Operator reads:     Thank you for joining today’s Bank of America Private Bank call on “Planning Your Family’s Legacy. The views and opinions expressed are those of the presenters as of May 19, 2020, subject to change without notice and may differ from views expressed by Bank of America Corporation or its affiliates. This is presented for informational purposes only and should not be used or construed as a recommendation of any service, security, or sector. Please listen to the end of the call for important disclosures. I will now turn it over to Jesse Mandell.

 

Jesse:            Hello everyone, I am Jesse Mandell on the strategy team at Bank of America Private Bank focused on helping Business Owners and Families.

Thank you for joining today. While all of us are adjusting to the impact of this health crisis, including the market volatility that’s characterized it, we know there is no better time to go back to the basics – and plan.

Recently I spoke with several of our experts and we discussed the impact of careful and deliberate intergenerational planning. We hope our discussion today might get you thinking, and possibly trigger conversations with your family. We recognize some of you have older children who are starting to plan –it may involve a business, or building resources for your family, thinking about estate and wealth transfer planning or family investment dynamics, we can help you build a better tomorrow for you and your families.

I am joined today by Bank of America Private Bank experts, Mike Pelzar, Head of National Trust Services, Neal Elkin, Managing Director, Senior Portfolio Consultant, Steve Lavner, Managing Director, National Wealth Strategy Group and Darren Sakurada, Director, Structured Credit Executive.

Neal will lead us off with an investment overview, Mike will speak to our trust business, Steve will cover our Wealth Strategy approaches, and we’ll wrap up with Darren who will discuss credit and how it can make a difference in planning for your family.

So Neal, let’s get started. How does today’s market impact families and their long-term planning?

Neal: Thank you Jesse and thank you to everyone listening.

Financial markets have certainly been very volatile over these past several weeks. I find it helpful when trying to wrap my head around these current dynamics to break the cross currents into three main themes or axis: health, economic and financial – this may also be helpful to you and your families. As I go through these discussions,

please keep in mind that our thoughts on the economic and financial axis are dependent on continued improvement along the health axis.

First, it is important to appreciate how strong the US economy, and the global economy, were poised to be, coming into 2020. Clearly that strength has evaporated but the starting point matters and in this case, it matters a lot. Primarily, that strength can materially impact the shape and timing of the expected recovery, particularly here in the US due to the size and scope of the policy response.

Given the exogenous nature of this pandemic, and the reality that there is no significant systemic imbalances that need to work themselves out of the system, we expect a rapid recovery, most likely this will be the shortest recession on record.

Jesse: Excellent, what would we be telling our clients and their children during these market conditions Neal?

Neal:  You know, first and foremost, children should be prepared for economic volatility. This is the 2nd financial crisis for many young adults and the most important element of my conversations with clients and their children is a focus on remaining calm and not to panic. While the recent dislocations will certainly earn some significant respect in the record books with regard to speed as we moved in equity markets from an all-time high to a bear market in 21 days, twice as fast as when we were entering the Depression, we also moved from bear market to bull market status in record time – three days for the Dow Jones index.

Currently, we are trading more than 30 % off the lows as of this

recording. I have too many stories of clients who reacted too quickly, trying to time market downturns, liquidating assets to cash, only to have them stay on the sidelines as markets recovered. I like to share with clients the reality that we are investing for the medium and long term and that the right portfolio should be built to withstand short- term bouts of volatility and uncertainty.

Another reality of those that rush to the sidelines is that they need to be right twice – when they exit and when they decide to re-enter.

That element of the decision to rush to cash often causes the biggest headache.

I used to share with clients the risk to portfolio performance if they were not invested during the 10-best days for equity markets in any given year but a colleague once called me out on the selective use of that data. So, let’s assume that clients miss the 10-best and the 10- worst days over a given decade – the implication remains material and investors will miss significant return opportunities.

In summary – times like this require you, as an investor, to remain focused on the long-term and not get whiplashed by this short-term volatility.

Jesse: Thank you Neal, what are your thoughts regarding “time horizon” and how investment strategies vary due to the timing for each generation?

 

Neal:   Well, I think it’s really important to keep in mind the reality of time in markets UvsU. timing the market. Jesse – did you know that if you look at equity markets since 1929, there is an amazing divergence regarding expected positive and negative return; basically, over a 1- day time horizon, you have a 46% chance of experiencing a negative return, but if you move your timeline out to 5 years, that probability of a negative return drops to below 10%, and if you move it out to 10 years, that probability drops to below 5%.

