Alternative Investments Are Not Just for the Wealthy

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We hear a lot these days about alternative investments. Wall Street firms regularly tout their expertise in these investments and try to convince us we need them in our portfolio.

In the beginning, alternative investments were only available to what most would consider the wealthy.

The SEC set the definition of the wealthy with their accredited investor definition. To be eligible to invest in these alternative investments, one has to have an income of at least $200,000 (individual) or $300,000 (joint) for the last two years. Additionally, the rule states the investor expects that income to continue going forward.

If they don’t meet the income requirement, accredited investors must have a net worth of at least $1,000,000 (exclusive of personal residence). Though that group is growing, it leaves out millions of people who could benefit from the diversification offered by this asset class.

One thing common in the early days of these investments was high fees. In the beginning, managers charged investors 2% of the amount invested plus 20% of profits. Here’s what that means.

In This Article

The High Cost of Fees

If someone invested $100,000 in a fund, and the fund earned 10% (few do), the total dollars paid by the investor would be $4,000 ($100k x 2% = $2,000 + $10,000 x 20% = $2,000). That means instead of making $10,000 on your $100,000 investment, you walked away with $6,000! Instead of a 10% return, you earned 6%! That’s a 40% drop in your profit!

Also, your money was not available to you until the project or fund sold or closed. That typically is five years or more.

Over the years, investors became wise to the scheme, as did other investment product producers. They introduced lower cost, more liquid alternative investments into the marketplace, and lowered the bar for investing.

In today’s post, we’re going to introduce you to six investments you may not have considered – three for accredited investors, three for everyone else. We think by the end of this post, you’ll feel more comfortable and confident in looking at these investments for your portfolio.

What Are Alternative Investments?

Let’s start with what most consider the traditional investment products – those would be stocks, bonds, and cash. Investors can put money in the U.S. and international markets in both stocks, bonds, and cash. Most investors access these products via mutual funds and exchange-traded funds (ETFs). The most popular form of investing in these markets is via index funds.

When investing in index funds, investors put their money in funds that mirror the market. There are no fund managers picking which stocks to buy, when to buy them, and when to sell. Instead, in index funds, investors get all of the stocks in that index (like the S & P 500) at the same proportion each stock makes up in the indexes.

Rather than trying to beat the market, investors take what the market offers. It’s a very inexpensive and easy way to invest.

Alternative investments, on the other hand, are not mutual funds, ETFs, or index funds. Instead, the funds have a management team and invest in things that are different from the stock and bond markets. They include offerings like private equity, real estate, hedge funds, venture capital, managed futures, and derivative products.

Many of you have heard these names thrown in the financial press. In addition to high fees, many alternative investments have high minimum initial investments.

Crowdfunding – The Game Changer

For the reasons mentioned above, innovation entered the alternative investment arena. As a result, companies began developing investments with lower fees and smaller minimum investments. They made these accessible to non-accredited investors. These innovative investments are a game-changer for the everyday investor.

Crowdfunded real estate investment trusts are the primary vehicle for these investments. These newer funds register with the SEC as exempt funds, usually under the SEC’s Regulation Crowdfunding. Crowdfunding in real estate, like with individual or small business crowdfunding allows smaller investors into an investment space that hasn’t been available to them in the past.

We’ll offer a couple of specific funds to consider shortly.

Other options come in the form of mutual funds (managed futures, commodities, long-short funds, etc.). We will leave the discussion of these for another day. We want to focus on private funds, which are more like the traditional alternative investments initially designed for the wealthy.

Alternative Investments for Everyone

We want to highlight three investments available to non-accredited investors. One, Vinovest, is a unique offering. The other two, DiversyFund and Fundrise, are crowdfunded real estate funds as described in the last section.

Let’s dive into the summaries.

Vinovest

Vinovest offers a unique alternative investment in assets; one would normally not consider an investment class. We’re talking about fine wine. You can read our review of Vinovest for a more detailed description.

