Often hosted by a community foundation such as the Community Foundation of Greater Des Moines, a donor advised fund is an account through which individuals can make gifts of cash or property and possibly qualify for a charitable tax deduction in the same year. The donor then serves as an “advisor” to the fund and can request grants be made to local or national 501(c)(3) organizations, the definition of a qualified charity.

One unique feature of donor advised funds is that they allow you to separate the calendar year of the tax deduction with the eventual disbursement of funds to the charities you care about. You can also group several years of normal charitable giving amounts into one year and use the tax deduction to offset an income spike.

Let’s say you earned a $100,000 bonus for a job well done and that you normally give $5,000 a year to charity. You could place $25,000 of the bonus into a donor advised fund and possibly take that amount as a tax deduction. By doing this you can multiply your charitable deduction by five times the normal amount, assuming you itemize your tax deductions each year. Because the $100,000 bonus pushed you into a higher tax bracket, your tax deduction is more valuable than a normal year. In addition, the $25,000 donor advised fund can now be used to give away the $5,000 per year to charity, and because donations are not coming out of your checking account, it feels like you got a pay raise via a reduced expense. That’s about $400 of freed-up cash each month.

If you take the additional step of investing the $25,000, you could potentially gain additional charitable grants from the donor advised fund.

One of my favorite uses of the donor advised fund is the flexibility to incorporate this tool into estate planning. By naming a donor advised fund as a partial or whole beneficiary of IRAs and other retirement accounts, you establish the intention to leave part of your estate to your favorite causes without being irrevocably bound to the named charities. It’s true that beneficiary designation forms are easily changed, but if you own multiple retirement accounts, the management of multiple beneficiary changes can feel burdensome. Some donor advised funds allow for charity percentage changes via a simple letter of instruction. As a result, all money from an estate intended for charity can flow through a donor advised fund and then be directed on to the charitable causes on file.

Donor advised funds can even serve as the interim charity of choice for more sophisticated tools like charitable remainder trusts and charitable lead trusts. Hooking a donor advised fund onto a charitable trust is a terrific way to build in donor flexibility and avoid certain irrevocable decisions around the named non-profits ultimately designated to receive the money.

For those who experience a “sudden money” event, are already active donors to charitable causes, and wish to decouple the charitable income tax deduction from the eventual grants to charity, the donor advised fund is a tool that may fit your circumstances. If you’d like to learn more, contact your Foster Group advisor. Or if you don’t have a financial advisor, contact us to set up an Introductory Meeting.
 
 

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I’m not referring to the obvious fact that you can write and take notes with one.

Many years ago, I went through a finance class where the teacher used a pencil to help me understand the inverse relationship between bond prices and interest rates. His explanation went like this:

Hold a pencil horizontally in front of you. The left end of the pencil represents the price, or value, of the bond, and the right end of the pencil represents the interest rate. To illustrate, think of the picture below as a pencil you are holding.

Now we’ll add some numbers. At issuance, the bond price starts at the par, or face value, and it has a stated interest rate that is generally fixed over the life of the bond. Below is an example of a five-year, $1,000 bond, issued with a stated interest rate of 4%.

The bond issuer pays interest payments of $40 each year until the bond matures in five years, and you receive your $1,000 back. Below I added the current bond price and interest rate to the illustration.

What if interest rates rise?

When interest rates rise, it causes bond prices to fall, because investors can now purchase a similar quality and duration bond but with a higher coupon rate. Using the pencil for a visual representation helps demonstrate the point. When you raise the interest rate end of your pencil, it lowers the bond price side of the pencil.

In this case, if rates were to rise by 1% and you tried to sell your 4% bond, you would find out that no one would be willing to pay the full $1,000 par value, because they could buy a similar bond for $1,000 with the higher current interest rate of 5%. You would have to sell your current bond at a price below $1,000 to make it worthwhile for the buyer.

What if interest rates fall?

Inversely, when interest rates go down, bond prices go up. To see this, lower the interest rate side of your pencil and see how the bond price side rises.

Using our original five-year 4% bond as an example, if market interest rates move down 1%, your bond is now worth more, because similar bonds available for purchase are only paying an interest rate of 3%. If you decided to sell the bond, you would require the buyer to pay a price above the $1,000 to make it worthwhile.

