"As We Start a New Decade with the Global Economy Emerging from the Worst Recession of the Post War E"
WINTER 2010 fiduciary perspective i n s i g h t s o n p r i vat e w e a lt h m a n a g e m e n t A NOTE FROM OUR PRESIDENT FUNDING A REVOCABLE TRUST: In 2009, the global economy emerged AN ESTATE PLANNING OPPORTUNITY from the worst recession since World War II, and the stock market’s nine- When many people think of trusts, they think of wealth. In today’s world, having a trust may month rally was the steepest since the 1930s. While we are optimistic be more about privacy and personalization than about prestige. The revocable trust is an that the economic recovery will con- estate planning tool that, when used in conjunction with a will, can personalize your estate tinue, it remains unclear if it is sustain- plan, keep it out of the public eye, and avoid certain expenses. able in the long term. What Is a Revocable Trust? Our diversified investment approach works well in times such as these. Also referred to as a living trust, a revo- The terms of a revocable trust specifi- By constructing portfolios utilizing a cable trust is a document that defines an cally direct the trustee how to manage broad range of asset classes, both individual’s desires and plans for assets and distribute assets when the grantor domestic and international, we can during one’s lifetime, through any possi- can no longer make decisions, because take advantage of market changes ble incapacity, and ultimately at death. It of either death or mental incapacity. and new investment opportunities. is “revocable” because it can be changed The trust language can be as flexible as We hope you enjoy this issue of the or terminated by the donor at any time, necessary to provide guidance regard- Fiduciary Perspective. If there are as long as she is mentally competent. ing the management and distribution any topics that you would like us of both financial and physical assets. In to cover in future issues, please let The donor, or grantor, is the individual addition, the trust can provide specific us know by either contacting your investment officer or emailing us at who creates the trust and transfers her timelines regarding the distribution of firstname.lastname@example.org. personal assets into it. The trustee man- assets to beneficiaries and can dictate ages the trust and its assets as directed whether those distributions are to be This issue and prior issues of the by the trust document. Often the donor made outright or in future trust. Fiduciary Perspective, as well as our will name herself as trustee to maintain monthly economic and market com- control of the assets during her lifetime. Funding the Trust mentary, are available on our website at www. fiduciary-trust.com. It is also important to select a co-trustee Funding a revocable trust is as impor- or successor trustee to serve when the tant as creating one and involves trans- Best wishes for a Happy New Year. donor becomes incompetent or dies. ferring assets from the donor’s indi- The co-trustee or successor trustee vidual name to the name of the trust. Doug Smith-Petersen could be a spouse, another individual, There are several benefits to funding the President and CEO trust during the donor’s lifetime. Such or a corporate trustee, like Fiduciary Trust. During a donor’s lifetime, the funding allows a donor to establish a IN THIS ISSUE trust can provide for her benefit or for relationship with the trustees and to the benefit of others, as she determines. understand their approach and capabili- Remainder beneficiaries are typically ties in the event of her incapacity. When Feature Article named to inherit assets after the donor’s needed, the trustees are also able to man- Funding a Revocable Trust: age the trust’s assets without interruption death and can include family members An estate planning opportunity and charities. or delay. Unlike a conservatorship, Market Commentary (continued on page 4) News and Notes m a r k e t c o m m e n ta r y By Christopher M. White, CFA Chief Investment Officer Today our economy is expanding faster than many observers think. But the longer-term picture is cloudy at best. This dichotomy is captured in both the cyclical and the secular outlooks. The near-term, cyclical recovery is robust. Stock markets around the world have discounted some of this promise, but there may still be more to go. The unresolved issues and the malaise that persist in the developed world are more secular and give those same stock markets pause as we enter this new decade. The Cyclical Expansion Growth of the Money Supply rates observed after the initial employment The Fed will remove the “punch bowl” Thanks to the massive growth of the recovery following a recession. Note