that and is still my best friend and a great Mom!
I’m also thankful for my kids. While many newspaper, radio and TV stories lament “out of control” teenagers, I am thankful that my kids are not among them. My son, Tyler, is now a freshman in college, makes good grades, goes to church regularly and works here in the office during the summers. My daughter, Jordyn, is an energetic junior in high school who also makes good grades, plays sports and has never been any trouble whatsoever.
The Biggest “Thank You” Of All
On a larger scale, I am thankful to be living in the greatest country on the face of the earth. Sure, we have our problems, especially in light of the current financial crisis, the stock market plunge and the global recession, but I’d be willing to bet that there are citizens of many other countries who would trade places with us in a heartbeat.
I’m even grateful in the wake of an election that didn’t go the way I would have preferred. Only in a country where you have the freedom for political discourse can you have a situation where the will of the people speaks as loudly as it did just a few weeks ago. In 1994, a similar message was sent when the Republicans gained control. In many countries, such a shift in power cannot happen without a bloody revolution, but here in America, our votes give us the ultimate say as to the direction of the country.
I am sometimes amused at politicians and celebrities who make controversial statements, and then complain about losing votes or income. It is important to remember that our freedom of speech has never been a freedom from consequences for what we say. These complainers should be thankful that they live in a land where they have the right to say whatever they want without having to fear being hauled away in the middle of the night by the “thought police.”
And finally, though there seems to be a vocal minority who want to challenge the “One Nation, Under God” concept, I don’t think that we should ever forget to thank Him who has blessed our nation so bountifully. No matter what detractors may say, our nation was founded upon Biblical principles, and I think that’s a big reason why America has been so successful and has lasted for so long.
Even though a vocal minority wants to push the separation of church and state to ridiculous extremes, they’ll never be able to remove God’s influence from the precepts upon which this country was founded, nor the solid beliefs of its people.
These are just a few things that I am very thankful for during this Thanksgiving season. As you are inundated with food, football and Christmas shopping promotions this week, please don’t forget to stop for a minute, bow your head and be thankful for all of the blessings you have received during the year. I certainly am!
Wishing you a bountiful Thanksgiving holiday,
Gary D. Halbert
There is a Silver Lining
Despite Hard Times, Families Count Blessings
Neither the Great Depression Nor Japan
IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS in exchange for introducing client accounts. For more information on HWM or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.
As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from that of the Advisor. The performance of the S&P 500 Stock Index and the NASDAQ Composite Index is not meant to imply that investors should consider an investment in the Scotia Partners Growth S&P Plus trading program as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks that comprise the NASDAQ Composite Index. Historical performance data represents an actual account in a program named Scotia Partners Growth S&P Plus, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Scotia Partners Growth S&P Plus. The signals are generated by the use of a proprietary model developed by Scotia Partners. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.
When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Scotia Partners Growth S&P Plus trading program.
In addition, you should be aware that (i) the Scotia Partners Growth S&P Plus program is speculative and involves a high degree of risk; (ii) the Scotia Partners trading program’s performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell Advisory Services will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Purcell Advisory Services trading program’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.
Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.