Understanding the relationship between interest rates and bond prices could make it easier to become overly concerned about day-to-day price movements. However, it’s important to remember that those movements don’t really amount to much if you hold a bond to its maturity.

The price movements are just a reflection of what you could get for your bond if you sold it at that time. If you don’t sell, the price of your bond will gradually move closer to its par value as it gets nearer to its maturity date. At maturity, barring default, you get your principal back.

If you invest in fixed income using mutual funds, you don’t have to worry about individual bonds and their maturity dates. A mutual fund holds a large basket of bonds, each with its own interest rate and maturity date. The fund will have a yield and duration based on its underlying holdings, and the price of the fund will fluctuate based on the daily prices of those holdings. However, as with an individual bond, the price movements are a reflection of what you could get for a share of the mutual fund if you sold it at that time.

Another thing to keep in mind is that not all bonds are created equal. Depending on the credit quality of the issuer and the term or length of time to maturity, bonds react differently to interest rate movements. To learn more about these two characteristics, term and credit, visit the blog on our website entitled What Kind of Bonds Should be in My Portfolio?

Sitting in my finance class years ago, I never thought of someday writing an article about what I was learning from a pencil. I love finding easier ways to understand complicated things. Hopefully, these illustrations and examples help you better understand the inverse relationship between interest rates and bond prices.

The post Why Does the Value of Bonds Fall When Interest Rates Go Up? appeared first on Foster Group.

The amount of portfolio assets an investor holds in cash/bonds (aka fixed income) should be determined by cash flow needs. Think of it as your lifeboat. If the market is tanking, the last thing you want to do to create cash is to liquidate stock. Ideally, those growth assets would be given time to recover. Buy low, sell high, not the other way around. Investors must be able to remain invested through some difficult market downturns to achieve better long-term results. Preservation assets like bonds help buffer these near term bumpy roads and reduce investor angst.

So what exactly are “cash flow needs”? Think of someone nearing or in retirement. Income from employment has or will be ceasing. Thus the portfolio becomes a source for maintaining a certain standard of living. In preparation for that time, individuals should take steps to have enough cash and bonds in their portfolio to cover approximately eight years’ worth of their distribution needs. Historically, this level of cushion has been enough to weather virtually all market corrections. If stock and/or real estate markets decline, this lifeboat of preservation assets provides ample liquidity to sustain us while we wait for an expected recovery.

What if you do not have any immediate cash flow needs from the portfolio? Depending on your time horizon, it may make sense to have an investment line-up exclusively allocated to the equity markets. If growth is the goal for the foreseeable future and there is an understanding that markets will go up and down, then an all-equity portfolio can be reasonable. Advantages of having some fixed income exposure include having “dry powder” for rebalancing, as well as a degree of diversification for risk management.

For example, when stock markets declined in February, investors with fixed income in their portfolios were afforded the opportunity to deploy additional capital into those equity markets, in effect, “buying low”. As the market turns upward in later time periods, the investor owns more shares that have been purchased at lower prices. Simple stuff.

Remember, buy low, sell high. This tactic is not based upon a prediction nor timing effort. That’s fools’ gold. Rather, it is predicated on what percent of your portfolio ought to be in the stock market versus out of the stock market. What does your plan suggest the portfolio needs to do to meet your individual goals? From there, you have no need to take more risk than necessary. Build a diversified, low-cost portfolio in accordance with your plans. Keep the lifeboat intact and stay diversified. Wait, did I already say that?

The post Nervous About the Market? Maybe You Need a Lifeboat? appeared first on Foster Group.

Science Council, www.sciencecouncil.org

Consider the following two questions:
Question 1: If you had symptoms of a potential serious health problem, would you:

a.) consult a physician, possibly more than one, undergo testing, and choose the doctor and treatment option that, through careful clinical trials, was shown to have the highest probability of good outcomes, or
b.) talk with a friend who had a health problem with symptoms like yours a decade ago and try whatever he or she did?

Question 2: If you are planning to retire and want to achieve other financial goals, would you:

a.) consult an investment professional, possibly more than one, go through a diagnostic of your current situation and goals, and choose the investment approach that academic research had shown to have a higher probability of successful outcomes, or
b.) talk with a friend who invests, seems to have been successful, and try whatever he or she did?

