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Foundation Problems Caused by the 2017 Tax and Job Act

Monday, February 26, 2018   (0 Comments)
Posted by: James R. Hollon
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Foundation Problems Caused by the 2017 Tax and Job Act

Are You Prepared for How It Will Hurt Fundraising?

By James R. Hollon

Reasons for concern about how the new law will change fundraising:

1.       Far fewer wealthy people will need to give to charities to avoid estate taxes.

2.       Currently, an individual’s estate tax deduction will be $11.2 million for the next 7 years, until reverting back to $5.6 million in 2025.

3.       The husband-and-wife estate tax deduction is scheduled to be $22.4 million for the next 7 years.

4.       This year when foundations seek funds, wealthy people will probably be busy trying to change their estate plans.

5.       So, in my opinion, you cannot count on individuals and families being as charitable as before?

6.       Taxable estates were: 52,000 in 2000, 5,000 in 2017, and estimated to be 1800 in 2018.  What does this trend tell us?

7.       Heirs will still get a step-up basis upon a donor’s demise.

8.       Will establishing generation skipping and irrevocable trust increase?

9.       Giving to heirs instead of charity will probably rapidly increase.

10.   The new tax act includes indexing to keep up with inflation.

11.   Will people pare their gifts to philanthropies, such as the Charitable Remainder Trust and Charitable Annuity Trust, etc.?

12.   “The scheduled estate tax cut at around $5.5 million in 2026 may have the ultra-wealthy nervous “. *

13.   High property and income taxes may cause many people to move to lower tax areas of the country.

14.   “2017 tax law allows individuals to gift up to $11.2 million during their lifetime, before 2026. *

How can foundations maintain their charitable impact when fundraising gets harder? And what if there’s a market correction?

Reduced fundraising due to the new tax act will be the biggest thing to affect foundations in decades. But if a market correction comes along to reduce foundation assets, the tax act’s effects will be even greater, because restoring assets through increased giving will be so much harder. And in fact, we may be in for a big correction, since the market is at an all-time high, and the last major correction was way back in 2008.  (In 2008, the Dow Jones average low was 6547. As of this writing, the Dow is over 25,000.) When the next correction comes, as one day it surely will, will your foundation’s assets be able to take the hit? Are you confident your portfolio is totally diversified for growth while minimizing risks against loss of assets?  

Success story: How one foundation maintained charitable giving without a single fundraiser in 17 years.

You can look at Matson’s website and under:  Save the Investor.  Save the World, you will find some startling performance numbers which began in 1991, 25 plus years ago.  Guess what!  This asset allocation portfolio is based on research done by Harry Markowitz, William Sharpe and Merton Miller who won the 1990 Nobel Prize for Economics.   Ouestion:  Can we raise philanthropic returns a ½% minimum or more to help rescue less fortunate individuals in our communities?

At Matson’s website, you will find assets under management, $8.6 billion, protecting over 33,000 clients. These clients have stopped gambling with their investments and financial futures. Clients are invested in 45 countries and have 16,337 holdings which means broad global diversification.  You will find where Mr. Matson is constantly sought after by investment media.

Thanks to Matson’s way of diversifying to minimize losses, since 2000 an Alabama foundation has given to charitable organizations 133% of its original investment assets as of 11/20/17 ¾  and still had 124% of its original assets remaining.  Not only that, since 2000 the foundation has never held a fundraiser and never added or removed even one stock or bond from their portfolio.  The foundation was able to do this because in 2000 they hired a discretionary portfolio manager who transferred the fiduciary responsibility from the foundation to Matson. Matson has the discretionary responsibility of foundation’s portfolio, which it has managed with total diversification for growth and minimal risk as specified by the Nobel Prize-winning asset allocation strategy known as Modern Portfolio Theory.

Portfolio management by Matson also produced a huge cost savings for the foundation. Why?  Because Modern Portfolio Theory asset allocation eliminates the need to constantly select new stocks and bonds, and so eliminates hiring financial advisors to monitor the portfolio and serve as an investment committee and Board of Directors. 

More proof of the value of total diversification from my personal Matson account.

