Changing Your Game with Trump Cards on the Table

We’re taught two “don’ts” – don’t talk politics and don’t throw stones. However, we have a new reality, and for many, Trump’s victory was a surprise. Client conversations involve the elephant in the room – “What changes should we make” or “We’re scared… are we going to be okay?”

Regardless of who won this highly contentious and nasty election cycle, half the country was going to be unhappy with election results. It’s an unfortunate reflection of our deeply divided country. Late night show hosts each had their unique delivery of emotions and hopes. Seth Meyers captured it whether you’re red or blue – “I felt a lot of emotions last night and into today. Some sadness, anger and fear. And I’m aware those are the same emotions a lot of Trump supporters felt… emotions that led them to make their choice. It would be wrong to assume my emotions are more authentic than theirs.”

We’ve heard acceptance, concession and transition speeches. Underlying all were the themes of working together for a brighter future. There’s lots of uncertainty on how the cards will be turned over. However, the man hasn’t yet taken office or his “first one hundred days.” Why not give him and the process a chance to work? And why not focus on things we can control? Let’s look at a couple areas in your financial plan for you to consider under the new administration and Congress.

Estate Tax Repeal?

The so-called “death tax” is unpopular as a double tax. The estate tax affects few Americans and accounts for less than 1%of the total annual Federal tax revenue. Nevertheless, repeal of the estate tax has been in the cross-hairs.

The prospects and impacts of repeal are uncertain. However, some insights by estate planning gurus Jonathan Blattmachr and Marty Shenkman are as follows:

  • Repeal could reform the focus of estate planning to family and asset protection, and income tax planning.
  • Permanent repeal is uncertain, and more likely we’ll see a ten year sunset provision (Byrd Rule) unless the Republicans can get sixty votes in the Senate.
  • Uncertainty suggests it may be premature to make substantial changes to existing estate plans. Better clarity may come in three to six months. Consult your estate counsel.

Income Tax Reform?

Trump campaigned on tax reduction ($6.2 trillion in a decade) and “simplification.” The tax code and regulations have expanded. They’re equivalent in volume to ten Harry Potters (entire series) or seven King James bibles. However, it’s uncertain what Congress approves (e.g. closing the budget deficit and reducing federal debt which has roughly doubled the past eight years) and how long those changes are effective. Tax policy changes over time and Congress giveth and taketh away.  For example, I started my career in 1980. The Economic Recovery Tax Act of 1981 (Regan tax cuts) provided a 25% across the board cut in rates. The government wanted some of it back. They eliminated $30 billion in loopholes (deductions and credits) and targeted tax shelters with the Tax Reform Act of 1986.

Talk to your CPA and advisor regarding potential tax planning moves. Generally with potential reform – lower future taxes – consider deferring income and accelerating deductions. Some ideas:

  • Deferring income – You sell a stock or rental property in December and you’ll owe taxes four months later. If you wait until January, the bill is due in over a year. However, the risk is price fluctuation.
  • Deductions – Maximize retirement and HSA contributions by year end. Accelerate your eligible medical and dental procedures, prepay property taxes and mortgage payment, and make your charitable donations. Review lax loss harvesting in investment accounts.
  • Business owners and contractors – Defer income to January, and buy needed equipment and pay employee bonuses by Christmas.
  • Don’t go overboard – The strategies need to make economic sense. Don’t be a spendthrift or trigger alternative minimum tax with excessive deductions.

Final Thoughts

There’s plenty of uncertainty (and unturned cards) – Keep politics away from personal finance. Be flexible and adapt your financial roadmap as greater clarity emerges. And until then be patient and stick to the plan. You saw the markets’ boomerang on election night. And the wall isn’t going to be built overnight.

Here’s to dieting another day. Happy Thanksgiving.

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Worst President Ever

Who will be the better President, or who will be worse? Historians also argue who was the worst? Perhaps Warren G. Harding for the scandals that plagued his short term or Woodrow Wilson who lead us into WWI. However, James Buchanan is most often saddled with the title of “worst US President.” When a fork in the road appeared, he typically took the wrong path. Buchanan took little interest in battling the recession that struck before the Civil War. And his attitudes and blunders about slavery helped divide the country and his party.

The American economy was robust in the early 1850’s. Twenty years of expansion had been fed by Manifest Destiny, the discovery of gold and silver, and westward expansion by railroads, settlers and commerce. Manufacturing boomed from strong overseas demand. And the number of banks doubled from 1850 to 1857.

But the economy strained and the Panic of ’57 ensued. US farming profits plunged from bumper crops and overseas competition. Investors worried about speculative railroad and land loans. US gold reserves declined $20 million from trade imbalances and withdrawals. Ohio Life & Trust’s bankruptcy signaled trouble. Credit collapsed, building and railroad construction froze, and unemployment skyrocketed. (Sound familiar… the cycle of bubbles?).

