The New Normal—Wealth Structuring​

THE NEW NORMAL - HOW WEALTH STRUCTURING CAN HELP YOU NAVIGATE UNCERTAINTY TODAY AND PREPARE A PLAN FOR TOMORROW Merrill Transcript Slide 1 Thank you for joining us to talk about how wealth structuring strategies can help you manage your wealth today and prepare for the future — regardless of the market conditions. I’m Mike Pelzar, Head of National Trust Services for Bank of America. I’m joined by my colleague, Mitch Drossman, Head of National Wealth Strategies within the Chief Investment Office of Bank of America. As we all face unprecedented times, I want you to know that we’re here to help in any way we can. Helping you take stock of your finances and make thoughtful decisions about your planning needs is why we are here today. Over the course of this presentation, we’ll share our take on how the coronavirus is impacting the markets, and potentially your finances. We’ll take a look back on historical bouts of volatility and market downturns, and share our Chief Investment Office’s outlook for the economy. We’ll discuss wealth structuring techniques and how they can help you preserve, protect, and control your wealth. And we’ll offer you some practical ideas about what you may want to consider now to help prepare for the future. Slide 2 Slide 3 Before we dive in, first and foremost, we hope that you and your family are safe and staying healthy as we all face uncertain times. The coronavirus pandemic has impacted nearly every aspect of our lives and is having a significant impact on people across the country. Beyond the immediate health impact of the virus, we are also seeing stress in our health system, drops in spending and economic activity as people stay at home to help stem the spread of the virus, and large increases in unemployment due to some extended shutdowns. People are focused on the health and well-being of their families and loved ones, and keeping everyone safe from harm. They are also taking on new responsibilities as teachers and caregivers on top of their regular day-to-day responsibilities. The pandemic effects on the economy and the markets is compounded by simmering trade tensions and the oil price shock that started just as the virus began to take hold in Europe and America. All these factors are still causing uncertainty that is spilling over into people’s finances. Even those who have relatively secure employment and finances are concerned. This is where we can help. We don’t know yet the ultimate impact of the virus but we are confident that in time, we’ll all get through this. We are sharing our views to make sure you have the information, advice, and guidance you need to navigate these challenging times and be prepared for when things get back to normal. Slide 4 Despite the speed and severity of the recession and unemployment levels, there were swift actions that help mute the impact of the effect of the coronavirus. The Federal Reserve was swift to enact stimulus measures, facilitate liquidity, and help provide reassurance to the markets. Congressional legislation and White House efforts to support individuals, small businesses, and industries have been expansive and are ongoing. Unemployment claims have started to slowly taper. Our Chief Investment Office feels that the market could likely continue to take cues from health data, including a significant increase in testing overall, greater availability of medical supplies, as well as promise for treatments and a potential vaccine. Q2 will likely be the most challenging period of the year in terms of corporate earnings and overall productivity. Given precedent data from other regions and continued advances in testing and treatment, the reopening of businesses and our economy could continue over the coming months and produce betterthan-expected results in the third quarter. Assuming limited second wave cases or other significant exogenous events, the green shoots of momentum and productivity should appear throughout Q3 and Q4 in our view. Slide 5 The most powerful tool you have for weathering the current market conditions is maintaining discipline. Regardless of market conditions, there are some investing basics that you really should keep in mind. For most of you, investing is a long-term pursuit. You are investing for needs five, ten, and even 20 years down the road. Long-term goals are best served by taking a long-term approach to investing, and staying invested, so don’t abandon the markets during short-term bouts of volatility. On the topic of goals, always remember why you are investing. Performance quarter over quarter matters, but the real measure of how you are doing is how you are progressing towards your longer term goals. It’s through this lens, one that takes into account not just performance but also risk over the long-term, that we evaluate your progress. Historically, establishing an asset allocation that is aligned with your goals, diversifying your holdings within your asset allocation, and rebalancing regularly, have been the best way to achieve superior risk-adjusted returns over the long run. And finally, you’ll always want to be on the lookout for opportunities. Even in volatile or declining markets, there are opportunities from strategic rebalancing, to tax-loss harvesting, to making tactical investments overall. As you think about how you want to prepare for the new normal, you may also want to consider how wealth structuring techniques can help you prepare for the future while taking advantage of opportunities today, all to help you safeguard who and what you care about most. Slide 6 While considering wealth structuring techniques as part of your larger plan has always been important, the nature of the pandemic and market volatility may have brought these topics into focus. Perhaps your income has been impacted or you’ve seen a decline in business. Perhaps you’re concerned about the possibility of tax increases down the road, or maybe the health aspects of the pandemic just have you thinking more about the future and ways to prepare. It’s only natural to be asking yourself questions like, “Have I taken the necessary steps to protect myself and my family? Do I have the right structures in place to manage my wealth now and in the future? Should I update parts of my estate plan, or is now the right time to consider wealth structuring?” Wealth structuring is an important component of your overall financial strategy and can help you plan for the future and secure your family’s well-being. And in the current market environment, there are even some strategies that are favorable given current market conditions. Slide 7 Anytime you think about your