The first thing to know about investing in fine wine is that it takes knowledge to understand how to choose the right wines. Vinovest has a team of experts, called sommeliers, who have undergone rigorous training over several years. Three of their four sommeliers have achieved the Master Sommelier title. That’s the highest degree of recognition in the wine industry. These folks know their wine.

Wine selections come from their knowledge and a sophisticated algorithm their technical team developed — the result – the best wines with the best chance or price appreciation. You own the individual bottles. Vinovest will store and age the wine at their state of the art facilities around the world. They guarantee the safety of your wine.

The minimum investment is just $5,000. It’s a unique offering and worthy of consideration.

Fundrise and DiversyFund

Crowdfunding offers a method of fundraising that can bypass Wall Street firms and big banks with their high rates and fees. The introduction of crowdfunding was disruptive. In crowdfunded real estate, non-accredited investors now have access to similar real estate investments that accredited investors have always enjoyed.

Both FundRise and DiversyFund are crowdfunded real estate funds. Investors can invest in these funds with as little as $500.

Here’s a summary of each. You’ll find a link to our review of both for reference.

Fundrise

Fundrise has invested over $2.5 billion to date and has a history of above-average returns. They offer three core plans to get you started – Supplemental Income, Balanced Investing, and Growth. Each name describes the goals of the fund. If you’re looking for income, consider the Supplemental Income fund.

If you want a mix of income and growth, go with the Balanced Investing Fund. Are you looking for capital appreciation? Choose the growth fund.

You can get more details and learn more about REITS and crowdfunded real estate in this review.

DiversyFund

Contrary to Fundrise, DiversyFund is a reasonably new entrant in the field of crowdfunded real estate investing. Unlike the Fundrise investment options, the team at DiversyFund focuses on growing investors’ capital. They have a value add investment strategy when looking for properties.

What that means is they look for multi-family properties (apartments, condos, etc.) that have positive cash flow (renters) in good neighborhoods. The value add in their property selection comes from finding properties that need some work. We’re not talking about a complete redo. Instead, the building might need a new roof, updated bathrooms or kitchens, or maybe a fresh coat of paint.

With the improvements, they can charge more rent when the leases expire, and new tenants come on board. Get additional details from this review.

Alternative Investments for Accredited Investors

What follows are three recommendations for those of you who meet the criteria of the accredited investor. What follows are offerings that have much lower minimum investments and fees. Two are crowdfunded offerings. The other is not.

FarmTogether

Have you ever thought about investing in farmland? Did you not pursue that thought because you didn’t know you had enough money or didn’t know enough about it? If either of those describes you, you’re going to want to learn about FarmTogether.

FarmTogether offers a low-cost investment opportunity that allows investors to own real land. Real land is less subject to inflation and more stable than many other investments. Why? For one thing, we’re not making any more of it. The law of supply and demand means it’s likely to appreciate.

For those looking for cash flow, they offer that as well. The typical investments range from $10,000 – $50,000 per transaction. That $10,000 number is much more accessible than many of these types of offerings. And there are precious few funds that offer investment in farmland with cash flow.

Here’s a look at their current offering:

alternative investment offering details from FarmTogether

You can read our full review here.

Yield Street

YieldStreet is a fixed income alternative investment. The team focuses on investments in litigation finance, real estate, consumer and commercial financing, to name a few. Getting into these types of alternative fixed income areas has typically been limited to hedge funds and other institutional investors. Accredited investors can now access these alternatives with Yieldstreet. They have the experience and expertise you want. Below are some of the details and history.

YieldStreet alternative investment stats

They have multiple offerings from which investors can choose. The minimum and maximum investment depend on the offering chosen. The minimum investment is usually $10,000. Once again, that is much lower than many alternative investments.

You can read our review of YieldStreet here.

PeerStreet

PeerStreet is another alternative investment in the real estate space. Rather than buying properties, the team at PeerStreet invest in loans backed by real estate. The quality of the loans is directly related to the quality of the real estate backing the loans. Here’s a picture of their loans.

