Friday, May 16, 2014

Estate Planning: 5 Tips to Stay Ahead

Westward Group for Tax and Estate Planning Advisors Tokyo Tips – MIAMI – If you haven’t changed your approach to estate planning recently, you should.

“The status quo is stupid,” said John Scroggin of Scroggin & Co. at the recent FPA Retreat here. “Estate planning is a constantly changing environment.”

Click here to read the full content of this article.

Thursday, May 15, 2014

Investors increasing allocations of alternative assets

Westward Group for Tax and Estate Planning Advisors Tokyo Tips – International stocks make up the most popular mutual fund flows by asset class, according to new research.

Cerulli Associates discloses this finding in “The Cerulli Edge: U.S. Asset Management.” Focusing at length on alternative investments, the report also offers insights into fixed income, private equity, customization and organizational alignment to enhance distributor relationships, marketing and sales plans.

For the trailing 12 months ended February 2014, the survey finds mutual fund flows of international stocks constituted $142.2 billion, a total that significantly outstrips other asset classes. The next three largest asset classes for the prior 12 months included:

  • Balanced funds ($94 billion);
  • U.S. stock ($60.1 billion); and
  • Alternatives ($41.3 billion).

“[P]ortfolio managers have tilted away from traditional domestic core equity and fixed income,” says Cerulli Director Cindy Zarker. “As economic signs of recovery heightened concerns of rising interest rates, many managers presented institutional and retail investors with investment options to hedge this risk.”

The report adds most institutional investors intend to maintain or increase their alternative asset allocations in 2014. Among the target sectors within this asset class are private equity, hedge funds, real estate and infrastructure.

The heightened focus on alternative investments has been an ongoing theme in recent months. Findings recently unveiled in “Investing Outside the Box,” a study on trends in nontraditional investing from MainStay Investments (a New York Life company and Barron’s Top Fund Family) reveal that high net worth investors on average have 22 percent of their portfolios invested in alternatives. One quarter of these investors (26 percent) see their exposure to alternatives increasing over the next five years by an average of 2.9 percentage points. Another 66 percent believe their level of exposure will remain the same.

And as reported by Cerulli last month in the “Cerulli Edge: Institutional Edition,” international equities remain the predominant focus of all new products under consideration or development (24.1 percent), followed by global equities (14.9 percent), world bonds (13.5 percent) and asset allocation/global tactical asset allocation strategies (10.6 percent).

Wednesday, May 14, 2014

The Morning Ledger: R&D Tax Credit Hangs in the Balance

Westward Group for Tax and Estate Planning Advisors Tokyo Tips – The U.S. House of Representatives voted last week to make permanent a corporate tax credit for research and development that expired at the end of last year, but its outlook remains far from certain, CFOJ’s Maxwell Murphy and Emily Chasan report. President Obama has threatened a veto and the Senate is taking up a competing measure that would extend the credit by only two years.

Tuesday, May 13, 2014

5 Tips Before You Leave Your Kids an Inheritance

Westward Group for Tax and Estate Planning Advisors Tokyo Tips - If you are a parent who worries about what your wealth will do to your children, you are not alone. Many clients want to leave money to their kids, but they are concerned that their children are ill-equipped to handle sudden wealth. Some worry that by providing too much money that it will rob their children of the ambition and hard work that it took for them to amass the wealth. And it’s not just parents who worry. At least one beneficiary has reservations.

CNN news-show host Anderson Cooper is the son of Gloria Vanderbilt — a successful fashion and interior designer and daughter to the Vanderbilt railroad and shipping empire who is believed to be worth $200 million. Is Anderson chomping at the bit for an inheritance? No. Here is what Anderson said recently in an interview with Howard Stern:

“I don’t believe in inheriting money,” he said. “I think it’s an initiative sucker. I think it’s a curse, ” Cooper went on to say. “Who has inherited a lot of money that has gone on to do things in their own life?” When Stern reminded him that his mother did this Anderson responded, “I think that’s an anomaly.”