The President said the government would do nothing…” the speculators in land and slaves deserved their gambler’s fate.” The government would continue to pay its obligations and complete existing projects, but little else. He did take anemic action with the Treasury. The size of coins was halved to reduce the silver and gold.

Buchanan also took little action to avert civil war and head off secession. He supported slavery and the Dred Scott decision which denied citizenship to African Americans. He addressed territorial slavery in his inaugural speech as “happily a matter of but little practical importance.” He backed the admittance of Kansas with its pro-slavery constitution and further divided his party ensuring Lincoln’s victory. And he took no action as seven states seceded on his watch.

He and Lincoln rode together to the new President’s inauguration. Buchanan said “If you’re as happy entering the presidency as I am leaving it, then you are a very happy man.” Who would have criticized the gent with the stovepipe hat who may have thought “Don’t let the carriage door hit you on the way out.”

We were taught two “don’ts” – don’t talk politics and don’t throw stones. However, the elephant in the living room deserves some attention. Some are voting for a candidate, and others are voting against the opponent. What and can they deliver? How will campaign promises differ from his or her policy decisions after the election? How will the markets react?

I’m no political expert. I join others pondering is the process flawed? How to encourage the best candidates to run? What to do with the shift in US values and beliefs? However, two things (1) not every position has supporting data and not every point will be swayed by the facts, and (2) it’s important to control what we do control.

Historically, election outcomes and market performance have little statistical relationship. However, in past elections, the S&P has seen more positive performance than negative. There’s less uncertainty – somebody won vs who won. Goldman Sachs analyzed the S&P index for 12 months following presidential elections since 1988. Average return was about 11% with the worst in 2008; there’s a typical post-election bounce, regardless of the winning party. First Trust studied 22 election years since 1928 and 82% (or 22 years) were positive returns. And Goldman also concluded that despite campaign rhetoric, longstanding checks and balances tend to mute grandiose campaign promises.

There are other important questions relevant to your financial health, and less likely to get you into a brawl. What’s important about money to me? What are my goals with my finances and my life? What obstacles do I face? How can I be more involved in the process?

We enter the fourth quarter. It’s crunch time and time to buckle up for the opportunity and challenges ahead. Here are some calendar items for you and your advisors:

  • Maximize deductible retirement and HSA contributions for 2016.
  • Adjust payroll/pension tax withholdings to avoid underpayment penalties.
  • Accelerate earnings to 2016 (or defer to 2017).
  • Make required minimum distributions from retirement accounts.
  • Execute year-end charitable giving and capital gains minimization strategies.
  • Medicare open enrollment runs until 12/7 (Affordable Care Act (the Exchange) runs later 11/1 to 1/31/17).
  • Final quarterly estimated taxes are due 1/17/17.
  • Review and update estate plans and beneficiary designations.

And vote on 11/8. Good luck.

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Money Market Reform

How concerned would you be if your cash reserve account balance fluctuated – hopefully by not much – reflecting short term conditions?  Say you normally held $30,000 in a money market account as cash reserves, and it might range $29,850 to $30,150, or a half percent fluctuation? If that would make you nervous, then you ought to talk to your financial advisor or call the financial institution to see if your money market share values will retain their constant $1 NAV (net asset value), or if they will float with market conditions, on or after October 15, 2016.

What is money market reform? New SEC rules go into play next month for money market funds and many companies have already made adjustments. Institutional prime and tax-exempt funds will end a 30 year plus tradition of fixed $1 share prices. Instead, share prices will fluctuate daily based on the underlying value of securities.  Funds that hold only government securities (including US Treasuries and agencies) can maintain the $1 NAV price. The reform emerged from the subprime debt crisis in 2008. There was a run on prime money markets by investors (and ran to government funds), the Reserve Primary Fund was the first money fund to “break a buck,” and the Treasury Department stepped in to reduce further contagion. The intent is to promote stability and fairness. Critics point to higher borrowing costs.

How is this relevant to you? First, is the peace of mind issue from price stability of cash reserves. If zero fluctuation of your mattress money describes you, then why stray from the $1 NAV funds? On the other hand, hopefully the daily market price fluctuations are minimal – i.e. they’re related to interest rate changes, or a credit or liquidity issue (see discussion below). Second, is the impact of a potential exodus of investors leaving prime money funds – estimates of up to $300 billion –  in favor of government money funds (note: roughly $2.6 trillion in money market industry). Commercial paper is the primary investment in prime funds, and the commercial paper market shrank resulting in increased borrowing costs. Three-month LIBOR (an unsecured lending rate) is near its highest since 2008. Hence, your borrowing costs may rise if you have loans tied to short term indexes.