Snapshot of PeerStreet loan history

The returns for loan investments are above average. The LTV (loan to value) of the properties shows they are not heavily leveraged, and the terms are relatively short. Like many of the investments we highlight here, PeerStreet has a low minimum investment of only $1,000 per loan.

Be sure to check out our review of PeerStreet to learn more.

Finding Other Alternative Investments

When it comes to investing, there are numerous options from which to choose. The problem comes in knowing where to look for the options. MoneyMade has you covered. What is MoneyMade?

From our review – “It’s a discovery engine built to help you find and compare all types of investment opportunities, spanning from alternative investment platforms through to Robo Investing.” And it’s super simple to use. Just enter the criteria of the investment you’re looking for and let MoneyMade do the rest. Take a look at a search for Startups on MoneyMade below.

MoneyMade: Discover | Startups

Read our review of MoneyMade to learn more and take advantage of this great new platform.

Final Thoughts

I hope by now, you see that alternative investments are no longer the exclusive investments for the uber-wealthy. Competition from mutual funds, and, more recently, from the crowdfunded investment arena have brought costs and minimum investments way down. That’s not so good for the Wall Street product producers. But it’s great for consumers.

The six investments we highlight are, by no means, meant to be the cure-all be all for alternative investments though we do think that Vinovest and FarmTogether are two of the more unique offerings available.

Before doing any investing, you should know why you’re investing. You should know what you want your investments to do for you. Once you get those foundational questions answered, you can take the time to investigate the best investments to help you achieve those goals. If you don’t know where to start, a great place would be MoneyMade. If you feel like you need help deciding, consider hiring an independent financial advisor.

Whether you’re a seasoned investor of a DIYer who is looking for alternatives to the traditional stocks and bonds, we think the six investments highlighted here are worthy of consideration. If none of those make sense, head over to MoneyMade and let them help you find what you’re looking for.

Good luck!

Fred started the blog Money with a Purpose in October 2017. The blog focused on three primary areas: Personal Finance, Overcoming Adversity, and Lifestyle. During his time at Money with a Purpose, he was quoted in Forbes, USA Today and appeared in Money Magazine, MarketWatch, The Good Men Project, Thrive Global and many other publications.

I April 2019, Fred, along with two other partners, acquired The Money Mix website. To focus his time and energy where he could be the most productive, Fred recently merged Money with a Purpose with The Money Mix. You can now find all of his great content right here on The Money Mix, along with content from some of the brightest minds in personal finance.

Source: debtdiscipline.com

What Is the Generation-Skipping Transfer Tax?

What Is the Generation-Skipping Transfer Tax? – SmartAsset

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Estate planning can help you pass on assets to your heirs while potentially minimizing taxes. When gifting assets, it’s important to consider when and how the generation-skipping tax transfer (GSTT) may apply. Also called the generation-skipping tax, this federal tax can apply when a grandparent leaves assets to a grandchild while skipping over their parents in the line of inheritance. It can also be triggered when leaving assets to someone who’s at least 37.5 years younger than you. If you’re considering “skipping” any of your heirs when passing on assets, it’s important to understand what that means from a tax perspective and how to fill out the requisite form. A financial advisor can also give you valuable guidance on how best to pass along your estate to your beneficiaries.

Generation-Skipping Tax, Definition

The Internal Revenue Code imposes both gift and estate taxes on transfers of assets above certain limits. For 2020, you can exclude gifts of up to $15,000 per person from the gift tax, with the limit doubling for married couples who file a joint return. Estate tax applies to estates larger than $11,580,000 for 2020, increasing to $11,700,000 in 2021. Again, these exemption limits double for married couples filing a joint return.

The gift tax rate can be as high as 40%, while the estate tax also maxes out at 40%. The IRS uses the generation-skipping transfer tax to collect its share of any wealth that moves across families when assets aren’t passed directly from parent to child. Assets subject to the generation-skipping tax are taxed at a flat 40% rate.

This tax can apply to both direct transfers of assets to your chosen beneficiaries as well as assets passed through a trust. A trust can be subject to the GSTT if all the beneficiaries of the trust are considered to be skip persons who have a direct interest in the trust.