What is your view of inherited money? Is it an “initiative sucker” or can it be used to create a better and more fulfilled life? In my sudden wealth management firm I’ve found that the answer is a resounding YES to both!  Yes it can cause some to lose their drive and ambition, but with the proper work and structure, those who inherit can use the money as a tool to create meaningful lives of their own. But for many parents who are not convinced their children are ready to handle wealth, they are not idly sitting by hoping their children have a sudden flash of financial acumen. No, these parents are taking matters into their own hands.

If you are concerned about gifting or leaving your children an inheritance, consider these popular strategies:

1. Give your kids a financial test. Each person can gift up to $14,000 (in 2014) per year to as many people as they wish without any gift tax consequence. If you are married, both you and your spouse can give $28,000 per person. Parents are gifting their children money without any restrictions or rules and then sitting back and watching what happens. How will your children handle a $5 million inheritance? Why don’t you see what they do with $20,000 first? Do they save it? Do they ask for help? Do they pay off debt? Do they blow it in Vegas?

2. Use incentive trusts. The fear of many parents (and apparently Anderson Cooper) is that too much money can squash ambition and drive. The image that keeps many affluent up at night is the idea that their kids will be robbed of zeal to make an impact – this same zeal and inner drive that pushed them to make their own mark on the world. The solution for many parents is to use incentives within a trust rather than leaving a large inheritance outright. The incentives can be as creative as you can imagine. For example, a common incentive – euphemistically called an “investment banker clause” – calls for trust distributions that match the child’s income. If Suzie makes $75,000 from her job, the trust will distribute to her $75,000 each year. If her younger brother Johnny spends too much time playing Xbox and only makes $22,000 a year, the trust will distribute just $22,000 to him. The built-in incentive with this clause is, of course, to make money. But what if Suzie wants to join the Peace Corps? You can add language that will ensure distributions if your child is involved in a non-profit. Again, the sky is the limit when it comes to drafting who gets what and when. Newport Beach estate planning attorney Cheryl Barrett, says “I often build educational incentives in parents’ and grandparents’ trusts that are designed to reward the beneficiaries’ educational accomplishments.” For example, the trustee might be directed to disburse $10,000 upon attainment of a Bachelor’s degree and $20,000 upon attainment of a Master’s or Doctorate degree. While Barrett acknowledges that a degree is not a guarantee of a beneficiary’s personal success, she states, “The pursuit of it requires vision, goal setting, and engagement with other motivated individuals, all of which enhance a beneficiary’s likelihood of success.”

3. Tie distributions to ages and events. Think back to when you were 20 years old. Would you have been emotionally and intellectually mature enough to handle a large inheritance? Many parents create their trust so that their kids get a small amount of money each year and larger amounts when they reach certain ages (e.g., 30, 35, 40). They will also allow for trust distributions to pay for college expenses, weddings, or house down payments. A popular strategy is to distribute income from the trust assets when the kids are young and then to distribute principal when they are older and, ideally, have a career and greater financial sophistication.

4. Get your kids involved in a personal foundation. If you have children still living with you, creating a personal foundation can be a wonderful opportunity to support causes you believe in, get a nice tax deduction, and more importantly to our point, teach kids about money. One of my clients sold his business and overnight was worth more than $25 million. He and his wife had three young kids and they were worried that the dad’s strong work ethic would be lost on the kids now that they could have anything they wanted. We created a personal foundation, and because it was required to disburse 5% of the foundation’s balance each year, we gave each family member the responsibility of researching a cause and donating 1%. This got each of the kids excited about their own cause and seeing how their money could have an impact. It was a great learning experience for the whole family.

5. Give without giving cash. There is another win-win alternative to outright gifting. Jeff Lewis, an estate planning attorney in Los Angeles likes this approach. Lewis says, “Many of my clients have started using their annual federal gift exclusion ($14,000 as of this writing) to directly pay down either an adult child’s mortgage principal or school loans. This will make a significant difference to the child’s future financial position, while not putting that amount of cash in their hands today.” Many parents realize that mortgages and school loans are substantially larger now than in their time, so helping to reduce that huge burden is a rewarding proposition for both generations. Lewis continues, “Be sure to check there are no pre-payment penalties or other negative loan consequences.”