When it comes to our physical health (Question 1), most of us seek out the best clinical approach available. We understand that medical science is constantly advancing and that new treatment options are being developed that increase the probability of better patient outcomes. These advances are occurring in everything from cancer treatments and orthopedic surgical procedures to the delivery of premature babies.

However, when it comes to how we invest (Question 2), many people either don’t know or don’t choose to seek out investment approaches that are developed with a similar scientific and academic rigor when compared to the best health care options.

As you think about your current portfolio and investments, consider these important scientific advancements that could raise your probability of achieving a better outcome.

Broad Diversification: A Quantifiable Free Lunch

Up until the 1950’s, investors thought the least risky portfolio to own was 100% US government bonds and that the riskiest portfolio was 100% stocks. Generally accepted wisdom also said you only needed to own about fifty stocks to have a well-diversified portfolio. This was before Nobel laureate Professor Harry Markowitz explained the statistical science behind diversification, which revealed that the 100% bond portfolio was not always the least risky portfolio and that adding not only more stocks, but also more exposure to entirely new asset classes (e.g. foreign stocks, real estate), could yield higher returns with less risk. Markowitz’s Mean Variance Optimization equations revealed that a diversified portfolio with 10% to 30% or more in stocks, had a high probability of being lower in risk (in terms of price volatility) while providing superior returns.

Source: https://www.aaii.com/journal/article/the-benefits-of-modern-portfolio-theory.touch

Mixing in other asset classes improved the results even more. He referred to this finding of increased return with lower volatility as “free economic return,” basically a little bit of free lunch for investors. Now 60 years later, this accepted science is used as a basic building block by successful investors around the world.

Factors: How Securities are Priced for Expected Return

Nobel prize winner William Sharpe’s work explained the relationship between the returns of risky assets like stocks to the returns an investor could achieve from holding a practically risk-free investment like US Treasury Bills. The higher expected return of stocks was explainable as the reward for bearing stock market risk. “Beta” became the name for this single market factor and revealed that much of a portfolio’s return was simply due to investing stocks generally rather than skill in individual stock selection. Professors Gene Fama, another Nobel winner, and Ken French built on Sharpe’s work, creating the three-factor model:

This model explains that investors can increase their expected return by not only emphasizing stocks in their portfolio (market factor), but also by emphasizing small cap companies (the size factor) and companies with high book to market ratios (the value or relative price factor). Academics following up on Fama and French’s work have uncovered other factors that can be used to enhance expected return or manage risk in both stock and bond portfolios.

Academically researched scientific approaches to diversification and factors are just two of many ways’ investors can advance with science today as they pursue their financial goals.

Whether you are answering “Question 1” about your health or “Question 2” about your investment portfolio, the answer with the higher probability of success is to advance with science.

The post Are You Advancing Your Portfolio with Science? appeared first on Foster Group.

INVESTING FOR THE LONG TERM AND OTHER “TIPS”
As the value of a dollar declines over time, investing can help grow wealth and preserve purchasing power. Investors should know that, over the long-haul, stocks historically have outpaced inflation, but there also have been stretches where this has not been the case. For example, during the 17-year period from 1966–1982, the return of the S&P 500 Index was 6.8% before inflation, but after adjusting for inflation, it was 0%. Additionally, if we look at the period from 2000–2009, the so-called “lost decade,” the return of the S&P 500 Index dropped from –0.9% before inflation to –3.4% after inflation.

Despite some periods where stocks have failed to outpace inflation, one dollar invested in the S&P 500 Index in 1926, after accounting for inflation, would have grown to more than $500 of purchasing power at the end of 2017, and would have significantly outpaced inflation over the long run. However, the story for US Treasury bills (T-bills), is quite different. In many periods, T-bills were unable to keep pace with inflation, and an investor would have experienced an erosion of purchasing power. After adjusting for inflation, one dollar invested in T-bills in 1926 would have grown only to $1.51 at the end of 2017.

While stocks are more volatile than T-bills, they also have been more likely to outpace inflation over long periods. The lesson here is that volatility is not the only type of risk that should concern investors. Ultimately, many investors may need to have some of their portfolio in growth investments that outpace inflation to maintain their standard of living and grow their wealth.

