Have "The Talk" With Your Children

(No, not THAT talk...)

Photo by Lacheev/iStock / Getty Images
Photo by Lacheev/iStock / Getty Images

“I don’t understand why Dad didn’t trust me”

One of the sadder statements I’ve heard uttered by a client.  And completely off the mark.  My client was surprised by her father’s trust provisions, which were quite restrictive with her inheritance.  She misunderstood her father’s intentions, which had nothing to do with lack of trust in his daughter.  Rather, he abhorred the concept of estate tax, and created an estate plan which prioritized tax savings at the expense of practicality and flexibility.  The worst part?  There was no way for the daughter to reconcile these feelings with her father, as a result of his death.

Some of the more unfortunate family circumstances I’ve witnessed through 18 years in the Trust business have involved surprises in the Estate Plan.  The “Reading of the Will” scene in movies/television is a common bit because there is always a dramatic surprise – and it’s never a happy surprise.  Although “The Reading of the Will” event is something of a fiction, there are kernels of truth underlying.  Surprises cause hurt feelings.

Hurt feelings due to misunderstandings.  Unintended, and with no ability to make it right since one of the parties to the relationship is deceased.

Worse yet, these surprises, misunderstandings and hard feelings often lead to litigation (and nothing is more wasteful of family assets).

Surprises may cause problems even if there are no hard feelings about the estate plan (an unexpected windfall, for instance).  Many inheritors don’t know how to handle their newfound wealth, and like lottery winners, often squander the prosperity for which they were unprepared.

Conversely, some of the more successful families I’ve worked with have been very open about estate planning across generations.  Especially the goals and values which are important to the family (and which typically have very little to do with dollar amounts).  Where a family business is involved, estate planning discussions are almost unavoidable if the family prudently addresses succession in the business.  Estate planning is a natural extension of the business discussion - more of an ongoing process, as opposed to an event. 

But you don’t have to be a business owner, or a Rockefeller, to discuss family legacy.  On the contrary, I suggest almost everyone should discuss their plans with their children.

The topic is easy to put on the backburner – death isn’t pleasant to discuss, and inheritance is something of a cultural taboo – it often simply is not spoken of.

I am certainly not suggesting the conversation is appropriate for young children, or those without the capacity or maturity to appreciate the discussion.  It also may not be appropriate to discuss dollar amounts (at least at first). Rather, discuss the philosophical legacy or values of the family, as well as the structure of the plan.  Will assets stay in trust?  Will there be unequal distributions, and why?  Ask your children what they would like to know – you might be surprised at their concerns.

Your children are also likely to be uncomfortable with the discussion, so don’t ambush them.  Set a date, and consider whether to include an objective advisor such as your attorney.  They can keep the discussion on track, and also address technical questions.

The topic is especially important if there are unequal distributions in the plan.  Address the matter directly to alleviate any misunderstandings.  This is also a good time to talk about who will administer the plan post-death.  Again, misunderstandings and conflict can appear if one child is involved and another is not.  Similarly, explain why a corporate trustee is involved, if appropriate.

A great fear of our clients’ is their heirs will be unproductive or irresponsible as a result of an expected inheritance.  Thus they may avoid the topic altogether.  Ironically, they miss the opportunity to disabuse the notion of being unproductive, by discussing their intentions, motives and values. 

Ask yourself; what do you want to accomplish for your family with the wealth you’ve accumulated? There’s a greater likelihood of success if your heirs are in on the plan.

(By the way, it is also imperative to discuss your plan with executors, guardians, etc., ahead of time.  More on that here.)


Matthew Black


Market Insights Q4 2016

Equity Update - Mark Evans, CFA

The first half of 2016 was constrained by risk averse sentiment resulting from a slowing of China's economy, oil prices that continued to tumble, and a slackening in U.S. growth. As these factors stabilized or improved in the second half of the year, a rotation back into 'risk' assets helped drive equity market gains.  From a macroeconomic point of view, 2016 ended on a solid note (record consumer confidence, U.S. home prices rising, an expansionary manufacturing sector, encouraging data out of Japan, etc.).

