1. Strategies for Fixed Income in the Current Environment
Winter 2017
WS151260

2. 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

3. 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?

4. 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

5. 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.

6. 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

7. 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.