The Shanghai Composite finished the day down 6.4%, capping a 13.3% decline on the week. This is the largest weekly drop for the Composite since October of 2008. The decline was due to the same factors that we have been discussing for a few weeks now; namely, fears of further tightening on the use of margin and concerns of high valuations. The markets have been propped up by the expectation of stimulus but there is an increasing concern that the stimulus will not be enough to boost growth. Given Beijing’s commitment to steady, sustainable rises in stock prices, we would expect to see some combination of further monetary loosening and an increase in foreign investment limits. It’s interesting that the government even sees the need to prop up a market that is still up 38% year-to-date, but this would be an effort to contain volatility.
IPO Market Picks Up Steam:
After a slow start to 2015, Initial Public Offerings (IPOs) are picking up steam. This is generally a positive sign for the markets, as an increase in companies going public is seen as meeting an increased demand for stocks. A company generally attempts to go public when they feel they can receive the most interest and therefore the highest price for its shares. At the beginning of 2015, low oil prices and the uncertainty surrounding the Federal Reserve’s interest rate hike were a few reasons companies cited as a reason for delaying their IPOs. An increase in private equity funding also allowed for companies to put off (or cancel) their IPOs.
As of the beginning of this week, we have seen 81 IPOs in 2015, down from 132 at the same point in 2014. As a point of reference, 2014 saw 293 IPOs, the most since 2000. This week, Fitbit (FIT) debuted and saw shares rise nearly 50% in its first day of trading (from its IPO price, not its first trading price). Wingstop (WING) and Shake Shack (SHAK) also saw success following their debuts this year. It is anticipated that we will start seeing more companies file for IPOs in the second half of 2015. Right now, upcoming IPOs include: Fogo De Chao, Mindbody Inc, and TransUnion.
From the retail investor’s perspective, IPOs are generally difficult to obtain and are often quite volatile once they begin trading. Using Fitbit as an example, investors who were able to obtain the IPO shares paid $20 per share. When the shares began trading yesterday, they opened around $30.45. So to the regular investor (who did not obtain the IPO shares) trying buy FIT, they would pay $30.45 instead of the IPO price of $20. The stock then traded as low as $29.50 and hit $33.95 at one point, a 15% swing in just a few days of trading. It is therefore important to realize the increased risks associated with trading in IPOs. For many investors, it is advisable to avoid them altogether and wait for the “dust to settle” before investing in the company.
Federal Reserve Concludes June Meeting:
The Federal Reserve meeting concluded on Wednesday without a rate hike, as was expected. While it is clear the Fed will be raising rates, Fed Chair Janet Yellen’s remarks seem to be on the dovish side, meaning rates may not be raised soon. She cited continued weakness in the labor market and subdued wage growth as factors keeping the Fed from raising rates. The International Monetary Fund (IMF) has been calling for the Fed to hold off on raising rates until 2016. When asked about her opinion on this, Yellen simply stated that the FOMC takes the IMF views into consideration, but ultimately the rate hike will be data dependent. The general market consensus is now that the rate hike will be in September.
Charitable Giving Strategies:
Many people assume that the hardest part of donating is the choice of charity or maybe even the decision to part with the money in the first place. However, when presented with all the different strategies that are available to give, donors often discover that choosing the correct gifting method can be somewhat overwhelming. Different giving strategies can provide a variety of benefits to both donor and charity. A number of factors affect each method’s potential and limitations. Below are some considerations:
Size of gift
While all charities appreciate any gifts they receive, not every giving method makes sense for every donation amount. Some strategies require thousands of dollars to setup and should not (or cannot) be used for smaller gifts. Consequently, giving a very large gift through an inappropriate method might prevent it from reaching its full potential value. Small gifts are those under $5,000 while mid-sized gifts start at $5,000 and go up to around $50,000. A large gift will typically be anything greater than $50,000. Each strategy lists a common, efficient size but is not strictly limited to it; likewise, the cash values of each size listed below are generalizations.
How it works
The descriptions provided in the chart below are only a primer and are not intended to be exhaustive. Giving strategies (particularly trusts) can be extremely complex and may require legal and tax guidance when being established.
