Attractive opportunities in wealth transfer planning, emerging markets and natural resources were tempered by projections of slow domestic growth and anemic returns on investment-grade bonds and cash at Wilmington Trust’s annual press briefing in midtown Manhattan yesterday.
Income, estate and gift planning offer “unprecedented” opportunities before the 2010 Tax Act expires and while exemptions are high and rates are low, said Carol Kroch, managing director, charitable trusts and head of wealth and financial planning for Wilmington Trust Investment Advisors, a division of M&T Bank Corporation.
Using a Delaware Dynasty Trust funded with some or all of the current $5 million gift exemption was at the “top of the list” of Wilmington’s recommendations, Kroch said. The perpetual trust, which extends beyond the lifetimes of the initial beneficiaries, is a “terrific long-term vehicle,” she said. The Delaware Dynasty Trust also takes advantage of the generation-skipping tax exemption, as well as the lifetime gift exemption, Kroch added.
Wilmington is also advising families to take advantage of continuing low interest rates this year for intra-family loans, and forgiving existing loans, Kroch said. In addition, interest rate sensitive gift vehicles continued to be attractive, she noted, particularly when funded with assets that have a depressed or discounted value and are likely to appreciate. “These rates are a real opportunity to transfer wealth,” Kroch said.
2018: Looking better
While 2012 was unlikely to be generous to investors, said Rex Macey, Wilmington Trust’s chief investment officer, the firm’s seven-year capital markets forecast was more optimistic.
This year was “shaping up” to mirror 2011, Macey argued: initial optimism followed by disappointment in a slow-growth environment. “Profit margins may not be there by mid-year,” he said, “and earnings may disappoint.”
Macey also warned that even over a seven-year period, he projected GDP growth of only 2.6 per cent, coupled with a “meaningful” rise in interest rates, leading to annualized total returns of approximately 2 per cent on investment-grade bonds, both taxable and tax-exempt.
“A large number of investors may be underestimating the risks of bonds held as core positions in their portfolios,” Macey said. “We expect falling bond prices to offset much of the income that investment-grade bonds pay in the coming years, leading to weak total returns.”
But he did forecast strong growth in developed international stock markets, which he projected would have a 10.2 per cent to 11.7 per cent annualized return by 2018, and emerging stock markets, which were projected to have an annualized return of 12.6 per cent over seven years.
That growth bodes well for global natural resources such as oil and agriculture, where, Macey said, Wilmington Trust was committing its own capital.
Expertise needed in uncertain environment
The complexity and uncertainty of the current investment climate is making the expertise of wealth managers more valuable, said Lawrence Gore, president and managing director of Wilmington Trust, and head of the firm’s New York office.
Despite the vast amount of information available to investors, they are still seeking out wealth managers to make sense of it for them, Gore said. But clients are also doing more due diligence, are more demanding, and are consolidating providers. “Protection of the downside is still their priority,” he said. “Clients are paying more attention, asking more questions and looking at more details.”