CONCLUSION
Inflation is an important consideration for many long-term investors. By combining the right mix of growth and risk management assets, investors may be able to blunt the effects of inflation and grow their wealth over time. Remember, however, that inflation is only one consideration among many that investors must contend with when building a portfolio for the future. The right mix of assets for any investor will depend upon that investor’s unique goals and needs. At Foster Group we help our clients weigh the impact of inflation and other important considerations when preparing and investing for their future.

The post Should I Worry About Inflation? appeared first on Foster Group.

I. Review Existing Irrevocable Trusts
Often, trusts created decades ago to avoid estate tax (when exemptions were $600,000 or $1,000,000) are no longer justified by estate tax concerns. Such trusts actually may be increasing the future income tax or capital gains tax exposure of the family.

A. Old Life Insurance Trusts
Corporate and individual fiduciaries serving as trustees of old life insurance trusts should meet with their advisors and consider whether the trusts have outlived their usefulness. In many cases, the policy held by the trust is small relative to the client’s existing estate tax exemptions, and the costs and hassle of administering the trust no longer may be justified. Where the creator (“settlor”) of a trust is living, a trust can be modified or terminated under Iowa law without court involvement by agreement of the settlor and all beneficiaries. Sometimes families will opt to do this with life insurance trusts that are no longer cost-justified by tax or non-tax factors. Be careful to ensure all contingent beneficiaries (including minor and unborn persons) are properly represented pursuant to the Trust Code. Other solutions may include: (1) distribute the policies out to the beneficiaries (sometimes after the trust has been modified to permit the same); (2) having the trust sell the policy back to the insured who created the trust; or (3) asking the court to terminate the trust because it is too small to justify continued administration.

B. Bypass or Credit Shelter Trusts Created by Predeceased Spouse.

Prior to 2010, almost every estate plan for couples with more than $1,000,000 in assets directed that when the first spouse died, his (or her) “tax-free amount” would be held in a “bypass trust” (also sometimes called a “family trust” or “credit-shelter trust”), usually for the primary (or exclusive) benefit of the surviving spouse. This was necessary under the pre-2010 “use it or lose it” regime of estate tax exemptions. Today, the exemptions are larger and are portable between spouses, so we see far fewer plans employing this strategy. However, many thousands of Iowa widows and widowers have a “bypass trust” of some type that was created when their spouse died under the prior regime. In many cases, these bypass trusts were created solely for estate tax planning purposes, with all other assets passing outright to the surviving spouse. At the time, this was good tax planning. Because the tax law has changed significantly, however, an audit of the family situation often will reveal that such trusts have become a detriment rather than a benefit to the family’s tax objectives.

Because the surviving spouse can now pass $11,180,000 tax free (up from $600,000 or $1,000,000 levels that existed when many of these trusts were created), the estate tax purposes that made these trusts beneficial when they were created no longer exist. If these trusts were primarily tax-motivated, it may no longer serve any purpose. What’s more, the existence of such a trust may be detrimental to the goal of tax efficiency, because the assets in a bypass trust do not receive a tax-free step-up in basis when the surviving spouse dies, and the children will bear capital gains taxes when the trust assets are liquidated after the surviving spouse dies. If these assets were held outright by the surviving spouse (or in a trust over which the surviving spouse had a general power of appointment), however, the assets would qualify for a tax-free step-up in basis at the surviving spouse’s death.

For these reasons, many families are taking a hard look at the terms of existing bypass trusts and at the provisions of applicable law that allow for the modification, termination, or decanting of existing trusts. In some cases, the terms of the bypass trust may authorize the trustee to distribute bypass trust assets out to a surviving spouse during her life, such that the trust assets can receive a step-up in basis. For other bypass trusts, it may be necessary to consider decanting or modifying the trust to provide flexibility for such distributions to be made or to make changes that would cause the bypass trust assets to qualify for a step-up in basis upon the surviving spouse’s death (such as the addition of a general power of appointment held by the surviving spouse).