Small cap U.S. equities outperformed all other asset classes with the Russell 2000 up 21.3% for the year. U.S. large caps were up 12% on the year, while commodities ended up +11.8% supported by OPEC production cuts and increased prospects of infrastructure spending. International developed equities were flat for the year while emerging market equities returned +11.1% supported by a rebound in commodity prices.

Large cap value stocks outperformed growth stocks in 2016, up 17.3% vs +7.1%. This is a dramatic contrast to trend, where growth outperformed value for a decade by roughly 70% in cumulative total return. Value stocks rallied further after the November election with performance comparisons shown below. 

Source: J.P. Morgan Asset Management

Source: J.P. Morgan Asset Management

Since the election, there has been a rapid rotation out of bonds and into stocks. Bonds, which were already expensive on a historical basis, continue to be less attractive than stocks on a valuation basis, even after the recent selloff in bonds. This can be seen from the chart below which shows that the earnings yield on the S&P 500 minus the 10-year U.S. Treasury yield is still one standard deviation above the historical average. 

Source: Strategas Research Partners

Source: Strategas Research Partners

As we look out into 2017, 'risk' assets should fare well with both inflation and global growth expected to pick up. Earnings growth, pro-growth policies, and deregulation should help support the equity markets. The chart below shows that U.S. corporations have a tremendous amount of cash on their balance sheets.  A substantial percentage could come home from overseas and be reinvested into the economy in the event of tax repatriation changes.

Source: J.P. Morgan Asset Management

Source: J.P. Morgan Asset Management

Overall, we are positive on the outlook for stocks despite the headwinds of rising interest rates.

Fixed-Income Update - Richard Sasala, Ph.D., CFA

The Barclays US Aggregate posted a loss of -2.98% in Q4 which brought down the YTD return to 2.65%.  The Intermediate Aggregate index lost -2.05% in Q4 and was up 1.97% for the year.   The Q4 losses resulted from sharp rate increases that occurred right after the election. As the market adjusted to a new view on the economy.

While the fixed income market on the year posted returns commensurate with their yields, details reveal that market timing and unusual variances between fixed-income sectors had an oversize effect this last year.  Segment divergences can be seen in the graphic below where high yield bonds posted a 17% annual gain while municipals eked out only 0.2%.  The high yield bonds reversed losses posted in 2015 as spreads retracted back to more normal levels. Inflation Protected Securities also had above average returns due to raised expectations for inflation post-election.  Municipal bond returns suffered from the uncertainty of the continued value from tax shelter benefits as the new-administration weighs possible income-tax reductions that would make taxable securities more attractive.


Timing discrepancies, illustrated in the line chart, show the total return of US Aggregate index reaching an impressive 6% cumulative total return by mid-year, only to give most of it back as rates rebounded sharply after the election as shown by the 10-year treasury rate curve.


In December the Fed increased short term rates by 25 bps for only the second time since the great recession.  This was widely expected by the market, especially post-election with the equity markets signaling potentially higher growth rates as well as potential increases in inflation.  The view going forward is for 2-3 rate increases in 2017 and a similar number in 2018.  Compared to past rate increase cycles, this is much slower and will hopefully allow the US to exit gracefully out of the unprecedented accommodative monetary policy period.

Are You Ready for the 2017 Tax Filing Season?

Photo by alfexe/iStock / Getty Images
Photo by alfexe/iStock / Getty Images

Although it may seem as if we just filed our income taxes (as some of you may have filed as late as October) the IRS has announced they will begin accepting 2016 tax returns on January 23, 2017. However, they are warning that refunds may be delayed this year for individuals claiming certain credits and also due to added security procedures. The IRS continues to make a concerted effort to strengthen their processing systems in order to protect taxpayers from identity theft and refund fraud.

It is expected that more than 153 million individual tax returns will be filed electronically in 2017. And, although the IRS is anticipating that the majority of refunds will be issued in less than 21 days, this may not be the case for taxpayers claiming either the Earned Income Credit or the Additional Child Tax Credit. Under the new tax law, such refunds will be held until February 15, 2017.