Timing of the gift
For some giving strategies, timing is not necessarily a factor. In other cases, your financial circumstances or life stage may dictate when it’s most advantageous to give. For two strategies, both involving life insurance, the process can be set up and managed at any time, but the gift cannot actually be made until the donor’s death.
A charitable tax deduction allows you to remove your donation from your income (or estate) so that you are not taxed for money that you do not actually keep. Depending on the type of charity, these deduction limits are either 50 percent of adjusted gross income when making standard gifts or 30 percent of income when donating capital gains property. In the case of appreciating trusts, a deduction can be made for the charity’s “present interest” in the gift – the part of the initial gift that will grow into the amount the charity will ultimately receive.
Some donations (through trusts and private foundations) can give back to a donor. Money returned to the owner from a donation is referred to as “retained interest” or “retained benefits.” The retained benefits or trusts are the monetary distributions given back to the donor (or other beneficiary). The retained benefit of private foundations is the ability to distribute some fund resources as payment to individuals who provide services for the foundation, including, in special cases, family members. Tax deductions are never given for any retained benefits.
Strategic Charitable Giving Chart
of Gift How It Works Typical Time of Gift Major Feature Tax Deduction Retained Benefits?
Direct Donation Small or Mid An outright gift to a charity. Ownership is transferred immediately. Amount of gift is also amount of deduction. Anytime Extremely simple and fast; no third parties needed. Full No
Donor Advised Fund (DAF) Mid to Large A gift set up as an investment fund that is managed by a sponsoring bank or charity. The fund then makes regular donations to a charity the donor has recommended. Anytime DAFs usually cost some money to create and manage, but they can greatly increase the total amount of money received by a charity. Full No
Charitable Retained Annuity Trusts (CRATs) Large A large donation given to a trust that invests the money and makes annual payments back to the grantor. At the end of trust’s term, the remainder goes to the chosen charity. High Income Year Since appreciated assets can be donated without tax, CRATs are an ideal way to maximize a gift when a donor owns stocks that have greatly increased in value since purchase. Charity’s Present Interest Yes
Charitable Lead Annuity Trusts (CLATs) Large The mirror of CRATs, CLATs are donations that are invested and give yearly payouts to the charity of choice. At the end of the term, the non-charitable beneficiary receives the remainder. High Income Year/
Death Because it requires the grantor to pay taxes on retained income, it is possible for a long term CLAT to pass its remainder to beneficiaries tax free. Charity’s Present Interest Yes
Charitable Gift Annuity Agreement (CGA) Mid to Large A donation made to a charity with a contract that the charity will pay regular annuities to the donator or other beneficiary for a set period. Essentially a CRAT that is managed by a charity instead of a trust. Retirement Many people purchase annuities at retirement. CGAs take the money that would normally go to the insurance company and give it to a charity instead. However, CGA annuities are not as competitive as standard ones. Charity’s Present Interest Yes
Direct Beneficiary of an Account Small or Mid A declaration on a 401(k), IRA or insurance policy that makes a charity the beneficiary of the account/policy in the event of death. Death Though very easy to declare, naming a charity as beneficiary should only be done after family and estate needs have been fully considered. Full (Estate) No
Outright Gift of Insurance Policy Small or Mid The ownership of the donor’s insurance policy transfers to a charity. The donor continues to pay premiums and the charity receives full death benefit. Death While more complex than making a charity beneficiary, this method not only removes the policy from the donor’s taxable estate but also deducts premium payments from regular income during life. Full (Estate); Full (Income) No
Creating a Private Foundation Large A private foundation is an organization that a donor creates and operates. Typically run by a family, a small board of trustees accepts donations and distributes them as needed. Anytime Private foundations allow an individual (or family) involvement with charitable giving and maximum control over where funding goes. Unfortunately, this level of control requires forfeiture of some tax benefits. Full (Limited to only 30% of Income) Partial
Private Operating Foundation (POFs) Very Large POFs are similar to standard private foundations except they are directly involved with organizing and executing charitable actions. In many ways, POFs act like privately owned charities. Anytime Same direct control as offered by a standard private foundation, but POF donations allow for the full limit of income tax credit (50%). Full Partial
The chart provided above is only intended to provide an overview of the most common charitable giving strategies available. Please contact Paradigm Financial Advisors, LLC or a tax/legal professional to help you design the strategy that is most suitable to your particular financial situation.
This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.