Volume 11: Second Quarter 2013 GLOBAL WEALTH MANAGEMENT
INVESTMENTS M oney M akes
W orld G o R ound by
K evin B annon
Ben Bernanke and the Federal Reserve are doing just about everything in their power to help the economy climb back onto a path of faster and self-sustaining growth. They have pushed short-term interest rates down to essentially 0% and committed to holding rates at this level until unemployment declines significantly from its current 7.6% rate. They have put massive quantities of new money into the system by purchasing Treasuries and mortgage-backed bonds to also keep longer-term interest rates low and have indicated that they will continue buying for as long as it takes for the economy to get back on track. The economy has come tantalizingly close to achieving this lift-off speed on a few occasions since the recovery technically began in 2009, only to slip back each time. Chairman Bernanke may be beginning to feel like Sisyphus, condemned forever to pushing a boulder uphill, only to watch it roll back down. Despite everything that the Federal Reserve has done on the monetary stimulus front, growth has so far
WEALTH MANAGEMENT If It Sounds Too Good to Be True, It Probably Is by S usan M ilona The most important (and therefore, most talked about) legal event of the second quarter of 2013 was the Supreme Court decision to strike down a key section of the Defense of Marriage Act (DOMA). The enormous impact of the DOMA decision on gay and lesbian couples has been discussed widely in the media, as well as in newsletters and alerts by legal and financial professionals. In the interest of not replicating work that has been done by hundreds before me, I’ve decided to devote this newsletter article to the other important case decided last calendar quarter. On May 17, 2013 a U.S. Bankruptcy Court in the State of Washington held in In re Huber (“Huber”) that a domestic asset protection trust (“DAPT”) was invalid against the creditors of the settlor and transfers to the trust could be “avoided” (undone, in Bankruptcy Ct. parlance). A DAPT is a trust to which the settlor conveys assets and usually retains the ability to receive benefits from the trust. If prepared correctly and in accordance with the laws of a
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FAMILY GOVERNANCE The Trust Conversation: The Most Important Conversation You’ll Have With Your Family About Your Legacy. by A bby R aphel What do you trust? Education, marriage, family, doctors, government, corporations, philanthropy, food safety, online banking, gmail, faith, experience, intuition? Trust is the pure belief in a person or thing. We trust some of the entities listed above because there are governing agencies with rules and regulations. Others are time-tested relationships. And others evolve from an inner guidance and compass. Trust is achieved through experience and relationships. The pillars of trust are accountability, integrity, reliability and intimacy. (continued on page 5)
(“Too Good... ” continued from page 1) jurisdiction that allows DAPTs (Alaska, Delaware, Nevada, to name a few), the assets of the DAPT can be sheltered from the settlor’s creditors, provided there is no fraud involved. At first glance, Huber appears to be the decision that asset protection planners have been dreading ever since the turn of this century, when the first States enacted DAPT legislation. As discussed below, however, DAPT planning likely will continue to be a viable option post-Huber. “Bad Facts Make Bad Law” Never was this adage more spot on than in Huber. Mr. Huber, a real estate developer, had fallen on hard times during the most recent housing collapse (not surprisingly). When Mr. Huber’s partner threatened to set up a DAPT trust in Alaska to shield his assets against claims by Mr. Huber, he and his lawyer condemned the scheme as fraudulent. In an unbecoming display of “do as I say, not as I do,” Mr. Huber then proceeded to engage an attorney to prepare a DAPT for himself. Given that Mr. Huber was a lifelong resident of Washington, it made sense to establish his DAPT in Alaska, which he did in September 2008. During 2009, Huber’s business began defaulting on loans. Finally, Mr. Huber filed for bankruptcy in February 2011. The Trustee in Bankruptcy filed a complaint in the bankruptcy case alleging, among other things, that Huber had transferred assets to his Alaska DAPT with intent to defraud his creditors and that the transfers should be unwound as fraudulent transfers. In deciding whether to apply the law of Washington versus Alaska to test the validity of the DAPT, the Bankruptcy Court noted that the settlor and beneficiaries of Huber’s Alaska DAPT were domiciled in Washington and most of the property of the DAPT was located in Washington. Given the minimal nexus with Alaska, the Bankruptcy judge applied Washington law to the issues raised in the complaint1. Finding that Washington had a strong public policy against DAPTs, the Court ruled that Huber’s DAPT was invalid.