For our younger generation, it is never too early to start planning and investing sooner, with the intention of investing for the long-term.

Secondly, dynamics have changed and we are thinking about how to help clients position their portfolios for what we are calling the New Frontier – crisis driven behavior that either reverts back to prior behavior or defines this new normal. Sectors that look appealing are global health care, medical technology, robotics, cloud computing, digital media, everything e-related – not just retail; think about all the technology that is needed to power the consumer facing sites and delivery mechanisms.

Third, I am often asked about the active/passive issues and decisions. I use this question to highlight our competitive advantage in this space.

As many of you know, we do not have a traditional asset management or fund management business; we have no dog in this active/passive fight. As a result, we have developed a quant based approach that identifies sub-asset class dispersion as the critical factor. Specifically, if dispersion is high – it makes sense to pay for active management.

If dispersion is low – it is difficult to rationalize paying for active management when passive beta makes more sense. Since the third quarter of 2019, we have been tracking a rising sense of dispersion across both equity sectors and fixed income sectors. Absent the periods of peak-panic in mid-march, and specifically since then, dispersion has moved significantly wider – making this an ideal time to leverage our strong due diligence process and identify active managers.

Jesse: Great updates Neal, thank you very much.

So many of us are staying more connected with our children, it’s now more than ever, top of mind that we “think and plan” across generations…

Um, I want to introduce Mike, as you lead our Trust Services business, can you share what you are hearing from families who are working to preserve their legacy amidst the family dynamics, and particularly the value of trust and estate planning.

 

Mike: Sure, well thanks for having me Jesse.

I’d certainly say in the current environment, many families are examining their estate and wealth transfer plans with a new sense of urgency. We are seeing more and more evidence that estate planning and thoughts about organizing the family’s affairs are becoming top of mind concerns for our clients. In these conversations, when I ask clients what they know or how they think about trusts, most say they find estate planning confusing with so many aspects to consider. There are a few main questions individuals and families should consider:

·        What are our goals for our wealth, particularly once we’re gone?

Am I concerned about the impact that a large inheritance may have on family members?

·        Should I set up or update any trusts to take advantage of estate and gift tax exemptions?

·        Whom would I name as executor for my estate and/or trustee for my trusts?

Are they experienced, responsible and willing to serve?

Jesse these are just a few to get people to start thinking about this.

Jesse:  You know, you’re right, these are such important questions. Beyond the traditional concerns about wealth transfer and estate tax minimization, what are some other concerns that a thoughtfully created trust can address?

Mike: Well Trusts can do so much more than transfer wealth to your heirs and minimize estate taxes.

A trust can help you address family dynamics, especially in the case of divorced families, blended families, or other complex circumstances.

You might also find a trust useful if you are likely to be called on to help a parent or other relative manage their own financial affairs. We can help you do that. And in those situations, where a client may be dealing with incapacity for any reason, a trust may have many benefits in helping to ensure that their affairs are handled in accordance with their wishes during the time they are incapacitated.

In certain circumstances, a trust may offer protection from creditors, or anyone who might be looking to take advantage of your family—either now or as they get older. And of course, a trust can help you avoid the cost of the probate process.

By creating a Trust, you can help make sure everything you value will be cared for in the future…in the way that you prescribe.

I’d encourage you to contact your wealth and tax advisors and your estate planning attorney to explore what a trust can do for you or to review and update any plans you may have put in place more than a few years ago.

 

Jesse:Thanks Mike, this has been very helpful. I’d like to bring Steve Lavner

into the conversation…

So Steve, in addition to health concerns and precautions with regard to the coronavirus pandemic, are there any estate or financial planning issues that our clients and their children should be thinking about?

 

Steve:  Thanks Jesse and yes, there are a number of issues to consider. Let me group these issues into two categories.

 

·        The first category relates to planning issues with respect to the recent reduction in valuations in the financial markets, as well as, the current low interest rate environment.

·        The second category relates to some practical concerns of how to execute various financial and estate planning documents, in light of social distancing and related measures.

 

Jesse: Interesting, ok, what are some of the planning issues with regard to the recent reduction in valuations?