As a parent, you want what is best for your kids. It’s natural and reasonable to worry how a large inheritance will affect their drive and choices for life. With some planning, money can be a tool that enriches their lives rather than an anchor that drags them down. Consider the strategies above and talk to your financial advisor and estate attorney for more ideas.

Friday, May 2, 2014

Westward Group for Tax and Estate Planning Advisors Tokyo Tips: Is There Hope For Japan's Now Underperforming Stock Market?

“As the sun sets on Japan’s powerful stock market rally, investors might ask what could rekindle the lost energy,” begins a Lex column in the April 20 Financial Times. What, indeed?

The Lex team reprise a rather tired “better corporate governance” theme. They report that Japan’s Diet is likely this year to amend the Companies Act to push companies to increase external directors and set up audit committees “more typical of western companies.”  More usefully (see below) they note the January launch of “a new JPX-Nikkei 400 share index, comprising Japanese companies that combine higher returns on equity and good corporate governance.”

To the question where the Japan market’s mojo has gone, an analysis by Maeda Masataka, a member Nihon Keizai Shimbun’s editorial board, published on April 23, is edifying, if not particularly reassuring. Maeda observes that one year and five months the launch of “Abenomics,” the Japanese stock market seems to have settled into a low trading volume funk, with no perceptible rallying factor on the horizon.

More troubling and surprising, perhaps, Maeda notes that when exchange rate changes are considered, even during the past 1.5 years returns from French and German stocks exceeded those from Japanese equities, and on the April 22–the day before President Obama touched down for a “state visit” in Tokyo–U.S. equity market returns also pulled ahead of those of Japan.

In short, Prime Minister Abe’s message to the investing world that “Japan is back” has become increasingly suspect, if not unbelievable.

Maeda writes that if we create an index putting a value of 100 on the level of the Nikkei 225 stock average on November 13, 2012, the day before Abe’s predecessor, Noda Yoshihiko, announced dissolution of the Diet lower house and new general elections (i.e., the “pre-Abenomics” market level), by April 18, 2104 that index value would have risen to 167.60. By comparison, against the same dates, the Germany’s DAX has risen to 184.61 and France’s CAC 40 has risen to 181.70.

The DAX is calculated with dividends reinvested, a little discounting is necessary.  But the result for investors and particularly Japanese investors (given the appreciation of the Euro vs. the yen) is painfully apparent:  Abenomics notwithstanding, they would have done better investing in Europe.

The Dow Jones Industrial Average closed on April 17 at 16,408, which was 166.12 on Maeda’s index, within a point of the Nikkei’s 167.60.  (Actual Nikkei closing on the 18th was 14,388 yen.  It closed today, April 28, at 14,288 yen.) Maeda’s prediction was that the Dow was set to outpace the Nikkei, and he has been validated.

What has happened to the Tokyo market’s mojo?  Maeda suggests, first, that the economics market’s rise was not unpinned by a positive reassessment of individual companies’ management capability. Rather, it was the inverse affect of yen depreciation. While buying stocks when export earnings were being buoyed by a weakening yen made sense, the increase in reported earnings was not definitive evidence of enhanced in corporate strength.

Of course, among the 3500 listed Japanese companies, there are many exceptionally well-managed companies that did attract new investments. Maeda notes, however, that during the 1980s, a time when Japanese companies were genuinely strong, their stocks continued to rise even as the yen appreciated.

“In other words,” writes Maeda, now “unless we Japanese are selling our labor at a discount, overall stock value will not rise. This is a big difference with German stocks, which are rising despite a rise in the Euro. It shows that Japan’s corporate revival is only half-finished.”

As a second point, looking at relationships of the Dow and Nikkei averages, Maeda reckons that short term foreign investors, and particularly hedge funds, were attracted by the promise of Abenomics, and became big net buyers during its first year, but that they have turned this year into net sellers.

Foreign investors have lost patience and been put off by what they see as gridlock in delivering Abenomics’ “third arrow” growth strategy reforms. What these investors are looking for is a “three set” menu of continued BOJ monetary stimulus, a cut in the corporate tax rate, and a successful conclusion to the TPP trade talks.