the slow- from the party. Federal Reserve’s balance sheet, our econ- ing growth rate of employment starting in omy has seen a huge amount of liquidity the 1970s. At about this time, technological No one likes to see the party end. When being pumped into the financial markets. advances created efficiencies that increased this happened in 1994 and again in 2004, The Federal Reserve was not alone. Other productivity. Fewer employees need to be bonds fared worse than stocks. As interest central banks around the world coordi- hired to expand business as a recovery develops. rates rise, the value of bonds falls. Longer- nated their stimulus efforts to expand their maturity bonds are hurt more, while bonds money supply at the same time. This cre- While we anticipate that the unemploy- with shorter maturities are hurt less by the ates a simultaneous business cycle expansion ment rate will drop in 2010, we see that rise in interest rates. As long as the recov- globally that may be surprisingly strong. longer-term improvement will be slow. We ery appears to be sustainable, stocks often will need a multiyear economic expansion tread water or show sub-par results during Will Employment Improve? to bring unemployment down to the levels these periods. The employment picture brightens. The we enjoyed in the late 1990s or in 2005 and drop in the unemployment rate from 2006. Because of the secular concerns, The end of this current cycle will carry 10.2% in October to 10% in November is highlighted in the following section, we are with it more risk than was the case in not seismic. But the initial unemployment not sanguine about our economy being able previous cycles. This is because the size claims have improved substantially from to achieve such a multiyear expansion. of the Federal Reserve’s balance sheet has over 600,000 last March to 432,000 in late ballooned far beyond historical limits. In December. This trend should continue into Rising Interest Rates addition, complex funding mechanisms 2010, and the unemployment rate should fall We do see that the cyclical expansion will that will be difficult to unwind have been below 10%. This will help make the recovery increase economic activity broadly in the used. Fiscal and monetary policy has been seem more sustainable to investors. U.S. and overseas. Ultimately, this means so thoroughly inserted into the private that central banks around the world will sector that the old patterns of “creative Our economy’s ability to generate new jobs need to reduce the monetary stimulus destruction” have not been allowed to work. is not what it used to be. The chart below or otherwise risk inflation. Our Federal The auto manufacturers, GM and Chrysler, illustrates the U.S. employment growth rate Reserve has begun to test programs to were never allowed to fail. Some brokerage after World War II. These are the growth reduce the money supply in this country. firms failed, e.g., Lehman Brothers, but oth- The quantita- ers were kept afloat. The largest banks were U.S. Employment Growth tive easing mea- maintained in spite of holding many toxic The average annual job growth rate after an initial period of recovery sures of buying assets. Thus, there are still a lot of credit 5 assets and problems that have yet to be resolved here Non-Manufacturing Sector 4 putting them and abroad. It is an open-ended question % Annual Job Growth 3 on the Federal whether the economy can successfully deal Reserve’s bal- with these problems without substantial 2 ance sheet have central bank support. 1 already been Manufacturing Sector scaled back. As 0 The Secular Scene that happens, -1 interest rates Just as we see a reduced capacity to gener- -2 will rise and ate new jobs in our economy compared 1948 1953 1957 1960 1969 1973 1980 1981 1990 2001 the money sup- to 50 years ago, our ability to grow other to to to to to to to to 1949 1954 1958 1961 1970 1975 1982 1991 ply will shrink. parts of the economy is also limited. This Recessions Post-World War II (continued on page 3) Source: Economic Cycle Research Institute 2 Fiduciary Perspective: Winter 2010 T NEWS AND NOTES Thanda Fields Brassard Named a 2009 Massachusetts“Rising Star” For the fifth consecutive year, Fiduciary Trust’s Thanda Fields Brassard has been named a MARKET COMMENTARY (continued from page 2) “Rising Star” in the November issue of Boston Magazine. Rising Star names Massachusetts’ is due to any number of “ills” we face. more favorably than the developed top up-and-coming attorneys; each year, only For starters, our economy is burdened markets. After all, capital is rewarded 2.5 percent of the attorneys in the state receive by debt. Rob Arnott, quoted in a recent by higher returns, fewer regulations, and this honor. issue of