Conversations - Fall 2000

LWA NEWS

We have two new employees this fall.  Debbie Greenslade is our new systems administrator.  She is originally from Illinois and moved to Short Hills two years ago when her husband John’s position with Dow Jones was relocated.  They have two children, John, a senior, and Rita, a sophomore, at Millburn High School.

Carol Eska has also joined our administrative support team.  Carol, her husband Tom and her daughter Cindy are residents of Berkeley Heights.  Cindy is a sophomore at Governor Livingston High School.  They have a Yorkshire Terrier, Chi-Chi, who weighs 3 pounds, but “thinks she is the ruler of the world.”

Diahann is scheduled to appear on CNBC’s Power Lunch with Bill Griffeth at 12:50 in the afternoon on:  10/23, 11/6, 11/28, 12/14.

LWA Website – www.lassuswherley.com - Important Reminder

We are glad to see that so many of you have been utilizing the “My Reports” section of our website to view your personal reports online. We have implemented several security measures to protect your accounts privacy.  For example, your reports are stored on a secure server in password-protected folders.  Also, we are using the 128-bit encryption standard (currently the highest available) to ensure the private viewing of your account information.

However, you can help protect your online reports by setting up your own password. This should be done at your first login. Having a custom password increases the security of your online reports and helps protect your privacy.  We encourage those of you who did not change their general passwords yet to do so at your earliest convenience. To change your password, please use the button labeled "Change Password" in the upper left corner on the "Reporting" screen. If you need help with this feature, please call Zuzana at (908) 464-0102.

TECHNIQUES FOR LIFETIME MAJOR CHARITABLE GIVING

By Suzanne C. Low, J.D., CFP^®

This article is the third in our series on charitable giving.  This article will deal with more complex tax advantageous ways to complete your charitable giving goals and will provide an overview of several widely used techniques for making major lifetime charitable gifts.

Charitable Remainder Trusts:  Charitable Remainder Trusts (CRT) allow individuals to retain the income from donated property while receiving an income tax deduction unavailable on a transfer at death. The donor in a CRT transfers income-producing property in trust, from which he or she receives annual payments for life or a term of years. Upon the beneficiary’s death, the charity receives the trust assets outright. The donor receives a gift and income tax deduction for the current value of the charity’s remainder interest upon transfer into trust. Trust income is taxable to the donor (or other non-charitable beneficiaries). This technique is particularly useful for gifting of highly appreciated, low-yielding assets, which after transfer to the charitable trust can be sold without capital gains tax, permitting the trustee to then invest the proceeds in higher yielding investments.

Charitable Lead Trusts:  Charitable Lead Trusts (CLT) allow a donor to support charitable programs with an immediate flow of income. At the end of the designated period, the donor receives back the principal for himself or has it go to other non-charitable beneficiaries. Depending on how it is structured, the donor either receives an income, gift or estate tax deduction. The grantor lead trust, which provides for a reversion of assets to the donor, is excellent for persons who are willing to give up control of assets for a number of years in order to receive an income tax deduction.  In a non-grantor lead trust, in which the property goes to someone other than the donor, the gifted assets’ growth escapes estate tax.

Private Foundations: Private foundations are increasingly popular vehicles for charitable gifting. These permit families to actively use their judgment to decide which charities in their sphere of interest deserve their gifts. Some experts say that assets of at least $1 million are required to justify the expenses of creating and maintaining a private foundation, since U.S. tax law requires a private foundation to give away at least five percent of its assets annually.  Individuals receive an income tax deduction of up to 30% of adjusted gross income (AGI) for cash gifts and up to 20% of AGI for full fair market value of appreciated property gifts made to private foundations.

Community Foundations: Many communities have created foundations that receive private donations and manage and administer them for local purpose grants, specific interests, scholarships or donor designated purposes. Advantages of contributing to a community foundation (considered a public charity for tax purposes) versus a private foundation include higher deductibility limits of up to 50% of AGI for cash gifts and up to 30% for appreciated property, as well as exemption from excise or asset value taxes. Generally, for a reasonable fee the community foundation’s professional staff handles administration of the fund, including investment management, tax filings and legal compliance.

There are strict and complex regulations that must be met in order to qualify trusts and foundations for available tax benefits and avoid penalties under the tax code. Furthermore, it is important to understand that such gifts are irrevocable and therefore should only be established for that portion of your estate which you are certain you will not need and that you want to donate to charity.

EXCHANGE-TRADED FUNDS

By Gigi Collins, CFA

Exchange-traded funds (ETFs) are the hottest new product on the financial horizon but that doesn’t mean that they are for everyone’s portfolio.

ETFs are sometimes called index shares because they are like a combination of an index fund and a stock.  Like an index fund, the ETF may track a particular market index by holding the stocks of that index.  Examples include, Spiders which track the S&P 500 index, Diamonds which track the Dow Jones Industrial Average, and Cubes track the Nasdaq100.  There are ETFs for almost every sector you can think of. For example, Barclays Global Investors has 56 different iShares and Merrill Lynch has 8 different HOLDRS.  Each of their products has some unique aspects that need to be considered in addition to the following.

ETFs trade like a stock.  It trades with a stock ticker and the price moves up and down during the day.  Remember that mutual funds are priced at the end of the market day. 

ETFs most attractive feature is its ability to control your tax liability.  You can control when you sell the ETF and generate any capital gain or loss thereby controlling your tax liability.  Unlike a mutual fund that buys and sells stocks, ETFs only replace stocks in the index as needed and this is done through exchanging shares with other institutions vs. selling the shares.  These adjustments might generate small capital gains but not the kind of distributions a mutual fund might generate.  The main tax liability will be when you decide to sell the ETF.

Generally ETFs have lower expenses than even the low cost index mutual funds but this is somewhat offset by the brokerage commissions when you buy and sell.  Some disadvantages of the ETFs are the trading costs and the ability to trade may tempt you to want to “trade” when you should be buying according to your asset allocation.

ETFs also carry market risk that mutual funds do not.  Since the ETF trades during the day, the ETF can trade at a price that is different from the net asset value of the underlying stocks.  This is more likely to occur with ETFs that track a sector or international stock indexes. 

Overall, ETFs broaden your investment options, but as you can see, you must match your goals to the product.  For example, ETFs would only be used in a taxable account where you are concerned about your tax liability.  We are planning on introducing them slowly into our clients’ portfolios but only if they match your goals.

back