For most people, the concept of “estate planning” at its most basic level is usually associated with the process of drafting a last will and testament, which governs the disbursement of assets to beneficiaries after the decedent has passed on. In reality, estate planning often involves more complex scenarios such as the establishment of trusts, which serve two functions: first, trusts generally avoid the probate process, giving beneficiaries faster access to the assets; second, trusts allow for greater control of specific dispensations and access to wealth. Trusts are administered by a third party, called a trustee. Trustee selection is extremely important because the trustee holds the fiduciary responsibility for the trust both during, and after, the benefactor’s life.
As the word itself suggests, there is a significant element of loyalty -- to the beneficiaries, and to the benefactor – involved in being a trustee. In our experience, many people default to naming a family member as a trustee, usually under the assumption that “blood is thicker than money,” and that family members are inherently trustworthy. While this may be true in many cases, we’ve found that like business and pleasure, sometimes fiduciary responsibilities and family members shouldn’t be mixed! If you’re considering a family member as a trustee, think carefully about the following questions.
Does he or she have the expertise to do the job?: The administration of a trust requires specialized skills. Does your family member have the legal, financial, and administrative background to manage the trust effectively during your lifetime, and after you’re gone.
Can a family member be truly impartial AND compassionate?: Will a family trustee have the wherewithal to make the tough, impartial decisions regarding management and dispensation often required of third-party trustees? If you’re leaving behind a lot of assets to a lot of beneficiaries, the answer is probably “no,” and that can sometimes be a recipe for acrimony, lawsuits, or worse. A truly neutral third party, such as an attorney or trust company, can administer the trust without taking a personal interest in the outcome.
Will a family member have the time to do it all?: Administering a trust, particularly after the benefactor’s death, can be a complicated, time-consuming process. It’s reasonable to ask whether family trustees, who have lives of their own (and are likely grieving the loss, as well), have the bandwidth to effectively manage a post-decedent trust. If you leave a small estate…maybe. If not, it’s probably best to name a professional trustee who can devote impartial time and attention to effective administration.
This month, we take a break from our discussion of more general financial topics to cover a more “technical” investment strategy currently in favor among some money managers and DIY investors: chasing high yield. Simply put, this strategy involves targeting specific asset types such as preferred stocks, “high-yield” bonds, real estate investment trusts (REITs) and other vehicles that offer rates of return that are often much higher than those being delivered by the market in general. You might reasonably ask, based on that definition, why pursuing higher returns for your portfolio could be described as “perilous.” After all, isn’t growth the goal? Our answer, with a caveat, is: yes, strong returns are a good thing, but chasing high yield is often little more than a gamble that the market is wrong. High-yield products exist, frankly, because no one would ever buy them without the lure of the returns they promise to compensate for higher risk of default.
As we’ve mentioned in past articles, helping our clients benchmark their tolerance for healthy risk is one of the cornerstones of our investment methodology. High-yield investment products are inherently high risk. Take preferred stocks, for example. The promise of receiving regular dividend payouts before common stock holders is very attractive to most investors. However, the high-yield trend toward “hybrid preferred” stock carries with it the very real risk that your holdings could be automatically converted to common stock, meaning both a reduction of income AND capital! Careful attention to technical nuances like yield-to-call date is especially important when investing in preferred stocks. If you have the time and the energy to spend in this sort of analysis, preferred stocks may work for you. Otherwise, you’re gambling on a high cash yield that may or may not ever materialize.
High-yield bonds also provide a cautionary tale. As with preferred stock, there is often a reason that the returns on high-yield bonds are so tantalizingly attractive, and that reason is usually linked to the bond’s rating. Issuers often have to offer high returns because the bonds are poorly rated or offer significant risk of default! Without the lure of a high interest rate, very few investors would put their money into these types of bonds. As the old saying goes, “You can put lipstick on a pig…but it’s still a pig.” In our experience, high-yield bonds wear a LOT of lipstick.
Wanting average or above-average returns is fundamental to investing. No one wants to lose money, after all. But chasing high yield is not for the faint of heart, and is often little more than an “educated bet” on market performance. Building a solid investment strategy that focuses heavily on managing risk, allocating assets prudently, and being patient may not have the flash and glitz of chasing high yield, but it will assuredly pay off better than gambling on a sucker’s bet. In this rising interest rate environment, lower your yield to maturity and be patient.
Happy Holidays! Whether you’re trimming the tree, lighting the menorah, or still trying to recycle Thanksgiving leftovers into new recipes, we at Atlantic Capital Management wish you happiness and prosperity this holiday season!
