Strategies for Fixed Income in the Current Environment - PowerPoint Presentation

Slide1

Strategies for Fixed Income in the Current Environment

Winter 2017

WS151260Slide2

Bonds have traditionally been held for safety and/or attractive income streams

However, 30+ years of declining interest rates may no longer meet these goals

Yields are lower

Principal values are vulnerable to decline

Strategies for Fixed Income in the Current Environment

Total returns include price, yield and roll returns over 1-year period. S&P Indices are as of 1/31/2017. Citigroup Index is as of 2/10/2017

Challenges for Fixed Income Investor

Citigroup Broad Investment Grade Index

Duration: 5.96 years

S&P Municipal Bond IndicesDuration Short: 1.88 yearsLong Intermediate: 5.36 years

Risk of Rising Interest Rates:Slide3

Hold to maturity: lose premium and opportunity cost

Sell and incur some capital gain – and reinvest in stocks?

Is a change in asset allocation in line with risk tolerance levels?

Fund charitable remainder trust with appreciated bonds

Sell bonds and reallocateTake advantage of equity asset classes where expectations of higher returns can be achieved over time.

Opportunity to increase annual incomePotential for long-term growth

Strategy for Appreciated Fixed Income Portfolios

Possible Solutions:

Funding Charitable Intent – Strategies for Appreciated Assets:Fund Charitable Remainder Trust with bond portfolio

Charitable Remainder TrustAppreciated AssetDiminishedIncomePotential

Capture appreciation in bonds

Replace low bond yields with higher yielding income stream

Why Now?Slide4

Client

Age 71, retired executive

Owns $2MM low yielding municipal bond portfolio

Appreciated asset, purchased at a premium

Diminished income potentialGoals

Diversify portfolio–$1MM/50% to stocksIncrease income stream

Capture appreciation in bonds

Minimize capital gains taxCharitable income tax deductionSolution - Fund 5% CRUT with $1MM in a Low-yielding Municipal Bond Portfolio

Allows immediate or staged diversification Avoids immediate tax on capital gainProvides charitable income tax deduction to grantorProvides income stream to grantor for term of years or lifeSample Client ScenarioSlide5

Charitable Remainder Unitrust

(CRUT)

Sample Strategy for Appreciated Assets

Client

CRUT

Sells Asset

Charity

$1MM Asset

Assets remaining in trust after 14 year term pass to charity

5% annual payment for a term of 14 years

(=

$762k

)

Charitable Gift Tax Deduction:

$489k

Remainder Value:

$1.2 Million

Assumes IRC §7520 rate of 2.4% for March 2017 and 6.5% return.Slide6

Charitable Remainder Unitrust

(CRUT)

Sample Successful Outcome for Grantor and Charity

Receives annual payouts, starting at $50,000 and increasing to $59,073 by end of the 14-year term

CRUT income advantage vs. municipal bond portfolio: $291,413

Income

Client Benefits:

Receives charitable income tax deduction of $489,861

Saves approximately $171,000 in income taxes in year one

Appreciates over client’s lifetime, if reinvestedFuture value of $414,033 if annual growth of 6.5%Charitable DeductionCharity receives estimated remainder of $1.2 millionBenefits for Client’s CharitySlide7

Disclosure

This material is provided for educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice and may not be used as such. Effort has been made to assure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed their specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.

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