Forbes, writes that all U.S. gov- less government interference. Capital ernment debt is 141% of GDP, placing it flows to where it is treated best. Fiduciary Trust Hosts Posse in a rarified league slightly behind Japan, Alumni Community Lebanon, and Zimbabwe. Add all U.S. For all these reasons and more, our In November, Fiduciary Trust officers made a personal and corporate debt, and total developed U.S. market is not as vibrant presentation to recent college graduates from debt comes to 557% of our national GDP. as the emerging markets. While we the Posse Foundation, a nonprofit organization Add the current cost of entitlements, might see several quarters of strong that helps public high school students who such as Social Security and Medicare, cyclical GDP growth in 2010, longer have demonstrated leadership and academic and total debt reaches 840% of GDP. term, GDP growth may be only 2%. It potential gain access to scholarships. Officers is difficult to sustain large and expand- This is crushing and unsustainable. It ing government programs and deficits spoke on a variety of financial topics, rang- also means that a new cycle of credit cre- on the back of such anemic growth. ing from budgeting, savings, and investing to ation cannot start, which limits the abil- Perhaps of greatest concern is that such credit, insurance, and financial scams. ity of the U.S. to grow. Other developed anemic growth means that this low-fly- countries are similarly burdened. In the ing economy is more likely to slip back Over the years, Fiduciary has partnered with U.S. it means that the interest payments into future recessions, making mean- the Posse Foundation by providing summer on this debt will, at some point in the ingful job growth difficult to achieve. internships to Posse scholars. This partnership near future, consume most of the U.S. tax Increasing the frequency of recessions, has allowed the firm to make a contribution to revenues. New taxes will be proposed as in Japan, raises the potential for defla- to balance budgets, thus placing an even tion and a higher equity risk premium. the development of tomorrow’s leaders. greater burden on our economy’s pro- Neither would be good for stocks. ductive capacity and in the private sector. Fiduciary Trust Honored at The Boston Conclusion Club’s Corporate Salute Other concerns include inflation and The near-term outlook is surprisingly Fiduciary Trust was once again honored by demographics. The Federal Reserve’s bright, given all that our economy has The Boston Club at its biennial Corporate strategy to print money and the growth come through over the past 18 months. Salute, held this past November, for having of federal expenditures as a percentage Employment appears to be improving. five women on its board. We are proud of this of GDP are both inflationary. This ulti- Economic growth is occurring domesti- distinction and appreciate the significant con- mately devalues our currency. Inflated cally and globally. But now equity mar- tributions these women make to our firm’s suc- dollars will make it cheaper to pay kets must calculate expected growth rates cess. The Boston Club actively promotes the future debt when it comes due. Our in a world with lower levels of liquidity. demographics, while better than many They also must come to terms with many professional advancement of women, including developed countries, are concerning due of the outstanding problems lurking in the participation of women on corporate and to the aging baby boomers. As the baby the developed economies. These secular, nonprofit boards. boomers retire, there will be more and long-term realities of troubled financial more retirees being supported by fewer companies, higher inflation, lower eco- Thinking Green and fewer young workers. In 2011, the nomic growth, high indebtedness, and In an effort to support “green” activities, we are first baby boomers will reach 65. Social stubbornly high unemployment will all offering readers the option of receiving their Security and Medicare outlays will grow dampen investor enthusiasm for com- copy of the Fiduciary Perspective via email. If inexorably as the baby boomers queue mitting capital to our developed econ- up for these entitlements. omy versus the emerging markets. This you would like to receive future copies of the means that a well-diversified portfolio Perspective electronically, please contact your Compare these issues and others with focused on unearthing quality invest- Investment Officer or email us at perspective@ the more dynamic emerging markets, ments around the world is necessary to fiduciary-trust.com. and it is easy to see why capital increas- take advantage of these shifting markets ingly views these emerging markets and changing