Which way from here?

As I sit putting the finishing touches on my 2008 personal income tax return (yes, I filed a timely extension), all the forms and figures cast my thoughts in several directions. Is the economy on the mend? Or is it, like Apollo Creed at the of Rocky II, just acting like it's going to get off the mat, only to slump again and be counted out? What about the stock market? I hear all sorts of chatter about bears becoming bulls and bulls turning to bears. What about skyrocketing federal budget deficits and Obamacare looming on the horizon? How will government action affect the economy and the markets? What is really going to happen? Well, my favorite answer to most questions is... it depends.

Our massive economy, more than four times larger than the second largest (Japan), truly makes the world go round. It is so involved and complex that it becomes nearly impossible for the common man to even begin to understand all things that can have an impact on it. The Conference Board recently released its monthly update on leading and coincident economic indicators. These two measurements attempt to reflect how the economy is doing now (coincident) and how it may perform in the future (leading). In summary, the LEIs had fallen for twenty straight months, but have been rebounding strongly for the past five. The CEIs have now leveled out. Taken together, these two indicators strongly suggest a near-term recovery for the economy. However, jobless rates continue to increase, with the unemployment rate nationally exceeding 10% for the first time in 25 years. Are we in store for a "jobless" recovery, where companies become profitable and expand without rehiring workers? Will the recovery materialize at all? Time will tell.

There's no doubt that there exists within the recent market recovery a not-so-subtle psychological lift for all those who suffered great losses over the past year. But many still remain very leery of the markets. Some, including many elderly investors, have sworn off the markets entirely (and, in most cases, rightly so). Still others, who have seen the markets rise a full 50% from the March 2009 lows are reticent to get in now, fearing they may suffer another pullback. As the economy begins to break into positive territory, the markets will continue to move higher based on the prospects of more consumer spending, especially seeing the recovery in their 401(k) and other retirement accounts. The unemployment rate may turn out to be the great Achilles' heel of the markets. If unemployment remains high, even in the face of other "recovery" indicators, the markets will remain spooked about another dip into recession. Consumer spending accounts for 70% of all economic activity. When consumers don't have jobs, they don't spend.

Finally, looming on the horizon like a big black storm cloud, is the government. Will tax rates go up? If they do, will they wreck the recovery? How will we pay for nationalized healthcare? How will we pay for the debt we already have? How much is the interest cost on the national debt annually anyway? If we have too many people unemployed, will tax revenues continue to go down as deficits rise to unheard of levels? Why do 10% of Americans pay 40% of the taxes and 40% of Americans pay no taxes? What if the guys who pay the most stop spending and investing? Well, I don't have a crystal ball, but if you look closely and follow the signs, you won't be surprised by what comes around the next bend.

The Anniversary of the Crisis

Many financial columnists are beginning to write about the one year anniversary of the loosely-termed "financial crisis". So, I thought I'd jump on the bandwagon and add a few thoughts of my own. First, I think the word "crisis" is used with far too much frequency these days. I try to be exact in my use of language. I don't always get my words just right. However, I'm pretty picky about other people's use of terms. If anything bad that happens is termed a "crisis", what do you call something that is really bad? Is a "catastrophe" worse than a "crisis"? How about a "calamity"? All these descriptors and their use in our lives often depend on how we perceive the world. For example, if someone loses a job, is it a "calamity", a "crisis" or a "catastrophe"? I guess it all depends. If the person who lost his job was financially prudent, saving money regularly, keeping a financial reserve of six months to a year of expenses and keeping personal spending within his budget, then a job loss would just be an obstacle or a setback to overcome. It wouldn't rise to the level of any of the "c" words above. However, if the person was awash in debt, had no savings and always spent more than he earned, a job loss might well be a "catastrophe" or worse.

Sound financial principles have stood the test of time because they are sound and tested by time. Pay yourself first and build up a reserve of cash for unexpected events. Make and keep a budget. Invest your capital in low-risk, diversified asset classes. If we can take a lesson from the past year, it's that risk and leverage have a way of turning on us just when we don't expect it. As soon as you're sure that your prospects can go nowhere but up, let me know. I'd like to borrow the crystal ball you're using.

Give Now or Give Later - The CLT and CRT of Charitable Giving

Even in times of economic uncertainty, many individuals are looking for the best way to support their favorite public charities. For some it's the local women's shelter. For others it's their Alma Mater. Yet others wish to donate to their church or favorite social cause. Either way, there are two very tax efficient ways to donate that should appeal to the benefactor in all of us. These two methods are represented by their abbreviations: CLT and CRT. The CLT is a Charitable Lead Trust. The CRT is the Charitable Remainder Trust. Let's look at each individually. There are several variations of each. We'll just be going over the basics here.

You can give now to your favorite charity by using a CLT. This type of trust allows the donor to transfer an asset to the trust while retaining ownership of the asset. The charity receives the income from the trust for a certain fixed period of time or based on the remaining life of the grantor (gift giver). An analogy would be that you keep the peach tree but you agree to give away the fruit. The charity enjoys the "fruit" for the term of the trust, then the asset passes back to the donor (if a grantor trust) or to the donor's heirs (non-grantor or irrevocable trust). The grantor gets a healthy current tax deduction for the discounted value of the gift. In the case of a non-grantor trust, the "tree" can pass to the heirs without being subject to estate taxes. This type of charitable giving makes even more sense in times of depressed asset prices and low interest rates.

You can give later by using a CRT. In this type of trust, the grantor irrevocably gives assets to the trust for the benefit of the charity. However, the grantor retains the right to the income from the assets, usually for the rest of their life. Once the grantor has passed, the charity gets the remaining trust assets without restriction. This type of trust generates a tax deduction now for the grantor (based on a formula). It also reduces the grantor's overall estate value, reducing future estate taxes. In this case, the grantor gives away the peach tree, but retains the right to keep the fruit until they pass away. This type of gift is usually irrevocable and cannot be changed. Proper advice and planning are required to make sure this strategy fits in with the overall estate plan.

Americans are the most generous people in the world. We consistently lead all other countries in charitable giving. If charitable giving is part of your future estate plan, contact CFS to receive a free estate planning consultation.