Caution for investors seeking higher rates – Investors on a fixed income (e.g. retirees) may be in a tough spot due to low interest rates on savings. However, a key reason you hold money markets is for liquidity (emergency reserves and planned expenses)… cash needs to be available when needed. Be careful if you’re tempted to “stretch” for higher cash flow by reaching for higher yields – including longer maturities, lower quality and annuities, to name a few.

Here’s an example… Ultra-short bond funds became popular in the 2000’s and some of them were used (or marketed) as alternatives to money market funds. They paid an attractive yield. However, the risks included longer maturities, and credit/liquidity issues. One of these funds with “YieldPlus” in its name blew up in the subprime credit crisis. This fund had grown to about twelve billion in assets by mid-2007. However, it was primarily invested in mortgage-backed securities and was longer term (about 6% of the portfolio matured within 6 months). The credit crisis hit, and the portfolio suffered massive redemption calls and illiquidity issues. Share value declined about 47% from its July 2007 high to April 2009. Assets fell to about $140 million. Lawsuits came-a-flying. They ended up paying $200 to $350 million in shareholder settlements and fines.

One would think that an investment with the term “Plus” in its name is a good warning to ask more – “Plus what?” If it means higher return, then you should have good reason to believe there’s higher risk – the trade-off of risk and return. Perhaps it’s a good time to talk with your advisors. Good luck.

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Scary Markets

Let’s play a game. I offer your choice of (A) $1 million in cash now, or (B) a magical shiny penny that doubles in value daily for 31 days. Which do you take? Of course it’s a trick question. Take the magic penny! It’ll be painfully boring early in the process (1 penny turns to 2, 4, 8, and so on), but things later get exciting.  End of week 1 you have $1, week 2 its $100, and week 3 its $10,000. You hit $5.4 million on day 30. And double that, you have $10.7 million on the 31st day. Compound interest is a powerful yet basic principal in personal finance. Consistency and time matter. You save and invest X dollars monthly, reinvest the profits, and you’ll achieve your goal – buy a newer vehicle, fund college or trade school, or retire on your terms.

But it’s not easy for three reasons. Patience wears thin as people don’t want to wait and put in their time; and they’d rather jump ahead for the big payoffs. Imagine the boredom and pain – the first couple of weeks of the magic penny, starting up a new fitness regimen, or breaking an old habit. Second, life tends to get in the way – an unexpected expense, job change or health event. And third, a crisis du jour occurs that cripples the markets temporarily, brings fear, and investors behave irrationally. So let’s talk scary markets.

They’re natural and frequently occur. In every four year period, there’s usually one great year, one terrible, and two mediocre. You’re probably happy in those great years. However, the down years really elevate stress. That’s also natural. Its call risk aversion. We’re hardwired to survive – seize favorable conditions and avoid or neutralize threats.

And that’s when you ought to be talking with your trusted advisors – When fear is high and you seek confidence. I’ve found those conversations to go something like this:

“Have you seen what’s going on? The market is down/ABC is going to get elected/XYZ crisis du jour. I want you to sell everything.”

We feel your stress. Standing on the ledge is serious stuff. Is it a permanent decision?

“No, I’ll get back in when the dust settles/things get better.”

Please help me understand. What does “dust settles/better times” look and sound like to you?

“The news reports will be better.”

Ok. When the news is better, where do you think the market will be?

“Higher.”

I’ll be professionally candid. This sounds like selling low and buying high. What am I missing?

Life is abundant with irreducible uncertainty.  There’s always something that will knock us off track. And when we’re thinking about making the Big Mistake. Here’s one – chasing past performance.

One of the hottest performing investment sectors was long government bonds and credit – up about 6.5% for the quarter and 14.3% year to date through June 30. And it’s tempting to rebalance your 401k plan by picking the highest performers from the menu of investment choices. Lipper reported that investors took some $6.1 billion out of equity funds and put $4.1 billion into taxable bond funds for the first week of July.

In volatile times, investors tend to run to safety by selling “riskier” assets (e.g. stocks) and buying “safer” assets (e.g. bonds). That’s driven bond prices to record highs and yields (interest rates) to near record lows. But how likely is the future to resemble the past – specifically, which way do you think interest rates are eventually headed? When interest rates rise – investors will see lower bond prices.

And remember the Rule of 72 – it’s a quick formula to see how long it takes money to double. You divide the number of years (or the return) into 72 – it’ll take 10 years for money to double at 7.2% return, or money will be worth half in about 24 years assuming 3% inflation. Using today’s rates, it’ll take about 107 years to double your savings in 1-year US deposit account, 1,387 years in a German account, and 6,932 in a Japanese account.

Please don’t misunderstand me. Investing in fixed income is often prudent in a diversified retirement account. It generates cash flow (e.g. retirement paychecks) and is a good buffer for volatility. Rather, don’t drive by the rearview mirror alone (past performance) – look ahead and avoid the obstacles in the road, and talk with your trusted advisors. And as an Irish blessing goes, “May you live as long as you want, and never want as long as you live.”