In keeping with the spirit of giving common during this season, we’re going to use our final column of the year to talk practically about year-end giving as it relates to both charitable and estate-planning scenarios. Beyond the obvious good that comes from making gifts or donations to the many charitable organizations that serve the public interest, there are also some significant tax advantages to charitable giving that make it an important part of any wealth-management strategy. Our experience serving our clients over the past 27 years has given us a lot of insight into the best practices for year-end giving; we’ve distilled the most practical into the list below.
Give to qualified organizations: There are many qualified, reputable organizations serving thousands of worthwhile causes; there are also many unqualified, disreputable groups willing to take your money. Use the Exempt Organizations Select Check tool at the irs.gov website to verify the legitimacy and tax-exempt status of the group(s) you choose to give to.
Pay attention to the rules and guidelines: As you might expect, the IRS has a plethora of rules and guidelines that cover charitable giving. For example, monetary donations of any amount, to any type of organization, must be documented properly in order to qualify as tax deductions. So whether you bought popcorn from the Boy Scouts or put up the cash for a new wing at the local hospital, you’ll need to provide bank records like canceled checks or statements to corroborate your contributions. Keep good records of your donations, including dates, amounts, organization names, etc. If you donate material goods to an organization, get a receipt if you do it in person, or keep written records that include time, date, and value of goods if you utilize a drop-off box or unattended location. Finally, be mindful of the technicalities involved in the tax exemptions; for instance, you cannot deduct charitable giving if you use any of the “short forms,” like the 1040A or 1040EZ, when you file your taxes.
This past summer, the Internal Revenue Service and the Treasury Department announced that couples married in jurisdictions that legally recognize same-sex unions will, commencing with the 2013 tax year, be classified as “married” for Federal tax purposes. This policy change not only affects those couples residing in states where same-sex marriage is legal, but extends to couples who were married in a supporting jurisdiction but physically reside in a jurisdiction that does not support same-sex unions. Currently, 14 states support legal same-sex marriages: Massachusetts, California, Connecticut, Iowa, New Jersey, Delaware, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Maine, Maryland and Washington comprise the complete list. As we approach the end of the 2013 tax year, we thought it might be helpful to recap the changes, and talk a little bit about what to expect next year if you’re filing for the first time as a same-sex couple.
Taken at face value, the changes are pretty straightforward: as part of the new ruling, same-sex couples will be classified as “married” by the IRS, meaning that same-sex unions will be treated the same as “traditional” marriages from a Federal tax classification standpoint. This includes income taxes, gift taxes, and estate taxes, and also encompasses all areas of IRS tax law where marriage classification is a factor. Personal exemptions, dependency exemptions, filing status, standard deductions, IRA contributions, child and earned income tax credits, and deductions based on employee benefits are all driven by marriage classification when filing Federal taxes. Under the new ruling, legally-married same-sex couples are now able to file using either the “married filing jointly” or “married filing separately” status available formerly only to those partners in “traditional” unions.
As with seemingly everything related to the IRS, however, there are some wrinkles. First, the ruling applies only to legally-binding same-sex marriages, regardless of domicile. Domestic partnerships, civil unions, and other common-law relationships do not qualify. Secondly, and perhaps most importantly, the new ruling requires that partners in a same-sex union must change their Federal tax status from “single” to “married.” With this change in status comes the very real possibility that marginal tax rates may change unfavorably, and eligibility for certain exemptions and the classification of certain types of employee benefits might be compromised. Given that no one likes to be surprised at the last minute when the IRS is involved, we advocate getting ahead of the status change early, and understanding how it will affect your tax bracket and eligibility going forward. While fairly uncomplicated scenarios may not require the services of a tax preparation specialist, we strongly advise seeking advice from a qualified tax attorney or CPA if you suspect (or discover) that your change of status may have unanticipated downside. If you’ve got a significant estate, or are in a situation where changes to gift-tax status brought about by the new classification might come into play, it’s probably best that you consult a professional who can help you understand the nuances.
Finally, several of the states listed above legalized same-sex unions a number of years ago; as a result of the statute of limitations incorporated as part of the new ruling, partners in same-sex marriages can choose to file amended returns for tax years 2010, 2011, and 2012 if they so choose (and if the obvious benefit of doing so exists!).