Maeda observes that many, if not most, long term foreign institutional investors–pension funds, mutual funds, and value investors–remained skeptical toward Japanese equities and did not greatly increase their portfolio allocations. He cites U.S. Treasury data showing that in September 2011 Japanese stocks made up 9.7% (USD 420 billion) of U.S. residents’ USD 4.32 trillion of foreign equities holdings. As at January 2104, Japanese equities had increased to USD 590 billion, but U.S. holdings had increased to USD 6.31 trillion, so the percentage had fallen to 9.4%.

Maeda acknowledges that by October 2012, Japanese stock allocations in U.S. portfolios were at a nadir, a mere 7.6% (USD 390 billion) of a total USD 5.13 trillion. In this sense, what happened since can be seen as a reversion to mean, rather than buying into Abenomics by long term investors.

Thursday, May 1, 2014

Westward Group for Tax and Estate Planning Advisors Tokyo Tips: Can the World Economy Break Its Addiction to Stimulus?

The world economy is a stimulus addict. This year it’s going cold turkey.

In China, keeping growth on track for the past five years has required ever larger injections of credit. The ratio of private-sector debt to GDP pushed over 200 percent in the first quarter of 2014, up from about 125 percent at the end of 2008.

That presents China President Xi Jinping and Premier Li Keqiang with an unpalatable choice. China’s new leaders could cap loans and face a sharp slowdown in growth, or they could continue on the credit binge and risk a finance crisis. So far the choice has been option No. 1.

STORY: China Pledges Major Stimulus Projects, Invites Private and Foreign Investors

That’s the right decision, but the consequences are still painful. New lending is flatlining. Investment is fading. At 5.7 percent, annualized first quarter GDP growth was well short of Premier Li’s 7.5 percent target for the year. With a key gauge of factory activity pointing to contraction in April, the signs heading into the second quarter are little better.

In Japan, the bursting of the credit bubble in 1989 left corporations saddled with debt and unwilling to spend. To prevent a lost decade turning into a permanent coma, the government was forced to rack up enormous debts. In 2013, an Abenomics spending splurge to kick-start the economy added to the debt load.

With public debt at 237 percent of GDP, Japan’s Prime Minister Shinzo Abe faced a choice no more palatable than that facing China’s leaders. Raising taxes threatened to strangle the infant recovery in its cradle. Continuing to borrow risked a sovereign debt crisis that would make Greece’s recent problems look like the first act of a larger tragedy.

STORY: With Growth Slowing, Will China Launch a Stimulus?

Abe’s solution for 2014 is a compromise. A hike in the consumption taxes—the first since 1997—will be offset by higher public spending. Even that threatens to stop Japan’s recovery in its tracks. GDP in the world’s No. 3 economy is expected to contract at a 3.4 percent annualized rate in the second quarter.

Worse could be to come. If Tokyo wants to avoid a debt apocalypse, a budget deficit of more than 8 percent of GDP has to swing into surplus. That’s tough to do without taking a serious chunk out of growth.

In the U.S., meanwhile, exiting an extraordinary period of monetary stimulus is proving less easy than entering it did. The U.S. housing market—a key contributor to the recovery—is hooked on low rates. Even a modest percentage-point increase in mortgage costs in the past year has caused tremors. New home sales fell to an 8-month low in March.

STORY: Two Papers That Could Persuade the Fed to Prolong Stimulus
The U.S. housing market is not the only one to suffer. With the cost of credit low, emerging markets from South America to East Asia became accustomed to capital inflows. In the years after the 2008 financial crisis, that buoyed stock prices and fueled a boom in real estate. As rates in the U.S. start to rise, emerging markets have been roiled by sudden reversals in capital flows twice in the past year.

Past stimulus in the world’s three largest economies had a purpose. Massive loan growth in China and close to zero rates in the U.S. eased the pain of the 2008 financial crisis. In Japan, the government had to keep borrowing to offset the impact of corporate saving. Still, even well-intentioned stimulus can’t go on forever. As policymakers in Beijing, Tokyo, and D.C. are discovering, breaking the stimulus habit is tough to do.