The Huber Court also noted that there was threatened litigation by creditors at the time of Huber’s transfers to the DAPT. Based on that finding, the Court decided that Mr. Huber’s transfers to the DAPT were executed with intent to hinder, delay or defraud his creditors and thus were invalid. One of Mr. Huber’s counterarguments to the allegation of intent to defraud was that he relied on his attorney’s advice, so he couldn’t have intended to defraud his creditors. (I could make a pointed comment here, but I’ll take the high road and refrain.) Commentators have dissected this case and have found legitimate fault with certain aspects of the Huber Court’s analysis. Even those most critical of the Court’s less-than-pristine analysis concede that the ultimate outcome should have been the same, given that the evidence clearly indicated intent to defraud. Huber’s bad facts, however, are the reasons why this case does not signal a death knell for domestic asset protection planning. Given that Mr. Huber created the DAPT when he was on the verge of default, there wasn’t a scintilla of a chance that the DAPT scheme would work (particularly given that Alaska law requires a settlor of a DAPT to execute an affidavit of solvency in order for the DAPT to be valid). The affidavit requirement and the 10-year statute of limitations for fraudulent transfers under the Bankruptcy Code present something of a Catch-22 for a potential settlor of a DAPT – only people concerned about creditors consider creating a DAPT, but if you have real concerns about creditors, it may be too late to do DAPT planning. It is essential to do DAPT planning long before creditor storm clouds appear on the horizon. Also, successful DAPT planning involves highly technical nuances, so it is important to consult with an attorney who is expert in the DAPT area. Your Highmount advisor will be happy to assist you in finding the right expert, so don’t hesitate to ask. 1
Highly qualified commentators convincingly have disputed the Court’s application of Washington law to the DAPT analysis. See, Blattmachr, Blattmacr & Blattmachr, “Avoiding the Adverse Effects of Huber, Trusts & Estates, July 2013, pp. 20-29.
(“Money...” continued from page 1) remained stalled at approximately 2%. As a result, some investors are beginning to suspect that monetary policy may be losing its effectiveness and that a pickup in growth will remain elusive. With labor market conditions, housing activity and auto sales all showing slow but increasingly steady improvement, however, more investors – ourselves among them – continue to believe that it is only a matter of when, not if, the Federal Reserve will ultimately be successful in achieving its objective. In economic terms, money does indeed make the world go round – but only if it is circulating completely freely, which it is not at present. Monetary policy is a blunt tool. The Federal Reserve can make money widely and cheaply available – as it is unquestionably doing currently – but it cannot make lenders lend, borrowers borrow, businesses invest or consumers spend if they do not want to. All the Federal Reserve can do to stimulate growth is inflate the prices of interest rate-sensitive assets such as real estate, bonds and stocks and hope that this creates a positive wealth effect that will, in turn, lead to higher spending. Asset prices are up, but spending has been slow to follow. In our view,
“I’ll put it back to work someday, but right now it feels great to have it lying around in humongous clumps.”