How Generation-Skipping Transfer Tax Works

Generation-skipping tax rules cover the transfer of assets to people who at least one generation apart. A common scenario where the GSTT can apply is the transfer of assets from a grandparent to a grandchild when one or both of the grandchild’s parents are still alive. If you’re transferring assets to a grandchild because your child has predeceased you, then the transfer tax wouldn’t apply.

The generation-skipping tax is a separate tax from the estate tax and it applies alongside it. Similar to estate tax, this tax kicks in when an estate’s value exceeds the annual exemption limits. The 40% GSTT would be applied to any transfers of assets above the exempt amount, in addition to the regular 40% estate tax.

This is how the IRS covers its bases in collecting taxes on wealth as it moves from one person to another. If you were to pass your estate from your child, who then passes it to their child then no GSTT would apply. The IRS could simply collect estate taxes from each successive generation. But if you skip your child and leave assets to your grandchild instead, that removes a link from the taxation chain. The GSTT essentially allows the IRS to replace that link.

You do have the ability to take advantage of lifetime estate and gift tax exemption limits, which can help to offset how much is owed for the generation-skipping tax. But any unused portion of the exemption counted toward the generation-skipping tax is lost when you die.

How to Avoid Generation-Skipping Transfer Tax

If you’d like to minimize estate and gift taxes as much as possible, talking to a financial advisor can be a good place to start. An advisor who’s well-versed in gift and estate taxes can help you create a plan for transferring assets. For example, that plan might include gifting assets to your grandchildren or another generation-skipping person annually, rather than at the end of your life. Remember, you can gift up to $15,000 per person each year without incurring gift tax, or up to $30,000 per person if you’re married and file a joint return. You’d just need to keep the lifetime exemption limits in mind when scheduling gifts.

You could also make payments on behalf of a beneficiary to avoid tax. Say you want to help your granddaughter with college costs, for example. Any direct payments you make to the school to cover tuition would generally be tax-free. The same is true for direct payments made to healthcare providers if you’re paying medical expenses on behalf of someone else.

Setting up a trust may be another option worth exploring to minimize generation-skipping taxes. A generation-skipping trust allows you to transfer assets to the trust and pay estate taxes at the time of the transfer. The assets you put into the trust have to remain there during the skipped generation’s lifetime. Once they pass away, the assets in the trust could be passed on tax-free to the next generation.

This strategy requires some planning and some patience on the part of the generation that stands to inherit. But the upside is that members of the skipped generation and the generation that follows can benefit from any income the assets in the trust generates in the meantime. Trusts can also yield another benefit, in that they can offer asset protection against creditors who may file legal claims against you or your estate.

Another type of trust you might consider is a dynasty trust. This type of trust can allow you to pass assets on to future generations without triggering estate, gift or generation-skipping taxes. The caveat is that these are designed to be long-term trusts.

You can name your children, grandchildren, great-grandchildren and subsequent generations as beneficiaries and the transfer of assets to the trust is irrevocable. That means once you place the assets in the trust, you won’t be able to take them back out again so it’s important to understand the implications before creating this type of trust.

The Bottom Line

The generation-skipping tax could take a significant bite out of the assets you’re able to leave behind to grandchildren or another eligible person. If you’re considering using this type of trust to pass on assets or you’re interested in exploring other ways to transfer assets while minimizing taxes, it’s wise to consult an estate planning lawyer or tax attorney first.

Tips for Estate Planning

  • Consider talking to your financial advisor about how to best shape your estate plan to minimize taxation. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. It takes just a few minutes to get your personalized recommendations for advisors online. If you’re ready, get started now.
  • Creating a trust can yield some advantages in your estate plan. In addition to helping you minimize tax liability, the assets in a trust are not subject to probate. That’s different from assets you leave behind in a will.

Photo credit: ©iStock.com/ljubaphoto, ©iStock.com/baona, ©iStock.com/svetikd

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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