Trust modifications (or decanting) involve complex legal questions and should not be undertaken lightly or without expert professional assistance. The Trustee needs to understand and limit its own potential liability with respect to any modification or distribution, and a unanimous consent and release signed by all beneficiaries (with minor and unborn beneficiaries represented pursuant to the Trust Code) will be recommended in most situations. Spendthrift clauses and other limitations will impact the options that are available. Competent legal and tax counsel are essential in this process, and the Trustee’s counsel generally should not also represent the beneficiaries with respect to the proposed modification, termination, or decanting. Beneficiaries need to consider, before consenting, that if the bypass trust assets are distributed to their surviving parent, such surviving parent could remarry, develop creditor problems, squander the trust assets, become the victim of elder abuse, or just flat-out change their estate plan in a way that reduces such beneficiaries’ inheritances. These non-tax risks need to be weighed against the benefits of obtaining a new basis equal to fair market value on the date of Mom’s (or Dad’s) death. In short, the answer in many cases may be to leave the trust in place, despite the adverse capital gains tax implications of doing so.

Despite the challenges involved, we are finding that especially where the surviving spouse is in her (or his) late 80s or 90s, many families are unanimously agreeing to implement a strategy that results in a step-up in basis upon the surviving spouse’s death.

II. Upstream Planning Opportunities: Gifts from Children to Parents
Many families have transferred interests in a farm or business to the next generation during life, for estate tax planning purposes. The trade-off in doing so is that the assets held by the children will not receive a step-up in basis when the parents die. Some families are looking at reversing these gifts by having children gift these interests back to their elderly parent. If an elderly parent lives at least a year after receiving these gifts, the gifted assets will obtain a step-up in basis at the recipient parent’s death, even if the parent bequeaths the property back to the gifting child. This strategy makes sense only where the following circumstances converge: (1) a parent reasonably can be expected to live a year; (2) the child is able to spare some of his or her gifting capacity (presently $11,180,000) on gifts back to parents; (3) the child is not worried that the parent will fail to leave the gifted property to the gifting child at death (which could occur if the spouse remarried without a premarital agreement, was the victim of elder abuse, or developed creditor problems related to nursing home expense or otherwise); and (4) the gifting child and the recipient parent have separate legal counsel with respect to these matters.
Another opportunity in upstream estate planning would be for a child to gift assets to a parent, and the parent to place those assets in a credit-shelter trust benefiting the child and his or her descendants. This might be particularly beneficial in circumstances where a child’s marriage was in jeopardy or where a child’s profession involved significant liability risk (for which insurance was an incomplete solution). Those two gifts would need to be independent from each other, and parent and child should have separate counsel with respect to those transactions.

III. Reviewing Wills and Revocable Trusts

A.  Simplifying Complex Estate Plans
We are revisiting a lot of estate plans created before 2010, to ensure that they do not create more complexity than is needed to achieve the client’s objectives and that they create flexibility to balance estate tax concerns against capital gains tax concerns. For most Iowans with less than $10,000,000 in assets, estate taxation is now a much smaller concern than capital gains taxation. (I say $10,000,000 instead of $20,000,000 because the estate tax exemptions will be cut in half in 2026, absent an intervening Act of Congress, due to sunset provisions in the 2017 tax act). For many families, it will be better to pass assets outright to a spouse (or to a QTIP marital deduction trust) when the first spouse dies rather than to a bypass trust so that we can receive a second tax-free step-up in basis on all assets when the second spouse dies. Most of our estate plans for couples with less than $20,000,000 in combined assets now postpone tax decisions until after the first spouse has died, either through a Clayton QTIP plan (where there are non-tax reasons for wrapping the surviving spouse’s inheritance in a trust) or a disclaimer plan (where there are no such non-tax reasons for a trust). Both of these approaches allow the surviving spouse and her advisors to weigh estate tax planning factors against capital gains tax factors and make an appropriate tax election after the first spouse’s death, in light of the couple’s financial situation, the legal landscape, and all other relevant factors.

B. Drafting for Flexibility
I entered the practice of law in 1998. Most trusts I reviewed in the early years of my practice were off-the-rack, formulaic, mechanical, and rigid. They generally did not create amendment powers, decanting powers, powers of appointment, or other mechanisms that allow a trust to change as needed to adapt to evolving circumstances. Pre-2000 trusts are largely derived from formbooks and seldom reflect the unique values of the families that created them. Old, rigid trusts have not, in my experience, well weathered the test of time. Since 1998, Iowa has a new Trust Code, and some states (like South Dakota and Delaware) have completely reinvented trust law (in ways I hope Iowa will soon emulate). Trusts have become mobile as states compete to lure them with trust-friendly legal regimes. Fiduciary powers have been divided in many cases with different persons or firms serving investment, distribution, and accounting roles. Estate tax exemptions have risen almost 20-fold, and the income tax and capital gains tax regimes also have changed significantly. In short, the entire landscape has shifted. Ossified trusts have had a hard time keeping pace.