finances, the first step is to identify your goals. When we think about wealth structuring, you need to ask yourself, “What is the purpose of my wealth? What do I want to do with my assets now and in the future?” Simply put, wealth structuring is intended to accomplish three objectives – first, preserve the wealth you’ve created and attempt to maximize its value by managing taxes and expenses. Second, protect your wealth from unexpected risks or unforeseen events, and third, control your assets so you can determine how they should be distributed to provide for the people and causes you care about most. These are the core elements of most wealth structuring discussions. As part of an ongoing journey, we explore all three areas to develop a plan that addresses your unique needs over time. A thoughtful conversation about your goals for yourself, your family, and the lasting impact you want to have is the starting point to determine what techniques we should discuss in more detail. Slide 8 Wealth structuring includes some foundational elements that everyone should have in place, things like your will, beneficiary designations on accounts such as your 401(k), IRA, or life insurance policies; healthcare proxies and powers of attorney; advanced directives such as a do-not-resuscitate order; and a revocable trust that can help you maintain control over your assets in the event of incapacity or even keep assets out of probate. Just as important is deciding who fills the roles associated with these documents. When you select someone to serve as executor of your will, act as your agent for a healthcare proxy or a power of attorney, or as trustee of a trust, these roles come with significant responsibility. You’ll want to make sure that the person you designate has the time, expertise, and, in some cases, independence to carry out your wishes as you intend. Even if you already have these elements in place, it’s important to discuss them and review them on a periodic basis to make sure that they still support your goals and financial situations as both can change over time. Slide 9 In addition to those foundational elements, it’s important to consider your larger financial picture as well, things like cash flow and liquidity needs to make sure you have enough cash to fund your expenses as well as any large purchases you’d like to make; retirement goals and any activities you’d like to engage in such as starting a second career; potential investment opportunities that can help you take advantage of market events; and philanthropic and legacy goals for charitable gifts today, as well as in the future, that can help you support the causes you care most about. Slide 10 In the current environment, wealth structuring can also help you take advantage of certain opportunities. While the stock market has rebounded from its lows in April of this year, many investors still have assets with depressed values. This situation can be advantageous for certain wealth structuring techniques. For instance, if your traditional IRA has declined in value, now may be a good time to consider a Roth IRA conversion. Although the assets are generally subject to income tax when you convert from a traditional to Roth IRA, if the values have gone down, the amount of income to be recognized may be lower. This may mean not only lower taxes but it may also keep you in a lower tax bracket, particularly since mandatory distributions from most retirement accounts have been waived for 2020. Once inside the Roth IRA, the value of the assets may not only rebound but also grow in a tax-free environment. In other words, you won’t have to pay taxes on any distributions you might take. If you believe taxes may rise in the wake of massive government stimulus spending during the pandemic, paying taxes now rather than later could also save money. Similarly, accelerated lifetime gifts can help you pass assets that you don’t need to fund your current or future lifestyle to your heirs and thereby remove those assets from your taxable estate. Gifts of this nature are generally free from tax if annually valued at $15,000.00 or less. And with a federal estate tax exemption of over $11 million per person, there is ample opportunity to even pass larger amounts to family members or others. If the assets that you give suffer a temporary decline in value, the current environment may offer an opportunity to give more and let the recipient wait for the assets to recover in value. A third strategy is generation-skipping wealth transfers. If you have a taxable estate in excess of the current federal exemption, you may want to pass some of those assets to grandchildren and skip a generation. Now, some trusts are intended to benefit grandchildren or more remote descendants, but there could be a cap on how much can be passed to those beneficiaries before a generation-skipping tax kicks in. Now may be a good time to consider allocating your GST exemption to trusts that are not already exempt. If the value of such a trust had decreased, this may be an ideal time to use your exemption and protect the trust from potential generation-skipping tax in the future. These three techniques underscore how temporary declines in asset values can work to your advantage in realizing your goals. Slide 11 Current market conditions have led to unprecedented actions by the Federal Reserve, resulting in historically low interest rates. This near-zero rate environment can also be beneficial to wealth structuring strategies as the prevailing interest rate at the time of the gift can influence the value of the gift. If gifts are part of your wealth transfer plans, now may be a good time to consider Grantor Retained Annuity Trusts, Charitable Lead Annuity Trusts, or intra-family loans. The Grantor Retained Annuity Trust or GRAT is a popular vehicle for making tax efficient gifts to beneficiaries and is especially attractive when interest rates are low. That’s because the IRS assumes the growth rate of assets placed in a GRAT is equal to the current interest rate. Any appreciation beyond that rate passes to heirs tax-free while the original assets are returned to the creator of the trust. Today, the assumed growth rate, or the so-called hurdle rate, for GRATs is at an all-time low, six tenths of 1%. A charitable lead trust, or a CLAT, operates in much the same way except that in this case, the annual payments go to a charity. When the trust terminates, any remaining assets go to heirs. CLATs are a great way to support charitable causes that you care about and potentially transfer wealth to heirs without any gift tax. Another technique for consideration is intra-family