opportunities. Fiduciary Perspective: Winter 2010 3 FUNDING A REVOCABLE TRUST: AN ESTATE PLANNING OPPORTUNITY (continued from page 1) a court-supervised procedure, the trustee will retain com- Continuity plete control of the trust assets during any period of the The donor of a revocable trust continues to have exclusive donor’s incapacity, without any interference from the court. control of the assets for as long as she is able or desires to If the trust is funded during the donor’s lifetime, the assets be involved. When an event occurs that renders the donor will not require any further movement on the donor’s death, unable to continue the management of the assets, the trust and the property can continue to be managed or distributed instrument provides specific directions to the trustee to without the involvement of the probate court. intervene and control the assets. Under the supervision of a co-trustee or successor trustee, a donor is assured of con- Funding a revocable trust during one’s life does not cause tinuity in the management and flow of her assets to herself, complicated tax consequences. The assets in the revocable her family, and ultimately her remainder beneficiaries. The trust are reported to the IRS as the donor’s personal assets, trustee’s authority continues through death and beyond dur- and any gains or losses are recorded using the donor’s tax ing trust management. identification number. Additionally, there is no tax liability on any payments made from the trust to the donor. However, Estate Planning Flexibility funding a revocable trust does not eliminate the possibility of Finally, using a revocable trust provides a great amount of paying estate taxes. The assets held in trust may still be sub- flexibility in an estate plan. Creating the trust is usually ject to an estate tax, if one would otherwise have been due. as simple as meeting with an estate planning attorney and The donor can also control the taxable disposition of assets drafting the document. As individuals go through life, their by utilizing appropri- needs and fam- ate federal and state ily circumstances estate tax credits, A r e v o c a b l e t r u s t a l s o a v o i d s t h e e x p e n s e s change. Sometimes as well as beneficial health issues or charitable deductions. and delays of the probate court. marital situations require a greater Privacy and degree of flexibility. Avoiding Probate The revocable trust can be easily amended to address these A primary benefit of creating and funding a revocable trust is changes rather than revising the entire trust instrument or maintaining the privacy of the donor, her assets, and her ben- re-executing one’s will. eficiaries. When a revocable trust is in place, a donor’s will generally states that her assets will be distributed in accor- Conclusion dance with the terms of her trust. However, the will is a pub- Although having a revocable trust is not uncommon, some lic document, and the probate process requires the disclosure remain unfunded during the donor’s lifetime. Executing and, of accounts, assets, and beneficiaries that would not be as important, funding a revocable trust can mean the dif- disclosed using a funded revocable trust. With a revocable ference between maintaining your privacy and having your trust, the amount and type of assets in the trust, as well as the assets go through a public, more expensive, and often delayed beneficiaries, are not disclosed to the probate court or to the probate process. If you have not discussed the advantages public. This protects the donor’s privacy, and typically only of a funded revocable trust with your Fiduciary Trust the trustee has knowledge of her complete plans and wealth. Investment Officer or with your attorney, we encourage you to do so in the near future. A revocable trust also avoids the expenses and delays of the probate court. Depending on the donor’s domicile, the pro- By Jill I. Cabitt, Esq., Vice President and Trust Counsel bate process can include administrative issues and expenses, and can cause considerable delays in the distribution of assets IRS Circular 230 Disclosure: This material is not intended to constitute tax advice. Accordingly, any discussion of to beneficiaries. A funded revocable trust shields its assets U.S. tax matters contained herein is not intended or written to be used, and cannot from the scrutiny of probate and gives beneficiaries faster, be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with Fiduciary Trust Company or any of the matters addressed herein or more direct access to their distributions. for the purpose of avoiding U.S. tax-related penalties. 175 Federal Street Boston, MA 02110 617 482 5270 tel www.fiduciary-trust.com Fiduciary Perspective: Winter 2010 4