The more I learn, the more I appreciate what I don’t and can’t know. The future is not just opaque, it is inscrutable. The best any estate planner (or family) can do is to create flexible vehicles that embody their values but that can adapt to changing circumstances. Especially with trusts that will last more than a generation, it is important for a family to articulate its values, which will serve as a pole star for future trustees and future generations. It is equally important to equip future generations with the ability to modify the mechanics of the vehicles that serve those values so that these vehicles can adapt to whatever challenges or opportunities the future throws their way.

Trustees must have discretion. Mechanisms must exist to remove and replace trustees. Some person must have the ability to modify and refine (or terminate) trusts as necessary to ensure that they continue to empower the development of each beneficiary’s human potential, while minimizing the potential detrimental effects of inherited wealth on character development and initiative. The audacity to plan for future generations must be tempered by the humility to give future generations the ability to adapt that plan to changing circumstances. Dead hand control must be paired with mechanisms of flexibility.

Paul Morf is a sixth-generation Iowan and second-generation estate planning attorney at Simmons Perrine Moyer Bergman PLC. Paul is a graduate of the Yale Law School, a fellow of the American College of Trust and Estates, and the founding vice-president of the Iowa Academy of Trust and Estates Counsel. He can be reached at pmorf@spmblaw.com. Find more information about Paul and his practice at https://www.spmblaw.com/our-attorneys/paul-p-morf.

The post Estate Planning in 2018 and Beyond: Simplification and Flexibility appeared first on Foster Group.

Here are five things you should consider before referring your client to a financial advisor:

1.  How are they compensated?
Fees are very important to understand for consumers. If the financial advisor provides a “run around” answer, this should raise red flags and warrant additional questions.

2.  Are they a fiduciary?
If the financial advisor is not a fiduciary, they may not act in the best interest of your client. This could be considered a deal breaker.

3.  What are their credentials and experience?
At the minimum, you will want to ensure they are qualified to provide financial advice. A CFP^® is the gold standard. In addition to credentials, ask about client retention. This will provide insight into how satisfied their clients may be.

4.  What is their niche market?
Understand who would be a good fit for the financial advisor. There is nothing more frustrating to a client than being referred somewhere that is not set up to help them.

5.  Do you understand their process and investment philosophy?
Knowing how a financial advisor operates will help you understand how your client will be treated. Ask if you can go through a sample process with the financial advisor to better understand their process and what types of clients could be a good fit.

We invite you to ask Foster Group these five questions. Learn how we aim for our clients to feel Truly Cared For^TM and how we could work together. Set up a meeting with one of our Financial Advisors by emailing us at communications@fostergrp.com or call (515) 226-9000 and ask to speak with an advisor.

The post 5 Things to Consider Before Referring Your Client to a Financial Advisor appeared first on Foster Group.

Thus enters the topic of required minimum distributions or, more affectionately, simply RMDs. The IRS has a formula and table that allows you to calculate (based upon prior year December 31^st account values) what you must distribute from your tax-deferred portfolio each year. The idea is to get an investor to draw down your account over your actuarily calculated remaining life span. Seems like a nice gesture!

You don’t have to spend the money, but it has to come out. You can have it reinvested in a taxable/non-qualified account, put it in the bank, bury it in the backyard, whatever, but you cannot funnel it back into the retirement account. If you have multiple IRAs, you only have to take that total distribution from one account if you so choose. Company retirement accounts like 401(k)s and 403(b)s must have RMDs taken from each. If you have a 401(k), are still actively employed with that company and have less than 5% ownership in the organization, you do not need to start withdrawing from that bucket of money until you are officially retired. If you are an owner of 5% or more of the company, you must start RMDs out of the group plan.