loans. These loans allow you to lend money to a family member, often an adult child, at an interest rate that is equal to the rate the IRS designates to avoid any gift tax implications. The borrower can then use the funds to acquire another asset, such as real estate or a business, with the potential to generate a higher rate of return than the interest rate on the note. This is simple math - borrow at one rate in anticipation of returns at a higher rate. All of these strategies are dependent on a prevailing interest rate at the time you make the gift, not on future rates, making the current historically low rates beneficial to your long-term goals. Slide 12 If your wealth structuring plan includes a trust, you’ll also want to take time to think about how that trust will be administered. Trust administration can be viewed as an honor, but it can also be a time-consuming task when they carry significant responsibilities, time commitments, and even liabilities. A trustee has a duty to act in the best interest of both the current and future beneficiaries of the trust and can be held personally liable for errors, mismanagement, or failure to take action that would have benefited your estate. As you think about who you’ll ask to administer your trust, be sure to think about the following: have you selected a trustee who has the time and expertise needed to administer your trust effectively? Are you confident that your trustee can navigate your family dynamics and administer the trust according to your wishes? May there be a time when the person you’ve named, or considering naming, will no longer be able to serve as trustee? Keep in mind if you name a family member or a friend, they don’t have to administer your trust on their own. They can tap into support from a professional trust services provider, like Bank of America, to help with the management and administration of services or even serve as cotrustee. When you select a professional trustee, it can give you specialized expertise, objectivity, and continuity that may not be possible when designating an individual alone. Slide 13 You can also explore how life insurance may help protect your family and the wealth you have built. For your family, it can help protect against the loss of income and expenses from a health event, cover longterm care expenses, or supplement retirement income. If you own a business, life insurance can help you safeguard it by protecting you from the loss of a key employee or a partner. It can also help with business succession when buying out a part owner or helping family members take over after you’re gone. And for your philanthropic goals, life insurance can help you guarantee the charitable gift as part of your estate without significantly reducing the amount your heirs receive. Slide 14 At Merrill, we take a team approach to wealth structuring. As a client, you have access to a team of experienced and knowledgeable trust, estate and insurance specialists who can help evaluate and identify the strategies that support your goals. We can also work directly with your attorney and tax advisor to further evaluate the alternatives and implement strategies that are best suited to your larger financial situation, and we will involve your family members as you see fit. You also have access to Bank of America’s extensive trust and estate services. Bank of America is the largest provider of personal trust services in the country, offering you access to the people, experience and solutions that will help bring your comprehensive plan to life and help you create the lasting and meaningful legacy you envision. Slide 15 So what should you consider doing now? First, remember you’re not alone. We’re here to help. We can answer questions, offer guidance and insight to you to help make sense of the markets and your wealth structuring goals. We’re here to offer you advice so you can make informed decisions about your finances and maintain investment discipline. This checklist is a handy reminder of the things we can do together, steps that will help you maintain confidence in your investment strategy and help you stay on track towards your long-term goals. Slide 16 It all begins with a conversation. Your advisor is always available to answer your questions, provide you our perspective, and offer advice, so don’t hesitate to reach out to them. I’ve have said it a lot during this presentation but remember to focus on your goals and your plan. Your goals are why you invest and are the foundation of everything we do. We encourage you to schedule time with your advisor to discuss what you’ve learned today and have an open dialogue to make sure you’re on the path to achieving your goals. Thank you for taking the time to join me today and thank you for being a client. The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of BofA Corp. This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available. Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions. Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results. All recommendations must be considered in the context of an individual investor’s goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all investors. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets. This material does not take into account a client’s particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed, or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp. Merrill Lynch Life Agency Inc. (“MLLA”) is a licensed insurance agency and a wholly owned subsidiary of BofA Corp. Investment products offered through MLPF&S and insurance and annuity products offered through MLLA: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Deposits Are Not Insured by Any Federal Government Agency Are Not a Condition to Any Banking Service or Activity Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC, and a wholly-owned subsidiary of Bank of America Corporation (“BofA Corp.”). Trust and fiduciary services and other banking products are provided by wholly-owned banking affiliates of BofA Corp., including Bank of America, N.A. Bank of America, N.A. and U.S. Trust Company of Delaware (collectively the “Bank”) do not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank. Certain Bank of America associates are registered representatives with Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”) and may assist you with investment products and services provided through MLPF&S and other nonbank investment affiliates. MLPF&S is a registered broker-dealer, registered investment adviser Member SIPC, and a wholly-owned subsidiary of BofA Corp. © 2020 Bank of America Corporation. All rights reserved. │ 3166631 │ 07/2020