Here are the economic and market highlights for the week:
- U.S. economic growth remained robust in August with the S&P Global Flash US Composite PMI Index hitting 54.1. Numbers above 50 indicate expansion while those below signal contraction. The services industry drove much of the increase with the Flash US Services Business Activity Index rising to 55.2, a two-month high. That helped to more than offset an eight-month low in the Flash US Manufacturing PMI index of 48. Demand for services remained strong as inflows of new work rose at a slightly higher rate on a month-to-month basis. Although the sector reported employment fell in August, the drop may not be as reflective of deteriorating labor conditions as it might otherwise seem. Purchase managers noted difficulty hiring staff and replacing leavers, which is a supply issue and not indicative of falling demand. Meanwhile, manufacturers signaled that tougher times lie ahead, noting that conditions deteriorated for the second consecutive month and at the steepest rate since December. The Flash Composite PMI also provided more good news for inflation weary consumers, prices charged for goods and services registered their smallest rise since June 2020. Business optimism also rose from July’s three-month low on easing inflationary pressures and the prospect for lower interest rates.
- July homes sales broke a four-month losing streak as supply rose nearly 20% over last year. Month-to-month, sales rose 1.30% to a seasonally adjusted rate of 3.95 million units. Median prices also moved higher, up 2.50% from a year ago to $422,600. This is the 13th straight month of annual increases. Supply of homes also continued to improve, rising 0.80% from June to 1.33 million units, a four month supply. While supply improved, the current inventory is significantly less than the six to seven months’ supply considered to be a healthy balance between supply and demand. The report is encouraging as sales were based on contracts that were likely signed in May and June when mortgage rates were well over 7% on the popular 30-year fixed rate loan. The latest data shows the 30-year mortgage rate at 6.50% and with the Fed poised to cut rates, more prospective homebuyers could see increased buying power in the quarters ahead.
Markets Rally as Fed Signals Shift in Policy
Wall Street sprinted higher on Friday as Fed Chair Jerome Powell made his clearest remarks that a shift in Fed policy is imminent. In a keynote address at the Fed’s annual retreat in Jackson Hole, the Fed Chair announced ‘the time has come’ for policy to adjust as inflationary pressures have eased and labor conditions have weakened. Powell’s Jackson Hole speech comes on the heels of another batch of reports which showed healthy expansion in the services industry and a rebound in the housing market. With investors cheering a shift in Fed policy, the S&P 500 led the major indices higher, rising 1.45% on the week.
While markets had anticipated a shift in policy, Powell still kept some cards close to his vest, declining to provide an exact timeline for interest rate cuts or target level for benchmark rates. Instead, he reiterated the central bank’s cautious approach to lowering rates and remaining data dependent. At issue is whether the Fed will lower rates by 0.25% or 0.50% in September, and the implication the magnitude the initial cut will have on additional cuts at the Fed’s final two meetings for the year. It is uncertain whether a larger cut would actually please markets by making capital less expensive or whether it would worry markets by signaling the Fed is concerned by the decline in labor markets and feels it is behind the curve. Nevertheless, investors were pleased to have gotten confirmation that rate cuts are definitively on the way and with the directness with which Powell addressed the Fed’s intent to support the economy.
The Week Ahead
The unofficial end of summer is here as the Labor Day holiday weekend approaches. In observance, Week in Review will pause from the market moving action. We’ll be back on September 6th with the latest nonfarm payroll, manufacturing, and services numbers.
The Role of Trusts in Estate Planning
Trusts are an important component of estate planning. They are a type of legal entity that can be used to hold assets, such as homes, bank accounts, investment accounts, cars, and other assets, for one or more beneficiaries. There are numerous types of trusts with each type serving a different purpose. Trusts offer several advantages in estate planning, including helping mitigate taxes and providing asset protection. They also allow the individual who establishes the trust – the grantor or trustor – to set specific terms and conditions for how and when assets may be distributed.
There are two primary types of trusts: (1) a living trust in which the grantor or settlor is still alive, and (2) a testamentary trust that doesn’t take effect until after one’s death. Living trusts can be either revocable or irrevocable. With a revocable trust, the grantor can make changes if needed. An irrevocable trust typically cannot be changed, modified, or canceled. Trusts can be established to remove assets – along with any future appreciation – from one’s taxable estate as part of a comprehensive estate plan and to provide for loved ones. Some common trust types include Spousal Lifetime Access Trust, Dynasty Trust, Charitable Remainder Trust, Charitable Lead Trust, and Special Needs Trust.
For shareholders of an S corporation, trusts can be established to hold shares of the business enterprise. An S corporation is an IRS designation for corporations that pass their income, losses, deductions, and credits through to shareholders and thus avoid taxation at both the corporate level and the individual level (double taxation). The S corporation designation is available only to small businesses with 100 or fewer shareholders, and there are several other requirements that a business must meet to qualify as an S corporation per IRS rules. It is an alternative to the limited liability company (LLC).
Trust Options for S Corporations
Individuals who own shares in an S corporation may choose to hold their shares in a Qualified Subchapter S Trust (QSST) or in an Electing Small Business Trust (ESBT). The main advantages of holding shares in a trust are the tax benefits and asset protections for the beneficiaries. While both types of trusts are vehicles for holding S corporation stock, the biggest differences between the two is how the income is reported and how the taxes are paid. A beneficiary of a QSST reports the trust income and expenses on his/her individual tax return, paying the taxes at the individual’s own income tax rate. With an ESBT, the trust itself pays tax on the income from the S corporation shares at the trust tax rate. Irrevocable trusts have their own tax brackets that are different than individual income tax rates. The maximum tax rate on trust income is met at a relatively low threshold – around $14,450 in 2024. However, some dividends and capital gains from the ESBT may pass through to the individual for tax purposes, which can relieve the higher tax burden. Ultimately, the choice between a QSST and an ESBT depends on the specific goals and needs of the trust’s creator, the structure of the family or beneficiaries, and the overall estate planning strategy. Consulting with a financial planner, estate planning professional, or tax advisor can help in making the most appropriate decision based on individual circumstances.
Trusts offer several advantages in estate planning beyond those mentioned above. They can provide privacy since trusts do not go through probate which can be a time-consuming, costly, and public process. Some types of trusts may offer protection from creditors, and trusts can also provide a mechanism for individuals to address a wide range of planning needs and goals. Probity Advisors, Inc.’s team of estate planning and financial planning professionals can help answer any questions you might have about the role of trusts in your estate plan.