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The Popularity of Pessimism

Barbarity swept the European continent between the 5th and 12th centuries by marauding Vikings as they raped, pillaged and plundered. Violation of a nun’s chastity – brides of Christ – could forbid them entry into Heaven. So imagine yourself a nun and barbarians at the gates… what would you do?

St. Ebba was Mother Superior of the monastery of Coldingham on the Scottish border overlooking the North Sea. The Danish invaded in the 9th century, and fearing the Viking’s reputation, St. Ebba gathered her nuns and encouraged them to follow her example. She cut off her nose and upper lip with a razor to disfigure herself to be unappealing to raiders. Her assembly did the same. Imagine the pain of their self-mutilation – and likely not the keen edge of modern kitchen cutlery. The Vikings arrived at dawn and were so disgusted, they set fire to the monastery and the holy virgins perished in the flames. They traded their chastity for their lives.

Life’s rich with trade-offs. And times are scary. There’s plenty of pounding at the gates today. One is market volatility. Here are some ideas to discuss with your advisors to help you avoid “cutting off the nose to spite the face.”

Why Does Pessimism Sound So Smart? – Some people are so stressed that it might be good medicine to turn off the news – most of it bad – blaring from TV, tablets and smartphones. Morgan Housel’s article in Motley Fool discusses the perverse popularity of pessimism. “For reasons I have never understood, people like to hear that the world is going to hell,” says historian Deirdre N. McCloskey. Housel wrote that bull (optimism) sounds like a reckless cheerleader, and bear (pessimism) sounds like a sharp mind. And clearly there’s more at stake with pessimism. Daniel Kahneman won a Nobel Prize showing that people respond stronger to loss than gain – “It’s an evolutionary shield… Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.” And reasons why pessimism garners so much attention – pessimism requires action whereas optimism means staying the course, optimism sounds like a sales pitch while pessimism sounds like someone trying to help you, and pessimists extrapolate problems yet fail to account for our remarkable abilities to adapt and overcome setbacks.

So what should you be doing? Investors are not a homogenous group of people that should all turn one way as a herd. Rather, investors can be segregated into different groups each having unique needs. I’ll use “age” as an example:

70’s and 80’s – “We’ve lived a lifetime of ups and downs, and diversification and time tends to smooth things. However, we’re not going to get out of this alive, and need to spend time with family and team about passing on our “stuff” and aging/end-of-life care before a health crisis erupts.”

50’s and 60’s – “Time to get serious about retirement. I know that holding a ton of cash isn’t going to protect me long-term. Are our spending assumptions realistic, and will we have enough cash flow to last us 3 to 4 decades of retirement?

30’s and 40’s – “I feel I should be “conservative” after seeing the Dot-com and Financial Crisis. But there are only 3 sources of retirement income: pensions and Social Security, continued employment, and income from my savings and investments. I’m not likely to hang around long enough for a pension, don’t trust SS, and want more freedom and time with my friends. So I’ve got to invest for me, and what a great time to buy when stuff’s on sale!”

Are you in these situations? Assuming you’ve got a reasonable time horizon and prudently diversified, there’s little reason to “uninvest.” And if you’re older and concerned with the volatility, why are you invested in “risky” assets anyway? (Note: “It’s for my family” is an excellent answer). Here are two strategies to discuss with your advisors:

  • Heavy in cash or similar (“Fixed” option in retirement plan) – Consider putting cash to work because investments are cheap – caveat: they may get cheaper. S&P 500 is down 13% from its 52-week high, developed and emerging markets 24% and 34%, US small caps 26%, Nasdaq 15%, REITs 18%, and broad commodities 44%. This may be better for those with “sudden cash” – you sold a property or switched retirement companies – and less suitable for “nervous Nelly’s” (there’s a reason you a bunch of cash).

 

  • Roth conversion – Monies in your IRA are generally fully taxable when you withdraw them in retirement. Roth IRA withdrawals however, are generally not. You can “convert” the traditional IRA to a Roth IRA, however, you have to pay taxes now for the switch – converting a $100,000 IRA at 28% tax bracket costs you $28,000 in Federal taxes (plus state). Consider conversion if (1) you’ll be a higher tax bracket when you retire, and (2) IRA value is lower due to market declines. Conversions are rare in my experience, primarily because most people hate to pay taxes. However, talk it over with your CPA and financial advisor.
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Need a New Year’s Resolution Do-Over?

Is your New Year off to a rough start – More strength needed to birth a new habit, rocky investment markets, or perhaps your team didn’t make it to Super Bowl 50? Well, you’ll have the chance for a do-over. Chinese New Year – Spring Festival – is coming up.