Little known/interesting fact: Roth 401(k) assets (taxes already paid) are still subject to an RMD (unlike if those same dollars were in a Roth IRA). If you are unsure if you have Roth 401(k) assets, check with your plan or advisor. The reason is because all 401(k)s have RMD obligations, regardless of account type. If that’s you, let’s chat on how to avoid that (rossp@fostergrp.com).

The penalty for not taking your RMD is significant; 50% excise tax is a fantastic encouragement not to forget. This calculated amount must come out by year-end. In the year you turn 70.5, the IRS allows you to take your first distribution by April 1 of the following year, although that means you will have two required distributions in one year. Clear as mud? Many rules and specifics surround RMDs, and the ramifications are significant if you mishandle the process. Spousal and inherited IRAs and annuities are a whole other level of complexity, with respect to RMDs and outside the scope of this blog. Engaging your trusted financial advisor is key in managing your withdrawal strategy to ensure avoidance of critical mistakes.

One fairly new alternative to taking your RMD and paying the resulting tax is gifting that amount (up to $100,000) to a qualified charity. For more information about this strategy, read Charitable Advantages of Owning an IRA, written by Walt Mozdzer earlier this year.

Retirement is a time to enjoy the fruits of your labor, not stress about the perils of financial mistakes. Whether you are north of 70.5 or fresh out of college, you can prepare for required distributions by developing an efficient withdrawal strategy. This goes well beyond what accounts to take money from but dives deep into the territory of what investments to liquidate within those accounts. For those accumulators in the crowd, utilizing Roth vehicles and non-qualified investment accounts serves as a fantastic tool to lessen future RMD strangleholds and enhance withdrawal (and tax) strategies down the road. Aside from that, stay diversified.

The post Uncle Sam Wants His Money appeared first on Foster Group.

I used to give seminars on estate planning and often would ask people to raise their hands if they had an estate plan. Around 25% of the room might raise their hands. I then would share that everyone in the room actually had an estate plan, but many of them would be disappointed with the results. Why? Because if you do not take the time to execute an estate plan, the state in which you resided has an estate plan for you called intestacy. When you die intestate, it means dying without a will and the laws of the state in which you resided govern how your assets will be distributed. The intestate estate plan will very likely result in your assets going to people that you would not have anticipated, or at the very least, not in the amounts you would have wanted. For example, in Nebraska if you are married and have children of the marriage, the surviving spouse receives the first $100,000 from your estate and the remaining assets are split 50% to your spouse and 50% to your children in equal shares. Not quite the scenario most spouses would have chosen as spouses often execute the “I Love You” will which basically leaves everything to the surviving spouse with the intent that any remaining assets will go to children when the surviving spouse dies. While distribution of intestate assets varies from state to state, the Nebraska law is a perfect example of why having a Will is important and definitely preferable to dying without one.

When a person dies, the process to distribute their assets is called probate. When a probate is opened with the court, a Personal Representative is appointed to distribute the deceased person’s assets and settle their final affairs. Probate is a very regimented process and a public one. Notice of a deceased person’s probate must be published in a newspaper of a specified circulation and run a prescribed number of times, to allow for interested parties to file claims in the probate. Because probate is a public proceeding, anyone can check out the file at the courthouse. Shortly after Burt Reynolds died, I saw a headline that read, “Burt Reynolds Omitted His Son from His Will.”ⁱ Now a headline like this catches your attention and makes you wonder, “Why would he do that?” It turns out that Burt Reynold’s will stated that his son is being provided for in a trust that Reynolds executed. So, as a result, no one other than a select few individuals will know what arrangements Burt Reynolds made for the son he adopted with Lonnie Anderson. This highlights one of the main benefits of and differences between a Trust and a Will….Privacy. While wills are a matter of public record, trusts are a very private matter and are not available for prying eyes to see. Trusts do not go through probate and the trustee of the trust would handle the deceased person’s final affairs.

In addition to the privacy aspect, trusts can allow for a smooth transition in the case of incapacity. When a trust is executed, the person making the trust, the Grantor, names a trustee. The trustee can be an individual or a corporate entity like a private trust company. Oftentimes, the Grantor serves as their own trustee, but if the Grantor should become incapacitated, either permanently or temporarily, the successor trustee steps in. Having a trust in times of incapacity, allows the trustee to provide continuous management of your assets without the need to go through a conservatorship proceeding. When time is of the essence, having to go through a court proceeding to appoint a conservator may result in costly delays. If the conservatorship is contested, meaning the parties involved are not in agreement, the proceedings will be delayed even further. Why not avoid arguments and ensure that the person or entity you want in charge of managing your assets is clearly stated by executing a trust and naming them as trustee or successor trustee?

