Thomas D.D. Graff, CFA Fixed Income Portfolio Manager
With the release of the minutes of the December Federal Open Market Committee (FOMC) meeting on Tuesday, December 13, the Federal Reserve announced that it would be making changes in how it communicates the Committee’s collective thinking. Brown Advisory believes that this is a significant development, with serious long-term and short-term implications.
Alice S. Paik, Strategic Advisor K. Brigid Peterson, Strategic Advisor
With favorable tax laws in place and talk of a possible higher tax regime ahead, many families are revisiting their plans for transferring to and protecting wealth for future generations. Although the future of tax law remains uncertain, current law and recent legislative proposals all suggest that transfer-tax exemptions could become more restrictive and tax rates could rise in the near term. Whether that happens in 2013 or sooner, no one knows for certain. These factors are further motivation for families to now craft and execute thoughtful plans for their long-term legacy if there is no compelling reason to wait until 2013. One key estate-planning tool is an irrevocable trust, in which a grantor cedes control over assets and gifts them to a beneficiary in a tax-efficient way. However, irrevocable trusts can be complex and the state laws that govern them limiting. Delaware trust law, on the other hand, provides several unique benefits to creators of trusts, trustees and beneficiaries that wealthy families should consider.
William L. Paternotte, CFA Strategic Advisor and Partner In the wake of recent gyrations in the capital markets, risk levels—or at least the perception thereof—are elevated. The combination of Europe’s financial crisis and attendant weakness in the euro, the United States’ struggle to resolve its own debt issues and keep its fragile expansion alive, and China’s efforts to suppress inflation while executing a “soft landing” has provided the markets with daily fuel for violent swings. It seems that no sooner does a ray of hope appear in one crisis than the market focuses on another one. Not only are the fundamentals shifting as events unfold, but the markets’ reaction to them seems to exaggerate the impact on portfolios.
The Strategic Advisory Team
With the enactment of tax legislation at the end of 2010, the federal government extended favorable tax laws for 2011 and 2012, but we believe this extension of lower income tax rates—and modifications to the transfer tax system—will be temporary. Therefore, we recommend that clients consider the opportunities currently available in this low tax environment.
On December 5, Standard and Poor’s (S&P) put 15 European sovereign credit ratings on negative watch, citing in part deteriorating budget conditions, anemic economic growth and a lack of political will to deal with these problems. This echoed S&P’s explanation given for downgrading the U.S. in August. More disturbing has been the sharp rise in Italian bond yields. Italian 5-year bond yields were under 3% as recently as November 2010, under 4% as recently as June 2011. Then with frightening speed, yields suddenly spiked, trading as high as 7.75% in November. More disturbing was a lack of any specific catalyst for the spike. There was no Greek-like revelation of a big hole in their budget or some sort of political unrest. It was basically just an erosion of confidence that became self-feeding. This has American investors asking, could the same thing happen here?