As summer comes to a close it can only mean one thing: hundreds of thousands of college students from all over the nation and the world will be returning to the Commonwealth to pursue some form of higher education. And while most of those students are looking forward to learning new things, meeting new people, and crisp Fall afternoons tailgating (we’ll skip over the part about winter parking bans for now), many parents are pondering how, exactly, they’re going to pay for their kids’ four-year excursion to the land of higher learning. As a popular radio commercial so aptly puts it, “This is the time of year when the logo on the sweatshirt starts appearing at the top of the bill!”
At Atlantic Capital Management, we help many families effectively plan and pay for college. In our experience, there is no “magic bullet” for college financing; like most other forms of investing, it requires planning, due diligence, and willingness to stay focused on the goal: paying for your kids’ education without going broke (or bankrupting them) in the process. Below are some tips, gathered from our direct experience, for effectively planning for and managing the college funding process.
It’s never too early to start: As with most investment scenarios, it’s wise to let the power of time and compounding work in your favor when it comes to college planning. The average yearly cost for a private four-year institution is now over $32,000. The sooner you can get started on saving for college while your children are still young, the more time you’ll have to make that money work for you. Invest what you can afford to, and make adjustments as life circumstances change.
Do your research: Your kids aren’t the only ones who should be hitting the books. New college financing options hit the market every year, and you should take the time to keep up with the changes and implement them, as necessary, in your portfolio. “Tried and true” instruments like 529 plans have been enhanced by things like the Coverdell “college IRA,” which allows for tax-free withdrawals for tuition, books, fees, and housing. Do your research, or consult your financial professional.
Understand the financial aid options: Most families assume that they won’t qualify for financial aid. In reality, even the top-tier institutions give a large percentage of students some kind of aid. So if you’re facing a near-term tuition scenario, file that FAFSA as early as possible! Carefully evaluate your options for grants, scholarships, and loans. Many families can put together an effective “hybrid” college finance plan even when faced with a short time frame. Work closely with the financial aid offices at prospective schools.
If you’d like to learn more about our approach to helping families pay for college, please call us at (508) 893-0872 to schedule a free consultation.
These days, Americans are living longer, healthier and more productive lives. Thanks primarily to advances in medicine, healthcare, and overall quality of life, average life expectancy has risen steadily and dramatically over the past 50 years. Forty percent of retirement-age men will live to be at least 85, and fifty-three percent of women that age will live to be at least 88. Overall, the average life expectancy in the United States is now 78.6 years, up from 69.7 years in 1960. Retirees and seniors living longer, healthier lives would appear to be a good thing for everyone involved, right? Not so fast, my friends. Without planning properly for it, living long into your “golden years” could quickly go from something you’ve dreamed about to a complete nightmare…particularly if your money dies before you do!
As we’ve discussed in previous articles, planning for your family’s financial security is a multi-faceted endeavor. From investments to insurance, the probability that you (and your spouse and children) are going to live longer adds a few new wrinkles to that planning process. Below are some suggestions for maximizing your financial security for a longer life expectancy.
Re-think “retirement”: It should seem fairly obvious that the longer you live in retirement, the more money you’ll need to…live in retirement! If you’re approaching traditional retirement age, you may want (or need!) to consider ways of forestalling living off of your retirement savings. For example, can you re-career or work in a more limited capacity for several years beyond traditional retirement age to supplement your income? Can you adjust your investment strategy or portfolio to maximize those additional years spent in the workforce? If you’re a younger investor, can you adjust the scope of your investment strategy, or your career arc, or both, to take into account working longer into your “retirement” years?
Plan for the long, long haul: With the help of a certified financial planner, map out a plan for a retirement period that lasts well into your 80s, and perhaps even into your 90s. Strive to understand the implications of long life expectancy on the principal balance of your nest egg; your goal should be to formulate a plan which allows you to live off a reasonable income stream for as long as you can before spending down the principal balance of your investments. Remember that time, in this instance, works just as easily against the value of your portfolio as it does in favor. Although we don’t mean it negatively in this sense…plan for the “worst-case scenario!”
Consider “longevity insurance”: Like a private pension - longevity insurance is another option for retirees seeking to turn their savings into a steady income stream throughout retirement. Unlike other strategies, annuities can offer a guaranteed income stream that will last as long as you and your spouse live if set up properly. With an immediate fixed annuity, you “buy it, set it and forget it.” As long as the insurance company remains solvent, annuity owners generally get a check for the same amount every month – they can even set up payments to last as long as they live, so that the longer they live, the more valuable the annuity becomes. They can also be set up to continue to pay to the surviving spouse in the event of death. Consider diversifying your investment strategy to include fixed-income annuities as part of your “worst-case scenario” planning.