Also, be advised that the due date this year is not the traditional April 15 date. Since April 15, 2017 falls on a Saturday and the fact that Emancipation Day this year (a legal holiday in DC) will be observed on Monday, April 17, the nation’s tax filing deadline is pushed to Tuesday, April 18, 2017.

Finally, the IRS wants to remind taxpayers to keep sufficient documentation to support their tax returns in addition to keeping copies of their previously filed tax returns for a minimum of three years. If filing assistance is needed this year, the IRS offers a variety of options to get help that can be found at IRS.gov.

Connie Farell, CPA

Take Advantage of The Now Permanent QCD Rule

Photo by tumsasedgars/iStock / Getty Images
Photo by tumsasedgars/iStock / Getty Images

Time is running out!  If you are age 70 ½ or older you must withdraw a minimum amount each year from your traditional IRA or employer sponsored retirement plan.  This “required minimum distribution” (RMD) is counted towards your taxable income and failure to take your RMD by year end could result in an IRS penalty.  A “qualified charitable contribution” (QCD) can be a convenient way to support charitable causes and obtain a tax break while meeting tax requirements for IRAs.  Under the now permanent QCD rule, beginning at age 70 ½, you can donate all or part of your distribution directly from your IRA to a qualified charity (up to $100,000 per taxpayer per year).  But unlike conventional RMDs, QCDs are excluded from your taxable income.  Interested in taking advantage of the QCD rule?  We recommend you consult a professional tax advisor for specific guidance on your personal tax situation. 

IRS Proposal Threatens Valuation Discounts for Family-Controlled Entities

Photo by BrianAJackson/iStock / Getty Images
Photo by BrianAJackson/iStock / Getty Images

Holding assets in a family-controlled entity can have significant benefits including creditor protection, centralized management of assets, and economies of scale.  Moreover, when closely-held business interests are transferred to family members, discounts for lack of marketability and control can substantially reduce the value of the transferred interest for gift and estate tax purposes.

The Treasury Department recently published new proposed regulations (2704(b) regulations) which, if adopted in their current form, would substantially curtail a taxpayer’s ability to claim a valuation discount for gifts and bequests of interests in family-controlled entities to family members.  Concerned clients may wish to complete contemplated transactions involving transfers of interests in family-controlled entities to avoid application of the new rules.  Others may wish to take a wait and see approach.  The Treasury has invited public comment on the regulations and it is not certain in what form the regulations will be adopted, or if such regulations will be adopted at all, particularly given the election of Donald J. Trump as our 45th President.  For more information, consult your legal and tax advisors.

Election Results and Market Implications


What can we expect from the markets in the next administration?  President Trump has an unusual ability to surprise, especially as a relative newcomer to the federal policy making scene.  This suggests that the next few years will present more volatility in the markets than we have come to expect.  This impact may feel exaggerated at first, as the last few months presented below-average volatility in the equity markets.

The appearance of a Trump administration could push up equity prices in some industries.  For example, fossil-fuel energy companies, weapons manufacturers, and other defense related companies may benefit, at least in the short term.  Rallies may also be seen in pharmaceutical/biotech and financial related company equities as expectations of tighter regulation in these industries drop away. 

It is also possible that the equity of companies dependent on a large minimum-wage workforce may appreciate in the short term, as expectations of an increase in the minimum wage weaken.  These companies include, for example, fast-food/fast-casual restaurants and big box retailers. Below are some possible sector winners and losers in an all Republican Government.


Source: Strategas

Source: Strategas


The last three (Republican-controlled) Congresses have generally prevented the sitting democratic president and his party from creating law.  The resulting gridlock has restricted policy innovation.  In this environment, change to our legal landscape has come through administrative rule-making and other changes in how existing law is enforced.  This circumstance has coincided with a strong period for the equity markets.

Today’s Republican sweep of both the legislative and executive branches of government suggests a break from the gridlock of the last six years.  How the G.O.P. will use its power to enact legislation remains to be seen, as internal party governance has faced its own gridlock of late.

