ABOVE MARKET HISTORICAL PERFORMANCE IN FIRST QUARTER 2017
We experienced a great start to the year as U.S. domestic markets started out strong. The NASDAQ Composite Index led the way with a 9.8 percent return for the first three months of 2017. The S&P 500 and the Dow Industrials returned 5.5 percent and 4.6 percent, respectively, for the same period. While these returns were a solid start to the year, returns for each of the months of January, February and March slowed down from one to the next. The momentum from the end of 2016 carried over into 2017, but was largely unsustainable as the “Trump Bump” came to a halt with the failure of the legislative overhaul to Obamacare. Technology stocks led the way with a double-digit total return for the quarter. Other sectors outperforming the S&P for the quarter were Consumer Discretionary, Consumer Staples, Healthcare, Materials, and Utilities. The Energy sector and the Telecommunications sector experienced negative returns for the first quarter. For the Healthcare sector this was a turnaround from a negative 2016.
Bond yields were expected to continue to rise in 2017 after an increase in the Fed Funds rate in December and a signal by the Federal Reserve for multiple rate increases in 2017. The Fed did follow through with this promise with another increase in March. However, the 10-year Treasury interest rate actually fell during the first quarter from 2.45 percent to 2.40 percent to end the quarter. While the Federal Reserve is expected to continue with these small increases in short term interest rates, it is our expectation that long-term interest rates will be static and may continue to fall due to historically low rates throughout the rest of the world. While The U.S. Federal Reserve has discontinued quantitative easing programs and started to increase interest rates, much of Europe and Asia are still attempting to assist their economies with lower interest rates to spur economic growth. As long as these monetary policies exist in other countries there is little reason to expect increasing long-term interest rates in the U.S. We expect the yield curve to continue to flatten during 2017 with rising short-term interest rates and static to lower long- term interest rates.
Geopolitical issues still dominate the headlines. Our own political scene has its drama as the Republican majority in Washington continues to fumble the ball while dealing with its newfound political power. The failure with the Healthcare agenda will only place more pressure on the majority as they turn their attention to Tax Reform and Infrastructure programs. Overseas, North Korea continues to dominate the news. This regime will continue to be a challenge as they acquire military abilities that expand beyond their own border. The United Kingdom is moving forward with their Brexit, which caused a jolt to the market in June of last year. Europe, as a whole, continues to be divided economically and politically as they deal with slow economies and disagreements over refugee policies. These challenges and possibly others, will continue to steer worldwide markets as we move into the second quarter of 2017 and beyond.
SHOULD YOU RELY ON A “DECLARATION OF TRUST OWNERSHIP”?
Revocable living trusts are effective tools to address many of the uncertainties inherent in the process of estate planning. An individual who creates a trust (called the grantor) names a person or institution (called the trustee) to manage trust assets and conduct the business of the trust for the benefit of one or more people or entities (called the beneficiaries). By establishing a revocable living trust, the grantor usually retains control of assets during their lifetime while they are legally competent, while at the same time providing a means for someone else to manage their affairs if they should become incapacitated. The grantor also provides instruction for the disposition of assets upon death, and may even provide a means for beneficiaries to receive trust benefits for many years into the future. All of this works quite well . . . as long as the grantor actually places his assets into the trust. The trust is really just an empty “bucket” when it is first created. This bucket must be filled.
Most estate planning attorneys will advise and assist their clients in filling their trust “buckets”. This usually involves re-titling deposit and investment accounts in the name of the trust, deeding real estate to the trust, registering any titled personal property (automobiles, for example) to the trust, and perhaps naming the trust as the beneficiary of life insurance policies, annuities, or retirement accounts. When these steps are taken, there is no question whether a successor trustee has the authority to manage the assets of the trust and/or distribute assets according to the terms of the trust document. If these steps (generally called “funding” the trust) are not taken, there can be stumbling blocks in the administration of the trust.
Some estate planning attorneys will draft a “Declaration of Trust Ownership” either as part of the trust document, or as a stand-alone document. This declaration usually states that the grantor intends for all property the grantor has or acquires in the future to be an asset of the trust. Legally speaking, such a declaration is effective to prove the grantor’s intent regarding the ownership of assets. However, sole reliance on this declaration to fund the trust is fraught with difficulties, especially after the death of the grantor.
Suppose a situation where a husband and wife jointly own a section of agricultural real estate. They decide to create a trust, but do not deed the land to the trust. Instead, they rely on the declaration of trust ownership. Once they have both passed away, the successor trustee of their trust attempts to sell the real estate, as provided in the terms of the trust, to a buyer who requires title insurance. The underwriter for the title insurance may very well be unwilling to accept the declaration as sufficient proof that the chain of title clearly passed from the grantors to their trust. This will necessitate a probate proceeding to get the real estate from the estate of the last grantor to die into the trust. Besides incurring attorney’s fees, this probate could cause such a delay that the potential buyer backs out of the deal. The expense and the added time could have been avoided altogether if the grantors had simply deeded the land to their trust when it was first created.
Suppose another scenario in which a husband and wife jointly own an investment account worth $200,000. They create a trust, but again rely on a declaration of trust ownership rather than re-titling the account. The bank or investment advisor has no knowledge of the trust, so when the wife decides, after her husband’s death, to add one of her children as a transfer-on-death beneficiary, new account documents are drawn up to add the TOD. The ownership of the account is now in the wife’s individual name, and can be transferred to the named child as the beneficiary as soon as a death certificate can be provided. Little does the bank or investment advisor know there are three other children, all of whom are named as beneficiaries of the trust that was created jointly by husband and wife. You can imagine the problems that ensue when, after the wife’s death, the successor trustee is gathering assets, and finds that this account has already been distributed in full to the one child. Did the wife’s actions in naming a TOD beneficiary amount to a revocation of the declaration of trust ownership? Or, did the wife unintentionally create the conflicting account ownership simply out of a desire to “make things easy” for her children? These are good questions, and will almost certainly end up the subject of a legal proceeding.
Again, to be clear, the law has recognized the efficacy of simply declaring assets to be owned by a trust. Have you taken measures to incorporate a revocable living trust as a part of your estate plan? If so, have you funded your trust by re-titling accounts, transferring deeds, etc.? Or, are you under the impression that a declaration of trust ownership has taken care of this step for you? If your answer to this final question was “yes”, then please re-consider. Executing documents of transfer is a relatively simple step that could save countless dollars, precious time, and much frustration on the part of your successor trustee when it comes time to settle your estate. Our trust officer would be glad to review your estate plan with you to help ensure it can be carried out smoothly and efficiently.
Park State Bank & Trust
P.O. Box 9
710 West Highway 24
Woodland Park, CO 80866