this is the result of two lingering blockages in the transmission mechanism. The first is banks and the second is big businesses. For a variety of reasons – capital adequacy and regulatory concerns chief among them – banks have not been lending. Much of the new money that the Federal Reserve has been pumping into the economy is being bottled up in the banking system. After declining for the past few years, however, the good news is that bank loans are now rising. Large corporations have also built up record amounts of cash on their balance sheets. Despite record profits as well, corporate managements have been extraordinarily reluctant to expand capacity. Concerns about gridlock in Washington and weakness in Europe and many emerging economies have certainly been restraining factors here, but capital spending finally appears to be on the rise again. As the trauma of the global meltdown of 2007-2008 continues to fade, the willingness to accept a return only slightly above 0% on a significant portion of a bank’s or a company’s assets becomes an increasingly difficult strategy to justify. There are, of course, always risks to every outlook. The key risk to our outlook is that clear evidence of the upturn we foresee takes longer to materialize than the 6-9 months we currently expect. The longer this process takes, the more money the Federal Reserve will be pumping into the economy. This clearly has the potential to create bubbles in asset prices, from single family homes to high yield bonds. More significantly, the greater the amount of liquidity being dammed up in the banking system, the more difficult it is likely to be to assure that the release, when it comes, will be controlled and orderly. Investors will do well to bear in mind that one of the primary objectives of the Federal Reserve’s strategy is to generate a moderately higher level of inflation. Inflation is, in the end, simply too much money chasing too few goods. Another potential implication of
Source: ©The New Yorker Collection 1994 Richard Cline from cartoonbank.com. All Rights Reserved.
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ECONOMIC OUTLOOK: THE MISSING LINKS Liquidity (in ample supply) + Animal Spirits (emerging from hibernation) = Faster Self-Sustaining Growth U.S. Bank Deposits vs. Lending 10
Cash on Corporate Balance Sheets
8 1.25 7 1.00 6
All High Yield BB Rated High Yield Bank Loans
ABank Rated Investment Grade Deposits
Source: Federal Reserve
Source: Federal Reserve
MARKET MONITOR: Talk of possible early tapering of quantitative easing rattled fixed income markets. Investment Returns through June 30, 2013 (in U.S. $) 2nd Quarter 2013 U.S. Fixed Income
Year to Date
• United Kingdom
Municipal Bond Index
Barclays Aggregate Index
• Asset Backed
High Yield Index
2nd Quarter 2013
Year to Date MSCI All World International Equities MSCI EAFE Index
U.S. Equities Dow Jones
U.S. Dollar (trade-weighted)
Dollar vs. Euro
Emerging Markets Equities MSCI E.M. Index
(“Trust...” continued from page 1) When working with multigenerational families on the topic of wealth transfer and succession, many tough questions are asked of a professional: “How much should I tell my children about the wealth and when? Do I share the big picture or stage them in? Should they prove themselves first or should we provide an education in finance? How do we get them engaged in the complex world of private wealth and financial planning?” There is no right answer to these tough questions. Perhaps it helps to look at the conversation about wealth transition through the lens of Trust. Trust in Parenting, Trust in the Next Gen and Trust in the Family Enterprise. It is a fine balance between all areas. With reflection and consideration of these angles of Trust, the answer to the tough questions of how much and when will be illuminated. TRUST IN PARENTING: Communication and Preparation Trust in parenting requires reflection in two areas: communication and preparation. Communication: Do you have open lines of communication with your children? Can they talk to you about complex problems and raise issues and questions of concern? You don’t need to completely open the Kimono and share all the financial complexity and balance sheet, but considering how you communicate with your children is just as important. Equally, how they communicate with you is a big factor in the equation. Preparation: Have you given your children the opportunity to fail and succeed? Have they had the chance to develop their own sense of personal identity and career path in this world? Have they carved out their own passions? Have they been able to develop grit, or passion for a particular long-term goal coupled with a powerful motivation to achieve their respective objective? Have they tried for a goal and failed, yet persevered or learned their lesson on their own? Or as a concerned parent, have you stepped in to offset their pain and disappointment, and in doing so, prevented them from learning a valuable life lesson? Have you
