Strategies for Fixed Income in the Current Environment Winter 2017 WS151260

Strategies for Fixed Income in the Current Environment Challenges for Fixed Income Investor Bonds have traditionally been held for safety and/or attractive income streams However, 30+ years of declining interest rates may no longer meet these goals Yields are lower Principal values are vulnerable to decline Risk of Rising Interest Rates: Citigroup Broad Investment Grade Index Duration: 5.96 years S&P Municipal Bond Indices Duration Short: 1.88 years Long Intermediate: 5.36 years Total returns include price, yield and roll returns over 1-year period. S&P Indices are as of 1/31/2017. Citigroup Index is as of 2/10/2017

Strategy for Appreciated Fixed Income Portfolios Possible Solutions: Hold to maturity: lose premium and opportunity cost Sell and incur some capital gain – and reinvest in stocks? Is a change in asset allocation in line with risk tolerance levels? Fund charitable remainder trust with appreciated bonds Sell bonds and reallocate Take advantage of equity asset classes where expectations of higher returns can be achieved over time. Opportunity to increase annual income Potential for long-term growth Funding Charitable Intent – Strategies for Appreciated Assets: Appreciated Asset Fund Charitable Remainder Trust with bond portfolio Charitable Remainder Trust Diminished Income Potential Capture appreciation in bonds Replace low bond yields with higher yielding income stream Why Now?

Sample Client Scenario Age 71, retired executive Owns $2MM low yielding municipal bond portfolio Appreciated asset, purchased at a premium Diminished income potential Goals Diversify portfolio–$1MM/50% to stocks Increase income stream Capture appreciation in bonds Minimize capital gains tax Charitable income tax deduction Solution - Fund 5% CRUT with $1MM in a Low-yielding Municipal Bond Portfolio Allows immediate or staged diversification Avoids immediate tax on capital gain Provides charitable income tax deduction to grantor Provides income stream to grantor for term of years or life

Charitable Remainder Unitrust (CRUT) Sample Strategy for Appreciated Assets Assets remaining in trust after 14 year term pass to charity $1MM Asset CRUT Sells Asset Charity Client 5% annual payment for a term of 14 years (= $762k) Charitable Gift Tax Deduction: $489k Remainder Value: $1.2 Million Assumes IRC §7520 rate of 2.4% for March 2017 and 6.5% return.

Charitable Remainder Unitrust (CRUT) Sample Successful Outcome for Grantor and Charity Client Benefits: Receives annual payouts, starting at $50,000 and increasing to $59,073 by end of the 14-year term CRUT income advantage vs. municipal bond portfolio: $291,413 Income Receives charitable income tax deduction of $489,861 Saves approximately $171,000 in income taxes in year one Appreciates over client’s lifetime, if reinvested Future value of $414,033 if annual growth of 6.5% Charitable Deduction Charity receives estimated remainder of $1.2 million Benefits for Client’s Charity

Disclosure This material is provided for educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice and may not be used as such. Effort has been made to assure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed their specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2017 The Bank of New York Mellon Corporation. All rights reserved.