When a trust is executed and properly funded, probate can be avoided. By properly funded, I mean that all of your assets are titled in the name of the trust. By doing this, the trust is the vehicle which distributes your assets upon your death and keeps your estate out of probate. Having a trust is like having the “get out of jail” card in Monopoly except you get to skip probate rather than skipping out of jail. If you own property in more than one state, a trust is an absolute necessity, unless you like the inflexibility of probate, and want to have one opened in every state where you own property. Not only does this add to the complexity of handling your estate, it greatly adds to the cost. By having a trust and titling all your assets in the name of the trust, including property you own in other states, you can avoid the additional cost and hassle of a multi-state probate administration.

In Aretha Franklin’s case, it appears that the family is currently in agreement and on the same page. However, there is an estimated $80 million dollars at stake and four children named as interested parties. Aretha’s long-time entertainment attorney Don Wilson had begged her to get a trust done. It was reported weeks before her death that she was ill. This would have been the time to get something on paper, a will at least. Estate planning can take a long time, but it does not have to. When time is of the essence and the person facing their mortality clearly expresses their wishes regarding the distribution of their assets, the will or trust will get done.ⁱⁱ I have seen it —when people are facing surgery with less than favorable odds or when doctors make a terminal diagnosis. No attorney wants to be embroiled in a messy intestate situation when it could be avoided. Even though there does not appear to be any current conflict among the heirs, Aretha’s attorney noted that proper planning would have avoided the messiness of dealing with her assets and her song rights. He stated, “I just hope it doesn’t end up getting so hotly contested. Any time they don’t leave a trust or a will, there always ends up being a fight.”ⁱⁱⁱ No truer words could be spoken. Not only would planning have avoided the in-fighting that will likely occur, it could have also resulted in more money going to her heirs rather than Uncle Sam.

During my career, I previously worked twelve years as a corporate trustee. In that capacity, I settled hundreds of estates, some with trusts and others with only a will and my trust company named as the personal representative. From experience, I can tell you that paying a little more to have a trust included as part of your estate plan will save time and money down the road. Trusts typically are easier to administer, distribute assets quicker and allow for greater flexibility than having a will alone. Whether you choose to have a will or a will and a trust as part of your estate plan, is a discussion best left to you and your legal counsel. No matter what choice is best for you, the important thing is that you think about your loved ones and the legacy you want to leave behind. THINK.

ⁱ “Burt Reynolds Omitted His Son from His Will”, David H. Lenok, Wealth Management.com, September 18, 2018
ⁱⁱ Aretha Franklin Died Without a Will, David H. Lenok, Wealth Management.com, August 22, 2018
ⁱⁱⁱ Ibid.

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Program resurrections are not accomplished overnight. Sustainable success is done with a long-term focus. Hiring the best assistant coaches, recruiting top-level talent that fit the culture, building goodwill within the college football landscape, and doing all this with objective discipline is critical. Having a vision and plan in pursuit of goals requires deference to successful precedent, not the discovery of some magic formula.

Coach Frost, in a way, embodies the traits of a financial advisor. He understands the fans. He understands what this football program means to this state. He empathizes with the fans’ hope for a national championship. He has a plan that does not take shortcuts but relies on evidence-based approaches to successful football outcomes. His job is to make decisions in the best interests of his team and university.

Coach Frost is a fiduciary to the Husker program, just as your financial advisor ought to be to you. Fans trust Coach Frost to do whatever is best for Husker football’s long-term success. Likewise, investors should trust their financial advisor to do whatever is in the very best interest of their plan and portfolio, with no shortcuts. Their advisor should play quarterback for their financial team while not trying to dictate every decision within their wealth plan or sell them a bill of goods.

Transparency, open communication, and discipline are hallmarks of winning football programs, just as they are with the successful engagement of a financial advisor. Growth is everywhere. Make sure it’s also found in your financial confidence and portfolio. Stay diversified.

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