What does this mean for the equity markets?  As usual, there are well reasoned arguments for extreme hope and extreme pessimism.  Expectations for extreme change of any sort are likely overblown. As the chart below shows, the stock market has historically performed well during Republican control.

Source: Strategas

Source: Strategas

Typically, regardless of the outcome of the elections, a relief rally follows through year-end. Seasonality is also supportive of a November/December rally.

Source: Strategas

Source: Strategas


Early Market Reaction

Equity futures markets had strong negative reactions overnight when it became clear that Trump had sufficient electoral votes. The losses have softened this morning as Trump called for unity and cooperation. The Fixed Income markets, which often lead the longer term equity markets, are showing a steepening yield curve. This could be an early indication of confidence in the longer term outlook for growth, consistent with favorable equity markets.

While short term volatility can sometimes be uncomfortable, volatility is the way that the markets find their way back to values reflective of new economic conditions and expectations.  We remain positive on stocks and see improving earnings as the primary theme for the market as we look out into 2017. This is why it is critical to maintain a long term perspective and an appropriate asset allocation.

Mark Evans, CFA
Richard Sasala, CFA
Matthew "Drew" Sheets
Renee Goubeaux


Email Based Fraud Prevention

Photo by NicoElNino/iStock / Getty Images
Photo by NicoElNino/iStock / Getty Images

There has been a global increase in the number of individuals who fall victim to email based fraud.  While email based fraud can take many forms, it often occurs when an unauthorized individual gains access to another individual’s email account, steals personal information, and then fabricates communications for the unauthorized individual’s financial gain. 

Fraud prevention is everyone’s responsibility.  The best defense is to be aware, use good judgment, and educate yourself regarding the general warning signs.  In that regard, be wary of: 

  • Emails with odd wording or spacing.  Many fraudulent requests are poorly written with misspellings and incorrect grammar.  Other, more sophisticated fraudulent requests may closely mimic legitimate email requests, but upon close examination, contain incorrect punctuation or use odd spacing or capitalization.
  • Emails sent from a suspicious address, email addresses with a misleading domain name, or emails containing mismatched URLs.  In many cases, emails are spoofed by making subtle changes so it is difficult to distinguish a fake address from a legitimate one.
  • Emails marked urgent or that make unrealistic threats.  Fraudulent requests often insist that a funds transfer must happen quickly due to an emergency.
  • Emails sent from a government agency.  It is unlikely that a government agency would initiate contact with you through email.  Contact the agency directly to verify whether the message is legitimate.  
Photo by filipefrazao/iStock / Getty Images
Photo by filipefrazao/iStock / Getty Images

The following measures can help protect you and your family from becoming victims of email based scams:

  • Always confirm that any request to initiate a transaction is from a legitimate source.  If the request cannot be confirmed at the source, it probably is not legitimate.
  • Double and triple check email addresses.
  • Slow down so as to avoid pressure to take action quickly before you have time to think it through.
  • Never open attachments, click on links, or respond to emails from suspicious or unknown sources.
  • Protect your account numbers, personal identification numbers, and passwords.  Never save this information on your computer.
  • Use strong passwords and do not use the same passwords all of the time. Passwords should be at least eight characters and contain upper/lower case letters, numbers, and special characters. Do not authorize websites to remember your user name or password.
  • Keep your computer and mobile devices up to date.
  • Ask yourself if you are sharing too much information on social media websites.  Check your social media privacy settings.

If you have questions or concerns about fraud prevention, please contact Steven Plummer at 419.865.1098. 

Investment Insights Q3 2016

Equity Update - Mark Evans, CFA

Despite weak corporate earnings, the equity markets continued to advance in the third quarter. The S&P 500 gained 3.9% while small-cap stocks performed even better as the Russell 2000 advanced 9%. Technology stocks led the market climbing 12.9% for the quarter while Utilities and Telecom, which performed very well in the first half of the year, fell -5.6% and -5.9% respectively.