Since 6/2/2000 thru 1/24/18 this author has a Matson account portfolio, as described above, that has an annual compound return of 8.48% net of fees.  No additional assets were added to the account.  Just think, it has gone through the worst corrections the market has experienced.

Another foundation problem made worse by the new tax law: the hidden costs of buying stocks

When wealthy people reduce giving, foundations will finally stop ignoring how hidden stock fees are draining their assets.  For an excellent online article about this, see “Hidden Expenses” (Forbes Magazine, 1/1/2005, article by James M. Clash with Michael Malello).  Clash describes one fund with a 99% turnover and a trading cost of 32 cents per $100. Another fund he describes had a $3.61 trading cost added to the expense ratio.  When you consider the many millions of shares in a typical mutual fund, these hidden costs are astounding!  Are hidden costs in managing your foundation’s assets hurting your charitable giving?  Note the low turnover in the asset allocation portfolio.

And are you grappling with these problems not related to the tax act…?

• Bylaws – Are they preventing needed change?

Do your bylaws’ voting rules make changing your foundation’s investment strategy difficult?  If so, change your bylaws so your investment decisions can adapt to the new tax act of 2017.  Commit to diversify totally, reduce fiduciary liability, and cut costs.  It can be done!  Matson’s asset allocation strategy for growth while minimizing asset risk will simplify decision making about turnover, stock picking, fund selection, fund removal, and conflicting investment advice from other people, possibly.

• Share Classes: Do you know what you have?

Do You Know How Many Are Offered by the Funds?

What share classes of mutual funds did they sell you when you purchased the investment?  Nowadays there are more classes than A shares, B shares or C shares and the SEC auditors are looking for the advisor who does not do the best he can for the client.  Like, if there is an institutional class which is better for the client, that is what the advisor has to provide.  Learning this will help you keep from shutting down decision making.  Follow some articles in Investment News publication about this problem.

Recommended online articles that stress the need for total diversification.

• “A Serious Threat to Your Investment Objectives, Lack of Diversification” by Tony M. Roth, M.A., J.D., LL.M, Barron’s Special Report March 27, 2017. “If you were told to develop a plan, you were also told you could not do it alone.”

Roth makes a strong case that total diversification is becoming a necessity. Would this cause you to wonder what made one diversification strategy so innovative?  One such diversification strategy now has a 26 plus years of experience using the Nobel Prize for Economics research.

• “Wilmington Trust: “On the Ropes No More” by Abby Schultz, Barrons March 25, 2017. Six years ago, reports Schultz, Wilmington Trust was bought by M & T Bank of Buffalo, NY for the fire sale price of $350 million as it reeled from “construction loan losses.”  A lack-of-diversification disaster.

Another quote “2017:  Year of the small cap stocks”, guess what, large and small stocks”, not small cap stocks” end the year higher.  So, we know stock picking and track record investing does not work.  Can you improve your diversification?  Barrons special report March 27, 2017.

Avoiding trust lawsuits over lack of diversification

Inadequate diversification of portfolio assets has brought more than one 401K and 403B plans into court as a defendant. Search Google for “401K and 403B lawsuits” and see what I mean.

A way to defend yourself from such charges is to obey the New Prudent Man Rule** described in the 1974 and the ERISA law and the rules of 1979. This rule requires asset diversification based on Modern Portfolio Theory, which as we mentioned won the Nobel Prize for Economics in 1990.

*Investment News, January 15, 2018  ** See The Trust Law Book, “Restatement of the Law Third”, page 66

Tax Act Workshop in your Scottsdale or Phoenix Office!

Find out What the 2017 Tax and Job Act Means for Your Foundation

  • How to grow your foundation's assets if the wealthy stop giving
  • How to minimize market risks threatening foundation assets
  • How to stop hidden portfolio fees

For more information, contact:

James R. Hollon

Foundation Advisor and Investment Coach

McBryar Advisory Services, Inc.


NOTE: All investing involves risk, and particular investment outcomes are not guaranteed. This letter is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, or an offer to provide advisory or other services by James R. Hollon or McBryar Advisory Services, Inc. in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained herein should not be construed as financial or investment advice on any specific subject.                                                                                                                                                                                      Copyright © 2018

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