In the current market cycle, the long-standing debate between passive and active investing appears to have been laid to rest. Judging by the exodus of funds from active managers, passive investing has won hands down.
Since 2007, investors have pulled $747 billion out of actively managed equity funds and purchased $1.65 trillion of passively managed equity index funds, a swing of $2.4 trillion – Vanguard Group Founder Jack Bogle, Financial Times, 12-13-16.
So should investors ditch their active managers and move their money to passively managed index funds and ETFs?
The stock market has recovered since the correction earlier in 2016, but we remain concerned about what lies ahead.
The underlying economic fundamentals don’t point to a strong economy or sustained growth. This recovery is the most tepid of any in the post-World War II era. If one or more interest rate hikes occur in 2016, it is likely that markets will encounter some rough patches.
In markets like this, investors need to be prepared for volatility. One of the best ways to achieve that goal is making sure alternative investments are a key part of a portfolio.
The Affordable Care Act, sometimes called Obamacare, is designed to provide healthcare to everyone in America, but that benefit comes with an additional cost – particularly to higher income taxpayers.
That cost is in the form of a new income tax called Net Investment Income Tax (NIIT), also known as the Medicare Contribution Tax. Not only does it lower net investment income, but it also injects a new layer of complexity into the nation’s already overburdened tax system.
With the addition of NIIT, the U.S. tax system now has three layers. One layer is the federal Regular Tax System, the second is the Alternative Minimum Tax System, and the third is NIIT.
Now in place for two years, NIIT must be considered when making income tax planning decisions before the end of each year.
Managing Significant Wealth
Our team at Cypress Wealth Advisors has been helping individuals and families manage their wealth for more than 30 years. We advise our clients on many issues but we are most often asked to help answer questions about managing significant wealth.
We’ve gathered our collective experience to focus on some of the key questions and answers to these challenging issues in a new white paper: Money and Family: The Hard Questions In Life. Please click here to download the complete report.
Here are some highlights from our observations:
What makes for successful management of significant wealth?
Good communication is probably the single most common attribute in successful family wealth management. Unfortunately, many wealth holders are afraid to discuss wealth with their children, and unhappiness almost always follows. Wealth holders shouldn’t underestimate the value of clearly conveying their wishes to future generations.
In the next couple of weeks, the Internal Revenue Service is expected to issue new guidelines governing Family Limited Partnerships (FLPs). These guidelines can’t come soon enough. The new regulation is a positive step forward to ending the abuse of an investment vehicle that provides very significant benefits to families.
What exactly is an FLP and how does it help families of significant wealth?
An FLP is typically set up to promote the gifting of assets, via FLP interests, to children while allowing the parents to retain control of the assets. Here’s an example: Parents create an FLP and contribute to the FLP a business that they own. They then gift 98% of their Limited Partner interest to their children, and the parents retain a 2% General Partner interest. The Limited Partners, by definition, have zero control in running the FLP, and the General Partners have all the control. However, the Limited Partners own 98% of the value of the FLP, and the General Partners only own 2% of the value.
High net worth individuals and families are typically smart about managing money, but things can go sideways when it comes to taxes.
Even after 25 years as a CPA, I’m continually surprised to see highly successful people waiting until just before April 15th to do anything with their prior year’s income taxes. At that point, it’s just too late for tax planning. By putting off the task, taxpayers miss a number of golden opportunities to reduce taxes.The good news is that getting ahead of the curve is relatively easy: Simply reach out to your tax advisor and let them know of any big financial changes in your life or your business during the past year. The heads up will give your advisor time to start thinking about your next move before the end of the year, when you have far more ways to minimize taxes.
By Barbara Young, Cypress Wealth Advisors
Just because someone is terrific at wealth creation doesn’t necessarily mean they’re equally good at managing serious money.
I was reminded of that during a recent conversation about the importance of alternative investments on a portfolio.
In my 30 years of investing and wealth management, I’ve seen many strategies come and go. One that is here to stay – and was previously accessible only to the wealthiest – is diversifying risk with alternative assets.