In 2017, the annual gift tax exclusion remains at $14,000. This means that each year, you can give $14,000 in cash, stocks and bonds, or an interest in physical property without triggering any gift tax. This $14,000 figure is indexed to inflation and therefore tends to rise modestly over time (e.g. back in 2000, you were permitted transfer $10,000 of present value without triggering a gift tax). The top rate thereafter is 40%. Also, the annual gift tax exclusion allows for separate gifts from two parents. In other words, a child may receive $14,000 from mom and $14,000 from dad for a total value of $28,000 each year without any required tax obligation.
When you buy shares in a mutual fund, you are both protected and limited by the Investment Company Act of 1940. This Congressional Act was aimed to root out the causes of the Stock Market Crash of 1929 and subsequent Great Depression by placing significant constraints on the ability of fund promoters to scam the individual investors they contact.
When you buy a mutual fund, there are certain guarantees that you receive: (1) the shares of the fund you buy are registered with the SEC; (2) the fund must have a board of directors, and 75% of those directors must be independent from the managers of the fund that individually select the investments; (3) the fund must refrain from directly managing its investment holdings and must function as a passive investor; (4) the fund must limit the amount of leverage it employs and must have certain cash on hand to cover redemptions, usually 3%; and (5) must provide quarterly data for an N-SAR form that gives details about the individual holdings, expense ratio, and investment objectives of the fund. Also, the fund faces diversification requirements unless it “conspicuously” advertises to the contrary.
In the past, I have been critical on the topic of why you shouldn’t buy closed end funds because they tend to employ significant leverage in an effort to use debt to buy additional assets that can provide capital appreciation and higher dividend yields. During the 2009-2016 measurement period, this moderate leverage strategy worked out well because interest rates were low and the markets moved upward with little volatility.
When interest rates rise, you need higher total returns from the selected investments to keep the gap consistent. That is to say, when you borrow at 3% and earn returns of 9%, that 6% difference represents the value created by your use of leverage. If you borrow at 5%, you have to earn 11% returns at the higher market levels to maintain the same effect, while also exposing yourself to a risk I call “the tyranny of compounding” that refers to the capital destruction that will occur if the chosen investment delivers results below 5%.
I admire people who don’t set ethics aside when they invest. That said, the conversation about what you would give up in the pursuit of socially responsible gains must be fully acknowledged. There has been a recent trend among financial professionals to downplay the performance sacrifices that occur when you decide to make an investment in a socially responsible fund. This is ironic that someone peddling socially responsible investing would start off the conversation with a lie, but it also provides disutility down the road when someone investing in a socially responsible mutual fund finds himself reaping returns that are lower than he is led to believe.
The trend has already begun, but I suspect that in the coming decades you will see traditional wills diminish as part of an estate planning tool and be replaced with a living trust. Although the set-up costs are higher for a living trust, the advantages are so much greater that the value proposition is clearly worth it.
When you create a will, you are creating a plan for your assets that will be executed after you die. A traditional will has no legal effect while you are alive, and comes into operation to distribute your assets at the moment of your death. Annuities, life insurance, and other retirement plans operate through a direct-to-beneficiary format dodges the will/probate process unless these accounts name the creator’s estate as the beneficiary.