 

Steve: Jesse, in our recent Tax Bulletin, there are a number of planning opportunities for our clients, for their children, and in some cases, their parents to consider. So here are some examples:

·        Tax loss harvesting – if appropriate, securities can be sold at a loss in order to offset a capital gains tax liability.

 

·        Next, Lifetime giving – a common strategy to reduce estate tax is to make gifts during life, typically to children, either outright or more commonly in trust. This strategy is commonly used by someone who is comfortable making gifts, without adversely affecting their own lifestyle or financial needs.

The planning idea here is relatively simple:

 

·        Since the gift tax is based on the value of the asset at the date of the gift, it may be advantageous to make gifts of assets which have declined in value.

·        And in order to potentially save even more, gifts can be made for the benefit of grandchildren in a manner which keeps the property out of the children’s estates which is commonly known as (GST) or generation-skipping tax planning.

Jesse:  Excellent, thank you so what are some of the planning issues with regard to the current low interest rate environment?

 

Steve: Our bulletin also addresses that and you may wish to consider the following strategies:

·        One, a Grantor retained annuity trust or GRAT– a very popular strategy which generates a free gift to trust beneficiaries when the assets in the trust outperform interest rates set by the IRS, and is typically used for gifts to children.

Next, sales to defective grantor trusts that’s similar to a GRAT, but it may also be utilized for gifts to grandchildren.

 

·        Third, Intra family loans –that’s commonly used when a parent wants to transfer money to children, but does not want to make a gift. Lending money to children is more attractive in a low interest rate environment.

Jesse: Ok, so Steve, you indicated there are also practical issues of how to execute various financial and estate planning documents, in light of social distancing and related measures. Could you elaborate more there?

 

Steve:  Sure Jesse. The main issue here is that many common estate and financial planning documents have a legal requirement that to be valid, they must be signed in the presence of witnesses or a notary. And in our current environment of social distancing that could be a real concern. In our recent Bulletin, we discuss some new laws and procedures which would satisfy legal requirements, while also remaining compliant with health precautions.

Jesse: So Steve, could you give us some examples of these new laws and which individuals might be affected?

 

Steve:   I’m happy to. Let me answer your second question first.

 

Individuals who are affected by these laws would include any person who is legally able to sign a will, trust, or other legal document so that includes young adults, as well as, older individuals.

With regard to some examples, New York and Florida each have new laws and procedures which allow certain documents to be executed remotely, using audio/visual technology. In order to understand the laws of your state, you should always consult with your legal or other professional advisor.

 

Jesse: Mmm, so Steve, if your state of residence doesn’t allow these remote procedures, is there anything else you can do to facilitate the execution of documents?

 

Steve:  Yes, there are some other possible solutions, and again it depends on your state’s law. Here are a few examples:

 

·        The use of a revocable trust may offer a possible solution. If someone already has a revocable trust and a will (often referred to as a pour-over will), then changes in the estate plan could be made by revising the provisions of the revocable trust. Now true, you’d still have to comply with state law governing the creation or amendment of revocable trusts, but those rules may be less stringent than the rules for execution of a will.

·        Another possibility for making some changes involves various types of dispositions, which generally pass assets to others without the reliance on a will that includes joint tenancies with right of survivorship and for certain types of accounts beneficiary designations.

 

Jesse:

Thank you Steve for going over all of that. Do you have any other closing remarks to share?

Steve:

Jesse, the most important takeaway, is that we are here to help our clients and their families navigate through these issues.

Jesse:

Thank you Steve, great insight. As we wrap up our conversation today, I’m like to turn it over to Darren Sakurada to take us through what clients need to know regarding Credit and why it matters to families, particularly in this environment?

Darren:

Thanks Jesse. These are interesting times, and we see opportunity as we navigate through this transitional time. Let me start by talking for a minute about what lenders have been seeing and working through these past weeks.

Lenders have received unprecedented volumes of requests for payment deferral, forbearance, and new loans under the Coronavirus Aid, Relief, and Economic Security Act – or CARES Act.

The Volumes of other transactions have decreased providing a partial offset, but it has been challenging across the industry. We’ve also been navigating through operational issues that hadn’t come up before. The appraisal process for various assets has had to be modified to accommodate social distancing and reduced travel.