The traditional Chinese calendar is old and complex. It dates back to the 14th Century BC (time of Egypt’s King Tut) and has been used to mark the best times to plant and harvest, festivals, and lucky times for your special events. And it uses various modes – lunar and solar, Ying and Yang, and the Chinese zodiac. Each year is represented by an animal of the zodiac, and legend says the order of the animals in the calendar was determined by how they finished a race across the river. 2016 is the year for monkey.

The most visible traditions for Chinese New Year include red and gold, loud and angry dragon dancers, and feasts with friends and family.  They make for great photos and memories. However, the more subtle traditions or taboos, serve as powerful shapers of character and values. These include: Cleaning house, settling unfinished business, resolving quarrels, and paying off debts. And, its bad luck to sleep past noon on the day after… it indicates a year ahead of laziness. Can you apply these to your on-going financial planning?

What should I contribute and how should I invest my retirement plan? Investors have big decisions to make. I’ll discuss the Federal Thrift Savings Plan (TSP) and common planning issues. If you’re working in the private sector, please read on because TSP is similar to 401k plans. The features and planning issues are related.

  • TSP Overview: Federal employees and servicemen and women are eligible. Augments other retirement benefits including FERS, CSRS, military retirement, and SS. Contributions are made via payroll deduction and ‘matched’ to a degree, several investment options, and 3 ways to access funds (loans, in-service and post-separation withdrawals). You may consolidate other retirement accounts. Please refer to TSP.gov for all details.

 

  • Contributions: Specified as a percentage of your compensation (3% automatic enrollment) and subject to a match up to 5% (via formula). If goal is to save 10% of pay, your ‘cost’ is 5%, and the Agency funds the rest. Members of the uniformed services have some special rules including the ability to contribute part or all of their incentive, special or bonus pay, but none from housing or subsistence allowances; and matching agency contributions are subject to rules specific to each individual service. Contributions are subject to IRS limits (e.g. $18,000 plus $6,000 catch ups for those 50 and above). Check with your HR department for specifics.

 

  • Traditional TSP vs Roth TSP: Your choice is paying taxes now, or later. Traditional contributions are tax deferred; withdrawals trigger tax. Roth TSP contributions are made after-taxes (i.e. pay taxes up front); withdrawals may be tax free. Consult your CPA for tax advice.

 

  • Investment Options: Five investment options include guaranteed account, and four index funds (bonds, large and small US stocks, and international stocks); plus five Lifecycle Funds (target funds).

How much to contribute? Your goal is to accumulate “your number” for retirement. Consider diversifying your wealth buckets. TSP saving is easy (save it before you can spend it). However, don’t have all of your retirement cash flow fully taxable. Consider a “3-legged stool” model consisting of Pre-Tax funds (traditional retirement accounts), After-Tax funds (joint, trust, Roth’s, etc.) and Business/Real Estate. Thus you’ll have various sources (and taxation) to fund your retirement. It’s multi-dimensional diversification – you’re diversifying investment risks, taxation, and liquidity – plus matching contributions.

Tax deductible contributions or Roth? Tax planning is complicated – balancing current taxes, guessing future tax policy, and simplicity. If your retirement tax brackets are lower, then consider tax deductible contributions. If opposite, consider Roth contributions. If taxable income fluctuates, you might ‘switch’ – make deductible contributions one year, and Roth the next. Others do a hybrid (fund both). Bottom line: Map things out so you’re not making decisions solely on short-sighted benefits (e.g. taxes).

What to do at retirement? This is Challenge #1 for investors. TSP participants have numerous options including a lump sum payment, monthly payments and a life annuity. You’ll face tax, financial and estate planning, and significant emotional issues. Investors tend to get serious about financial planning 5 to 10 years prior to retirement. You shift from saver to spender, don’t want to ‘screw things up,’ and the world gets a little more complicated when the world becomes your investment oyster. It’s a path you best not walk alone.

Prudent planning creates pathways towards your financial success, and breaks down the barriers (via education and good investor behavior). The choice is yours. You can count on others (marry wealth, live off SS or pensions, etc.), or do it yourself. Good luck!

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When Your Treasures Have More Than Sentimental Value

What would you bring to Antiques Road Show? It’s a popular show combining history and treasure hunts. And who wouldn’t want to stumble upon a treasure? You’ve heard the stories of the family who had a garage sale “ugly” bowl perched on their mantle for years – sold for $2.2 million at Sotheby’s, or the person who bought an old folded manuscript at a Pennsylvania flea market for $4 –it went for auction for $2.4 million as one of the 25 or so remaining official copies of the Declaration of Independence (500 were printed).