While this bull market is relatively old, there are no immediate signs that it is over yet as we continue to see signs of a classic wall of worry. Stocks have advanced 218% off the March 2009 low and have gone 88 months without a 20% pullback yet this is the most distrusted bull market in history. We continue to see net redemptions in equity mutual funds and ETFs, modest merger and acquisitions, and almost non-existent IPO activity. The market sentiment is being driven by fear and skepticism rather than greed. Given that real interest rates are extremely low and corporate credit spreads are well behaved, these are highly unlikely conditions for a bear market phase to begin. Additionally, the earnings outlook for 2017 looks to be much brighter as the earnings recession from energy companies will be behind us.

While we are entering the seasonally strong fourth quarter we are also entering a critical period in a Presidential election year. Typically, the fourth quarter is the best performing quarter for the stock market averaging almost 3% since 1928. Since 2009, the seasonal tail wind has been even more pronounced with an average gain of over 6%. However, countering this positive influence is a contentious open election. Open elections have on balance not produced such favorable returns. We are currently within a critical period when stocks focus on the election. In the three months ahead of the elections, the S&P 500 has predicted 19 of the past 22 elections. If stocks were higher in this three-month window, the incumbent party wins while the opposition party typically wins if stocks are lower. As of 9/30, the S&P 500 is slightly down at -.24% (since 8/8). October will be a critical test period. Further, the one-month performance of the market after the first debate is even more pronounced in open election years. This trend is evident from the chart below: a negative market favors the opposition party while a positive market favors the incumbent. Lastly, a relief rally typically occurs in the stock market after a presidential election regardless of the outcome.


Fixed Income Update – Rick Sasala, Ph.D., CFA

The Barclays US Aggregate posted a gain of 0.46% in Q3 which brings the YTD return to 5.80%.  The Intermediate Aggregate index gained 0.31% in Q3 and 4.10% YTD.   The Q3 gains were primarily from coupon payments as well as some narrowing of spreads, as rates overall were much more stable than the beginning of the year when yields fell significantly and produced most of the YTD returns.

The table below summarizes the quarterly yield moves for various treasury bonds as well as the yield change on an YTD basis.  Both the Y/Y and YTD numbers show a flattening of the curve since the longer maturity bonds have decreased and the shorter bonds have either remained the same or increased. Typically, long-term treasury yields are reflective of a combination of long-term growth and inflation expectations. Both of these are expected to be in the range of 2%, which indicates that there are other influencing forces which continue to put downward pressure on rates.  

While there continues to be much conversation and speculation about if, when and how the Fed will increase rates next, it is the international market over which the Fed has no direct control that has been a significant driver of the fixed-income markets this year.  This correlation can be seen in the following chart showing the spread change between the 2 yr and the 10 yr government bonds in the US, Germany and Japan.  One bright spot from the chart is that after 8 months of decreases, all three countries showed a notable tick in September which may indicate some stabilization.

The Fed and Three Big Questions

The Fed is wrestling with three big, intertwined questions today:

1.   How many people want jobs? - Seven years into the recovery, the unemployment rate has fallen to a low 4.9% but the picture doesn’t look quite right, since those actively seeking work is lower than normal. By keeping rates low, more people could be drawn back into the work force.

2.   How low are interest rates? - The Fed cut its benchmark by 5% in response to the great recession, expecting 5 points of stimulus.  Now the Fed is increasingly convinced that it has become more like 3% of stimulus.  Global rates are in a swoon from a glut of money or the absence of attractive investment opportunities.

3.   What damage is done by doing nothing? - The Fed usually increases rates because it fears inflation but inflation remains sluggish. But they are also worried about creating future financial crises since low rates are intended to encourage financial speculation. 


Household Income Gain The Largest in 50 Years

The Census Bureau's announcement that median household rose 5.2% marked the biggest annual gain on record. Income inequality eased as income grow fastest for lower-income households and the middle class grew more than the rich.

This shift could have hugely important implications for U.S. consumer spending, which accounts for a full 70% of GDP, and for retailers and other consumer-facing businesses.

The income gains for less affluent households probably continued in 2016. And, those paychecks tend to get spent. For most of these people additional income translates into additional spending.

Gains for middle and lower-income households look likely to continue, even if hiring moderates in the year ahead as the economy gets closer to full employment - wage growth ought to pick up steam.