Still, most banks, particularly the larger money center banks, have improved their financial and operational capacity over the past 10 years and are better positioned to meet those challenges. The Fed has been active in using the tools at its disposal to support credit markets and reduce interest rates to help the economy.

 

Jesse: Yes, this brings us to interest rates …

Darren: Correct, interest rates have come down, but not all rates and not in ways that have entirely passed through to borrowers at least as of yet. Rates for US Treasuries declined to the point of being moderately negative for short term maturities. Credit spreads, the portion of interest rates on loans that cover operational expenses and credit losses, expanded for certain types of loans. That is why the total effective rates have not come down as much, and in some cases actually increased. The situation remains very fluid, credit spreads have started to come back in. Different markets and different lenders are processing those changes day to day and week to week.

Jesse: So with all of these things happening, what do they mean for individuals and families? Are there actions people should be considering for the liabilities on their balance sheet? And what about the next generation in households, or those taking care of older parents….

 

Darren:   Our loan portfolio in the Private Bank has some unique characteristics given the kinds of credit we provide.

Many of our clients require more sophisticated advice given the complexity of their financial lives with a larger network of businesses, foundations, properties, and family members impacted by their

decisions. There’s no single set of answers to that question.

 

So that said, there are some common themes. Households vary in the ways they use credit, but often need and utilize different types of credit to manage their finances. They have credit cards, auto loans, and mortgages, but are much better served by having a team at the bank to manage the process since those products may involve various family members, trusts, and businesses.

 

In recent weeks, we’ve been hearing about clients who had children studying abroad or parents living in a rural community who needed to get home quickly. There are clients with businesses who wanted to gain perspective on what was happening in the broader industry and understand resources available to support them while operations are curtailed or suspended.

And there are commercial property owners trying to manage relationships with their tenants. So a lot of different conversations that involve personal resources in one capacity or another.

 

Jesse:                        That’s interesting, so this brings us back to how these clients are using credit and some of the different ways the households we serve use credit.

 

Darren:                     Yes. So determining an appropriate amount of debt for a household of any size is usually determined by the amount and stability of cash flow and liquidity available. In the earlier stages of building wealth, availability of cost effective financing may drive decisions made, whether it’s to purchase a second home or lease a more expensive vehicle. As wealth is accumulated, those households have the ability

to fund purchases and activities a variety of ways so the factors shift

 

more towards opportunity cost of using or not using financing available.

 

And that’s where different types of credit begin to introduce new opportunities. Structuring household debts so that there is not only resilience when adversity hits, but flexibility to take advantage of situations. That could mean using a line of credit to inject additional capital into a business or acquire new property. May also mean making a really impactful charitable contribution or assisting a family member when times are bleak. Or, just managing existing obligations in the most efficient manner.

Jesse:                        So Darren, maybe an example would be helpful, could you share one …

 

Of course. So many of our clients had relatively high taxable income last year and higher tax payments this year as a result. A loan secured by a portfolio of stocks and bonds may give them flexibility in meeting those payments without liquidating portions of the portfolio or taking distributions from a business right now.

A loan secured by a fine art collection or hedge fund investments may serve similar purpose. Even if there is an intention to sell or redeem out of those assets at some point, a loan may provide additional flexibility in respect of when and how that happens. In times like these, when major art auctions have been suspended and hedge fund managers are sensitive to redemptions, that flexibility can make a tremendous difference.

 

Jesse:                                  Thank you, so are there any other comments regarding the unique circumstances we find ourselves in right now? What about our clients’ children as they enter new stages of wealth in their life, preserving it, or acquiring it.

 

Darren:                     There are some things that have always been true in respect of banking and lending. Recent events have reinforced one in particular for me and that is good working relationships and good lines of communication are vitally important.

Jesse:                        Absolutely, so that was a great wrap up Darren.

 

I want to thank all of our speakers today, Neal, Mike, Steve, and Darren and all of you on the phone for taking time to join us.

We hope the insights we shared are helpful as you continue to take care of loved ones. Know that we are here for you, and your family (whatever stage of the journey they are in) with teams of experts to help provide solutions and resources to support and guide you in your financial planning and well-being, partnering every step of the way. This concludes our conversation today, thank you.

 

Operator:     All information is as of May 19, 2020. Opinions are those of the presenters and subject to change based on market fluctuations.

 

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Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.

 

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