The host, Mark I. Walberg, not to be confused with the actor with ripped abs, talks about appraising art, antiques and collectibles – Note: The values on the show are “estimates,” not appraised values. What generally enhances an item’s value is its authenticity, rarity, condition and providence – it must be true, one of a kind, rich with TLC, and have a story. The item retains sentimental value; however, if lacking any of these criteria, the item’s economic value diminishes. And appraisal is an art unto itself requiring knowledge and experience that goes way beyond a weekend certification program. Many of the nation’s best appraisers are second and third generation.

Valuation of personal property occurs in many aspects of personal finance. Say for example, you’re the trustee of your parents’ estate. They recently passed and you’ve got the Sisyphean task of managing their estate, keeping the beneficiaries outside the fence as you clear the barn and prepare for distribution, and adhere to the legal and accounting requirements. Joy Berus, of the Berus Law Group of Newport Beach, CA, presented “Art Law – Everything You Have Ever Wanted to Know” to the Estate Planning Council of Northern Nevada. I’ll share several areas involving valuation that may trigger some ideas for you, including hustling up your team of experts.

1. Why get you “stuff” valued? Valuations are needed in instances of division or selling, or insuring property. These include estate tax and equitable distribution, divorce, donation or gifting, insurance, or outright selling.

2. I don’t have anything of significant value, so why worry? You may be surprised how quickly an estate value grows as you inventory assets, or the non-descript porcelain has something in addition to sentimental value. Joy shared a helpful “checklist” of personal property. For example, here are three “P’s” – paintings, pottery, porcelain, three “S’s” – sculptures, sports memorabilia, silver, and three “Collections” – coin, stamp, wine, to name a few. You want to successfully survive an estate tax return audit, especially when there is art, antiques and collectibles. And an appraisal may be required to be filed with your return – articles with artistic or intrinsic value in total in excess of $3,000 (e.g. jewelry, furs, silverware, paintings, antiques, oriental rugs, coin or stamp collections, etc.), or a collection of similar items valued in excess of $10,000. The Art Advisory Panel assists the IRS in reviewing taxpayer submitted appraisals. Per the Panel’s 2013 report, they reviewed 291 items; their total value was very close to that submitted by taxpayers; however, they recommended adjustments (up or down) for roughly half.

3. I’m not going to report (aka the “empty jewelry box”). Joy gives many public talks, and the audiences’ attention may drift. However, they tend to wake up when she mentions ‘stepped-up basis.’ Generally, this means estate assets may be eligible for a step up in basis to the fair market value at time of death (there are exceptions, e.g. irrevocable trusts). This means the beneficiary may have little to no capital gains tax liability when he or she subsequently sells the inherited asset.  Here’s an example… you inherit your father’s ’57 T-bird. His original cost may have been $4,000 (about the current price to replace the car’s front fender), and it’s worth $20,000 to $90,000 today. You list the qualified valued on the estate tax return, there’s no estate tax because the estate is under the $5.45 million exclusion for 2015, and you may have little capital gains tax to report.

4. Where to find a qualified appraiser? Avoid being the $4 seller of that 1776 document. First, he or she should be a disinterested party (i.e. not be involved in selling your items) and certify as such. Second, they must be qualified and competent. Your attorney, accountant or advisor may have recommendations for you. And Joy recommends researching appraisal websites, including the ASA (appraisers.org), AAA (appraisersassociation.org) and ISA (isa-appraisers.org). The ASA has all types of appraisers and searchable categories, AAA is limited to fine art, and ISA is limited to personal property only.

Valuations of art, antiques and collectibles are tricky. There’s no on-line quote system such as that for Apple stock, no Kelly Blue Book-like reference, and how valid are the listings on eBay or Craigslist compared to your item? As trustee, you have a fiduciary duty. I wish you the best in being a good steward.

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Happy 4th! – Beware of Greeks Bearing Bonds

The bald eagle is an icon that symbolizes American ideals and spirit. The image rode Westward stamped on the lockplates of firearms carried by explorers and settlers, landed in Normandy for the liberation of Europe, rests on the Sea of Tranquility, and even adorns your 4th of July ice cold Bud .

However, here’s a short story about an earlier icon and our oldest founding father. Ben Franklin published a satirical commentary in 1751 that the colonists should send rattlesnakes to England as a thank you to the Brits for sending their felons to America. In a more serious tone during the French and Indian War, he later used a political cartoon asking for unity amongst the colonists. The snake was cut in 8 sections representing the individual colonies, curved like the coastline, with the words “Join, or Die.” It played on the superstition that a chopped up snake would come back to life if the pieces were rejoined by sunset.

Variations of the snake symbol later emerged reflecting liberty and freedom as tensions with England grew. No longer cut up in pieces, the serpent battled a British dragon. In December 1775, Ben published an essay under the pseudonym “American Guesser.” He had seen Marines preparing to board Continental naval warships and carrying drums, each painted yellow and adorned with a fierce rattlesnake coiled to strike and “Don’t Tread on Me.” The popularity of the rattlesnake symbol grew.

