Greetings from Woodward Financial Advisors! It's hard to believe December is upon us and that we'll soon be celebrating the start of 2018. Along with all the lights and decorations of the season, you might soon see year-end capital gain distributions. Additionally, if gifting is on your "to do" list, please read our helpful tips here when considering how and whom to give to this year. Finally, you can read about some of the things that happened behind the scenes at Woodward Financial Advisors over the past several months.
Year-End Capital Gain Distributions - A Primer
What are they and how are they generated?

Capital gain distributions occur when mutual funds sell some of their underlying holdings at a profit. The capital gains generated from these sales are nearly all passed on to the fund's investors, since fund companies have an Internal Revenue Code (IRC) requirement to pay out at least 90% of their income and realized capital gains each year to their investors. 
Why do fund managers sell appreciated securities that create capital gain distributions?

Fund managers might sell some of their holdings because the stocks no longer meet their investment criteria. In actively managed funds, this could happen when a stock or bond reaches a price where the manager believes the security to be overvalued. Additionally, if investors in a mutual fund sell a lot of shares of the fund, the managers may need to sell holdings to meet those redemption requests, which could trigger capital gains.
But I don't own actively managed mutual funds. Should I not expect distributions?

It's true that index funds are often more tax efficient than actively managed funds, but they still might pay out distributions. For example, a fund that tracks a small cap index may be forced to sell shares of a company that has grown so much that it no longer qualifies for that index. If the stock leaves the index, the fund also needs to sell its shares of that stock to continue tracking the index appropriately.
Are capital gain distributions good or bad?
Both. In general, capital gain distributions are a good thing, because at some level it means that a fund made money on an investment.
In taxable accounts, however, distributions mean that shareholders of the mutual fund will see an increase in their tax bill, due to the fund passing along the capital gains. If your IRA or workplace retirement plan owns funds that make capital gains distributions, there's no tax impact, due to the tax-deferred nature of these kinds of accounts.
What can be done to minimize the tax impact of capital gain distributions?
Start with "Asset Location": where you own certain types of funds (in terms of account types) can be as important as which types of funds to own. For example, in taxable accounts, we try not to own funds that tend to pay capital gains distributions. Instead, we look to buy those funds in IRAs and Roth IRAs, to maintain overall tax efficiency.
Second, think about the timing of purchases. Avoid sizable purchases right before a distribution, which typically happens towards the end of the year.
Lastly, in some instances, investors may own funds that are scheduled to make distributions, but the fund is worth less than what the investor originally paid. In that case, it may make sense to sell the fund, take the loss, and avoid the taxable distribution. The investor can then buy the fund back after 30 days to avoid wash sale rules, which would disqualify the loss. With equity markets hovering at all-time highs, however, this option is not as viable as in previous years.

Tips & Tools for Charitable Giving
For those of you who are charitably inclined, the end of the year is often a time to reflect on causes and organizations you support and to finalize any outstanding donations. 

Individual gifting is a powerful force in the philanthropic world. In 2016, the individual donor base made up 72% of total charitable contributions, giving nearly $282 billion to non-profits. When end of life giving was included, individual donors made up 80% of charitable giving, well ahead of both private foundations (15%) and corporations (5%). (Source:  Giving USA )

Since gifting is on the minds of many of our clients, we've compiled some tips and tools that may help enhance your charitable gifting goals: 

1.  Consider creating a charitable mission statement.  The goal of a charitable mission statement is to help focus gifting on what matters to you most by documenting the causes you support and the goals you hope to accomplish through your gifts. 

The first step in this process is to reflect on personal experiences and values. Are there any specific experiences that have influenced your gifting? Or a specific person in your life? What values are most meaningful to you? 

The next step is to draw upon these reflections to drill down on what really matters to you most. Then summarize these thoughts in 1-3 sentences and look for organizations that can help achieve this mission. 

As an example, I am fortunate to have a grandmother still living at age 98. While her quality of life has remained good, she has needed care and assistance at various points in time. After I visit her, I often think about those in our community who do not have the resources to provide this kind of assistance or family to visit them. 

This experience has inspired me to give to organizations who support our community's aging population. My mission statement for this cause might read something like, "I will help our community's senior population by funding programs that provide meals and companionship to those who have no other means of accessing these basic necessities." 

Interested in creating a mission statement for your causes? Click  here  for a worksheet developed by Fidelity Charitable to help brainstorm areas of inspiration and options for focus areas. 

2. Use independent evaluators like  Charity Navigator  and  Charity Watch  to learn more about organizations of interest.  Most donors care about how their funds are being used, but are not sure where to find this information. Independent evaluators like Charity Navigator and Charity Watch simplify this process by providing consumers information on the financial efficiency of non-profit organizations and by promoting overall transparency in the industry. Note that these resources are best suited for larger non-profits with several years of tax filings. 

Want to find out more about an organization, but don't see it listed on one of these websites? Check out  this article  by Charity Navigator for tips and information on how to do your own due diligence. 

3. Let  WFA  know about any significant gifting you plan to do.  So often, we find out about a client's charitable giving during our annual tax return review. This is good because it allows us to check in on future giving, but it means we may have missed a tax planning opportunity for gifts in the past. 

Be sure to notify your advisory team about your gifting plans so they can look into the different options available. Sometimes it makes sense to gift appreciated stock. Other times, gifting a portion of a required distribution from an Individual Retirement Account may be the best option. 

We hope these tips are useful and wish you a happy gift giving season!

Behind the Scenes at Woodward Financial...
  • Woodward Financial Advisors is now on Facebook! Click here to view our page, stay up to date on what's happening at the WFA office, and follow us. In November, we celebrated a team member's birthday. To find out who it was, check out our Facebook page! 
  • On Sept. 25, 2017, Ben Birken was quoted in  this article on concerning key questions people should ask a financial advisor before hiring one. 
  • Many of you know that Jim Miller sits on the TD Ameritrade Advisor Panel, which is a group of 20 leading advisory firms in the U.S. who are selected to provide TD Ameritrade with guidance and feedback on their client offerings, service, technology and many other areas. In October, Jim traveled to Park City, Utah for the panel's quarterly meeting.
  • Ben Birken served as the Conference Chair for the 2017 National Fall Conference of the National Association of Personal Financial Advisors (NAPFA). Ben led the Conference Planning Committee in crafting an agenda that included sessions on behavioral finance, cybersecurity, tax planning, healthcare reform, and more. 
  • In October, Allison Palmer and Ben Birken attended a Business Development workshop by Dimensional Fund Advisors (DFA) that explored topics on client engagement. Allison also participated in DFA's "Women's Initiative," which is a small focus group of advisors focused on how to best serve female clients.
  • John Day attended the Dimensional Fund Advisors Foundations Conference and Messaging Workshop in Charlotte, NC in October. The presentations at the Foundations Conference focused on Dimensional's market philosophy and investment approach, building global portfolios and how to communicate investment principals. The Communications Workshop was interactive and included speakers who presented on strategies that can be applied to a variety of conversations and questions, with a specific focus on methods that resonate with different learning styles.

Thank you for reading our final 2017 e-newsletter. May you find joy in this holiday season and have a wonderful 2018!

Woodward Financial Advisors 
1504 E. Franklin St. Suite 105
Chapel Hill, NC 27514
T: 919 929 2495
F: 919 929 2496