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Strategies for Fixed Income in the
Current Environment
Winter 2017
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Strategies for Fixed Income in the Current Environment
Challenges for Fixed Income Investor
•
•
•
•
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
Risk of Rising Interest Rates:
Citigroup Broad Investment Grade Index
Duration: 5.96 years
9
S&P Municipal Bond Indices
Duration Short: 1.88 years
Long Intermediate: 5.36 years
9
7.9
Short
Long Intermediate
6
Percent Change
6
Percent Change
7.2
2.9
3
0
-3
3
2.6
2.3
1.3
0.4
0
-0.5
-1.8
-3
-2.1
-6
-6.2
-6
-9
-7.0
-1
0
1
2
-9
-1
2
0
1
Interest Rate Change
2
Interest Rate Change
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
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Strategy for Appreciated Fixed Income Portfolios
Possible Solutions:
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•
•
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 reallocate
•
Take advantage of equity asset classes where expectations of higher returns can be achieved over time.
•
Opportunity to increase annual income
•
Potential for long-term growth
Funding Charitable Intent – Strategies for Appreciated Assets:
Appreciated
Asset
Diminished
Income
Potential
Charitable Remainder Trust
Fund Charitable Remainder Trust with bond portfolio
Why Now?
• Capture appreciation in bonds
• Replace low bond yields with higher yielding income stream
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Sample Client Scenario
Client
• Age 71, retired executive
• Owns $2MM low yielding municipal bond portfolio
•
Appreciated asset, purchased at a premium
•
Diminished income potential
Goals
• Diversify portfolio–$1MM/50% to stocks
• Increase income stream
• Capture appreciation in bonds
• Minimize capital gains tax
• Charitable income tax deduction
Solution - Fund 5% CRUT with $1MM in a Low-yielding Municipal Bond Portfolio
• Allows immediate or staged diversification
• Avoids immediate tax on capital gain
• Provides charitable income tax deduction to grantor
• Provides income stream to grantor for term of years or life
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Charitable Remainder Unitrust (CRUT)
Sample Strategy for Appreciated Assets
Assets
remaining in
trust after 14
year term pass
to charity
$1MM Asset
CRUT
Sells Asset
Client
Charitable Gift
Tax Deduction:
$489k
5
5% annual
payment for a
term of 14 years
(= $762k)
Charity
Remainder Value:
$1.2 Million
Assumes IRC §7520 rate of 2.4% for March 2017 and 6.5% return.
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Charitable Remainder Unitrust (CRUT)
Sample Successful Outcome for Grantor and Charity
Client Benefits:
Income
Charitable Deduction
• 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
• Receives charitable income tax deduction of
$489,861
• Saves approximately $171,000 in income
taxes in year one
• Appreciates over client’s lifetime, if
reinvested
• Future value of $414,033 if annual growth
of 6.5%
Benefits for Client’s Charity
Charity receives estimated remainder of $1.2 million
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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.
©2017 The Bank of New York Mellon Corporation. All rights reserved.
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