He wrote “the rattlesnake is found in no other quarter of the world besides America… Her eye excelled in brightness and she may therefore be esteemed an emblem of vigilance… She never begins an attack, nor when once engaged, ever surrenders – She is therefore an emblem of magnanimity and courage… She never wounds til she has generously given notice, even to her enemy, and cautioned him against the danger of stepping on her. Was I wrong, Sir, in thinking this strong picture of the temper and conduct of America?”

That image of a coiled rattlesnake and “Don’t Tread on Me” became one of America’s first flags, the Gadsden Flag. The rattlesnake was adopted by the Continental Congress, and along with the motto, “This we’ll defend,” has been part of the US Army’s pledge for 240 years.

And in current events, news commenters blast the Greek debt crisis, and fears of contagion and the break-up of the EU. Greek’s PM Alexis Tsipras and his Syriza Party seek freedom from the European Union and the austerity measures demanded by the bankers. They failed to make their debt repayments, and the money spigots have been turned off. European Council President Donald Tusk said “Europe wants to help Greece, but can’t help anyone against their own will. Let’s wait for the results of the Greek referendum.” A more colorful analogy was commentator Jeff Macke – “Greece is Europe’s ne’er do well kid refusing to work. German is harsh but enabling mother.”

How can Greece, the physical size of Alabama and economic output equivalent to Boston, cause such a stir in global economics? Perhaps the EU would have been better off without Greek membership – a country prone to economic woes, excessive government spending at 59% of GDP (the long term average in the US is about 20%), and corruption. Tax dodging is a national sport. Per a Columbia University paper, professionals reported that about all their income goes to personal debt repayment. However, it’s not a debt issue. It’s an underreporting issue – professionals, including doctors, accountants and lawyers, reported average monthly income of about $1,800. And the Greek tax collection chief, Harry Theoharis, resigned after just 17 months attempting to crack down on tax evaders and threats of “break your legs.”

A more important question you should be asking is “What relevance is the Greece situation (or other crisis du jour) to my financial well-being?” Markets hate uncertainty, are globally connected, and they’re complex. That’s why it’s important to have a plan, balance returns and risks (diversify), and keep your wits as you make adjustments for life’s surprises .

Are you weary of low interest rates on your savings? Which would you take if offered a 2.3% or 14.5% return per year on your investment? Those are the rates on 10-year US Treasuries and Greek bonds, and illustrate the risk-return trade off.  Good luck and don’t let hype or fear tread on you.

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Upsizing Your Home in Retirement – Are You Nuts?

Imagine moving one more time to live your golden years of retirement until independent living is no longer practical or safe. What would you want in the new home and where would it be? Fewer stairs to climb, easier yardwork, or possibly, a tighter circle of community? In short, simplicity, convenience, and ease – as Steve Martin would say, “Getting small.”

Sounds reasonable.  “Honey, let’s downsize in retirement. Life can be more manageable, and maybe, we’ll have some money left over to add to our retirement savings.” A recent study analyzed home moves by retirees – half moved into smaller homes and 20% stuck to a similar sized home. However, what were the rest thinking? Three out of ten went for larger homes.

Merrill Lynch in partnership with Age Wave, a thought leader on population aging, released a study called “Home in Retirement: More Freedom, New Choices.” The survey of 3,638 American adults represented a wide range of ages, incomes, gender and regions, and revealed their hopes and worries about where and the type of home they wish to live in retirement. Some interesting results included the notions of the “Freedom Threshold” – about age 61, the majority of people feel greater freedom from work and family obligations and can better chose where they want to live – and a “Downsize Surprise” – that a significant number of people opt not to move to a smaller home.

I’ll share some of the study’s findings about why retirees move, or not, that upsizing not downsizing in retirement isn’t a crazy idea, and some financial planning considerations.

Dig in or move on? Of retirees surveyed, about a third didn’t anticipate moving in retirement. However, two out of three plan to move at least once. Last year an estimated 4 million retirees switched roofs. Primary reasons for moving included: Being closer to family (29%), reducing home expense (26%), changes in health or marital status (17% and 12%), and empty nesters or cashing out home equity (7% for each). And the top reasons why retirees would not leave their current home: I love my home (64%), family close by (48%), don’t want to lose independence (44%), love my community (42%), friends are close by (31%), and can’t afford to move (28%). In both cases, emotional reasons outnumber financial reasons.

However, in either case – staying put or moving – there are some commonalities that are arguably related to “upsizing,” whether or not the current or future home is actually bigger.