allowed them to develop a sense of independence through budgeting, management of small financial accounts or preparing the necessary documents to be delivered to their accountant for taxes? TRUST IN THE NEXT GEN: Responsibility and Education Have they developed a sense of responsibility and appreciation for education? Have they worked for their allowance or gotten a summer job? Or perhaps dedicated limited free time to a sport or academic endeavor? Has your child taken on a project and seen it through to completion, even when the going gets tough? And have they shown an appetite to learn projects and take on new educational experiences? Have they been proactive in seeking learning opportunities within your family business or enterprise? Stewarding wealth is a complex world with vast practices of expertise: Investment Management, Financial Planning, Risk Management, Efficient Tax Planning, Philanthropy and Estate Planning. Mastery of these areas is not required, but proficiency and comfort working with advisors certainly is. Understanding this world is not intuitive, yet a commitment to learn to manage it is required for successful stewardship. TRUST IN THE FAMILY ENTERPRISE: Team, Governance, Values As important as your parenting and next generation relationship, the relationship with your advisors – the team that supports the maintenance and growth of your financial capital – is essential in the Trust Dynamic. Have you convened your various advisors to ensure they all understand your family’s values and vision? Have you developed a governance and decision making system, such as shared family values, a mission statement, a manifesto or family constitution? Does your family know the professionals who support your wealth management and estate planning and how to contact them? Do you feel your team is cohesive and will support your vision for succession and transition? Have you communicated this to your advisors? Some practitioners believe in the Socratic method – (continued on page 6)
Highmount Welcomes New Employees Jonathan Farrar - Jonathan is a new Director at Highmount whose primary role is to lead the Multi-Manager Program. He graduated from Lafayette and joins us from Veritable where he has performed as manager of due diligence since 2007. Afnan Quadery - Afnan joins Highmount as a Staff Accountant. She received her B.S. in Accounting from Hunter College and has a strong background and years of experience as an Accountant in Legal and Retail industries. Previously she was with Stroz Friedberg, IGIA Inc. & has volunteered at the IRS Tax Assistance Program.
(“Money...” continued from page 3) a slower-than-hoped-for pickup in growth is that, especially with the federal budget deficit improving dramatically this year, fiscal policy initiatives could be back on the table. New infrastructure spending? A higher minimum wage? Some form of wealth tax? Growing income inequality will be an issue receiving increasing attention. We are monitoring all of these risks closely, but our best judgment at this time is that stronger growth and modest inflation continue to represent the most likely scenario for the economy. For investors, this scenario points to a continuing favorable environment for stocks and a somewhat more challenging environment for bonds.
(“Trust...” continued from page 5) leading students to the answers through questions. And we have provided questions in a response to the question, “How much should I tell my children and when about the family wealth?” Through careful processing of these questions, answers will be provided as to the degree to which you and your family are ready and trusted for the most important conversation about your family legacy.
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Information provided in this newsletter should not be construed as investment, tax or legal advice. Information presented is not an offer to buy or sell, or a solicitation of any offer to buy, sell or invest in any Highmount Fund or in any security or commodity mentioned herein. Some investments discussed herein may be suitable only for sophisticated investors. Although information in this newsletter has been obtained from sources believed to be reliable, we do not guarantee its accuracy or completeness. Highmount disclaims any responsibility to update any information provided herein. Past performance of a security or Fund does not necessarily indicate or predict future performance and investments mentioned herein may lose value. There is no assurance that any security discussed in this newsletter will continue to be held in the applicable portfolio or that securities that have previously been sold will not be repurchased. It should not be assumed that recommendations made in the future will be profitable. There are no assurances that an investor’s portfolio will match or outperform any particular benchmark. If you have any questions, please call (646) 274-7470, or email info@hmcap. com, or write Highmount Capital LLC, Attention: Chief Compliance Officer, 12 East 49th Street, 36th Floor, New York, NY 10017. To ensure compliance with Internal Revenue Service requirements, Highmount informs you that any tax information herein is not intended or written to be used, and cannot be used, to (i) avoid penalties under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter discussed in this newsletter. Nothing contained in this newsletter constitutes tax advice. Third-party rankings and recognition from publications or rating services is no guarantee of future investment success. Working with a highly-rated adviser does not ensure that a client or prospective client will experience a higher level of results. A more thorough disclosure of the criteria used in making these rankings is available upon request. Any views or opinions presented herein are solely those of the author and do not necessarily represent those of Highmount Capital LLC.
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