A larger or cushier welcome mat – Three of the four top reasons retirees upsized their homes had to do with relationships – more room when the family visits, family members move in, or friends visit – and the fourth was for a more prestigious home. Family members may be spread across the country like seeds scattered in the wind, busy calendars make family retreats more challenging, or mature adults grow weary of airport shuffles and hustles. More people join the sandwich generation – caring for elders or kids moving back home to regroup and make another run at life. And another biggie, the desire or need to make living quarters more comfortable, versatile and safe as we age – everything from mobility alternatives to smooth stair ascents, lower cabinets for accessibility, and higher technology for healthcare monitors and connectivity via video chat.

Planning considerations

Continue to review your priorities of where and how you want to live, and balance them against the realities of affordability, medical/physical/mental conditions, and resources including family.

Consider your alternatives. Too often we reduce decisions to A or B. What about more of the letters in the alphabet and having more chairs at the kitchen table discussing options?

And finally, engage the specialists when YouTube videos and DIY blogs may lead you somewhere you’d rather not be. You’re dealing with several moving parts including finance, legal, healthcare, tax, design and construction, to name a few.

T.S. Elliot said “Home is where one starts from.” Good luck in your journey.

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Give Your CPA a Heads Up

Some surprises bring great joy – a call from an old friend, a door opened, or an unsolicited “You’re awesome!” But walking into your CPA’s office and saying “Oh, one more thing… Did I tell you about a little thing that happened to us last year?” is likely to test her or his humor. There are two types of CPAs – historians and advisors. The first may tell you “Yes, you’re hemorrhaging, and here’s your tax bill for 2014.” The other offers “Here are some ways to stop the bleeding.” Use the conversations now as you work on your 2014 tax filings to prepare for the year ahead. It benefits both – your CPA may have the satisfaction of engaging creativity, research and planning skills, you’ll have more focus on exploring the various paths you may take, and ideally, you’re writing the smallest tax check legally required, and minimizing surprises.

Here are some questions to ask your CPA.

Expected impacts of major changes that are likely to occur in 2015? Three areas of change include family, income and significant transactions.

  • Family – Births or adoptions; marriage or splitting the sheets; children advancing in their lives; and death or caregiving. Each may impact filing status, income, expense or asset changes. For example, your child enters or advances in the workplace. Who’s going to file the return, the kid or the CPA? What guidance should be given to them regarding tax withholding, budgeting, saving and investing? Will your tax situation change – dependents, exemptions, credits, kiddie tax, etc.

 

  •  Income – Can be either significant increases (business income, promotions or bonuses, option exercise, retirement plan distributions, Roth IRA conversions, investment income, etc.) or reductions (business decline or exit, retirement, unemployment, maturity of a note receivable, paying off debt, investment loss, etc.). Let’s take new business income as an example – spouse becomes an independent contractor, director fees, or an expansion of your business. Will a new entity be formed (another tax return) or file a Schedule C? What management decisions are advised including financing, budgeting and planning, staffing, insurance and risk management, employee benefits, and how should you take money out of the business?

 

  • Significant Transaction – The purchase or sale of house or major asset, business exit or acquisition, inheritance, retirement plan distributions, etc. These too warrant additional planning and engagement of your other trusted advisors. Assume the case of a couple downsizing their home. What’s the likely order of the transactions – sell the current home, take on interim housing, then buy the new place, or take on a temporary two homeownership status until the first home is sold? In the case of the latter, how are you financing the purchase (the current home equity isn’t available until later)? What are the funds required (selling expenses and taxes, move-in costs, down payment)? Will the funds for down payment come from selling investments? A retirement account?

Our estimated 2015 tax bill? Explore opportunities to reduce that bill, and prepare to fund it (adjusting withholdings and quarterly tax payments). Here are three areas to consider for tax reduction.

  • Are you saving enough for the future? How should savings be directed to tax-advantaged retirement plans and after-tax investing? Maxing out your 401k contributions may not be sufficient to fund your retirement lifestyle, nor is it prudent to have all of your retirement income to be taxed as ordinary income. If you are the business owner (plan sponsor), what are your options for design or redesign of your retirement plan to tweak the allocation of contributions or expected benefits?

 

  • Eligible for a Health Spending Account (HSA)? If you have a qualifying high deductible medical insurance plan, you may be eligible to fund a HSA. Contributions may reduce your taxable income and may grow tax free if withdrawn for qualified medical expenses.

 

  • High income taxpayers – Don’t forget about the additional 3.8% net investment income tax and 0.9% Medicare surcharge tax (wages and self-employment income) exposures, phase-out of deductions, exemptions, and credits, and utilizing capital loss carryforwards.

Tax planning and financial planning are very intertwined. If I don’t pick up the phone and talk to the client’s CPA of a major potential event, I risk three things: “I didn’t think of that” (another option), client gets a nasty tax surprise come April, or I’ve aggravated the CPA “Why am I hearing about this after-the-fact?” So one last thought… bring a smile and a cup of cheer to your tax accountant. They’re the ones who wrestle with the 74,000 pages of the Tax Code on your behalf. You’re just writing the check.

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