Articles of Interest
Bob LeClair’s Finance and Markets Newsletter W/E 2.1.2020
Test Your Knowledge of 2020 Key Federal Numbers for Financial Planning
Each year, the government reviews the gift and estate tax exemptions and contribution limits for retirement plans to make inflation adjustments. As you assess your plans for gifts and retirement plan contributions for 2020, it’s important that you understand this year’s key federal numbers.
Important Timing Changes to 2019 Tax Form Mailings (1099 and 5498)
The IRS tax form mailing date for most non-retirement 1099 tax forms is February 15 . As in past years, National Financial Services LLC (NFS) has applied for and received a mailing extension from the IRS that will permit the generation of some non-retirement 1099 tax documents after February 15, but no later than March 6.
SECURE Act Information
On December 20, 2019, the SECURE Act was signed into law. The SECURE Act contains 29 provisions, encompassing many aspects of financial planning and retirement saving. Once treasury regulations are released, nuances in interpreting this new law will become clearer. Until then, individuals are left to interpret the law’s effects based on the language of the law itself. This article will address what the SECURE Act entails and who it affects, as well as provide suggestions on how to plan for the changes that have been instituted.
A Tale of Two Decades
Investors naturally want to only hold the best performing assets all the time. One of the most important jobs we have is to make sure our clients maintain the proper allocation for their risk level and time horizon and avoid the persuasion to react to recent market swings. Inevitably, portfolios covering a broad spectrum of asset classes will have positions that do not compare favorably with the flavor of the day. No one ever likes to own a loser. However, research and history continue to remind us that a broadly diversified portfolio is ultimately the only way to win over the long term.
Rate Cut, Trade War, and Global Political Unrest - What Does It Mean?
There is a lot going on now and volatility in the financial markets has increased again. Not really, but when it comes to finances, the human condition only considers negative volatility volatile. The market can be racing up at a frantic pace and no one calls it volatile.
The Uncommon Average
The return of Market Volatility this past week and the headlines of a trade war with China
have the media in a frenzy. We want to remind our clients and friends that we are still in a
normal range of returns and that as long as you have an investment philosophy that you
can stick with, you will be ok. Please review this short article from Dimensional Funds on
setting proper expectations. As always, if you have questions or concerns, please call us
and we will be happy to review your situation.
Here's the Prescription
We hope you are enjoying the warmer temperatures and are avoiding the pollen that comes with it! In our efforts to stay informed we spend a lot of time reading industry relevant information and frequently come across articles and information that we deem worth sharing. This article from David R. Jones at Dimensional Funds is one such article. Please take two minutes to read this brief article.
SEC Charges Wealthfront, Hedgeable with False Disclosures
Wealthfront one of the first, largest and widely known robo advisors has been fined for a series of violations by the SEC. As is evident from the attached article, the robos can break the rules and are doing so.
A Solution to the Password Problem
Whether you’re looking to make a New Year’s resolution or you’re simply trying to implement some information security best practices, you would be well served to start using a password manager. Why?
Financial Steps You Can Take to Improve Your Relationship with Your Spouse
Getting to the Point of a Point
A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.” These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors such as a 500-point move do not have the same impact on performance as they used to. With this in mind, we examine what a point move in the Dow means and the impact it may have on an investment portfolio.
We are writing to inform our clients and colleagues of some exciting changes at Vaughn Wealth. First, Christina Hoffman, our client communications coordinator, recently married and is moving to Atlanta to start her new family. Christina has been a wonderful part of our team for 4 years and we will miss her. However, we are truly excited and wish her many blessings in this new chapter in her life!
We are equally thrilled to announce that in less than one week after Christina’s departure, we were blessed to identify her replacement, Mary Ann Wells. Mary Ann comes to Vaughn Wealth from West Chester, Ohio where she worked as an operations specialist in the trust and wealth management department of First Financial Bank. Already, Mary Ann’s background has proven to be an asset to our firm increasing the value we provide you. Her values and personality blend well into our culture and we believe you will all claim her to be part of our overarching family.
Thank You, Jack Bogle
Presented by Kevin & Kyle Taylor
Recent Market Volatility
While it may be difficult to remain calm during periods of market volatility, part of our job is to help our clients stay on course and provide confidence in how they are invested. Please watch this short video that shares our sentiments. As always, if you need to talk please give us a call. We are here to help.
Most people tend to avoid or lose focus on events that aren’t imminent, such as death. Nobody expects tomorrow to be their last day, and thus, estate planning languishes at the bottom of their to-do lists. Planners and attorneys can speak about the importance of estate planning until they’re blue in the face, but sometimes it takes a concrete example to drive the point home. 2017 was a year of several high-profile cases where a lack of planning created nightmares for the remaining family resulting in litigation, fines, taxes, 2 court costs and, most importantly, tattered relationships with potential permanent estrangement.
Lessons for the Next Crisis
It will soon be the 10-year anniversary of when, in early October 2007, the S&P 500 Index hit what was its highest point before losing more than half its value over the next year and a half during the global financial crisis. Over the coming weeks and months, as other anniversaries of major crisis-related events pass (for example, 10 years since the bank run on Northern Rock or 10 years since the collapse of Lehman Brothers), there will likely be a steady stream of retrospectives on what happened as well as opinions on how the environment today may be similar or different from the period leading up to the crisis.
Market Highs and Diversification
The Dow Jones Industrial Average and the S&P 500 stock indices have recently made new all-time highs. With the markets hitting new highs, you may think it is a good time to cash in those gains, however historical data shows that 80.5% of the months following a new index high had positive returns.
Exhibit 1. S&P Total Return Index Highs: 1926-2016* (Chart provided by Dimensional Fund Advisors.)
Percent of months with Positive Return Over Next 12-Month Period
From January 1926-December 2016, 319 months, or approximately 29% of monthly observations were new closing highs.**
After considering this data, we believe that a more disciplined strategy would be to revisit your long-term objectives and to make sure you are invested in the proper asset allocation for those stated objectives, your risk tolerance and your time horizon.
What does the term “asset allocation” mean? It is a systematic approach to investing that can help you create a more efficient mix of investments by diversifying a portfolio among the major asset classes including stocks, bonds, alternatives and cash. We also believe that proper diversification includes investing in large, small, domestic and international companies. A well-diversified portfolio will include assets from around the globe.
There are investment opportunities in the Global equity markets and nearly half of the companies you can invest in lie outside of the United States. A portfolio that consists solely of companies within the Dow Jones Industrial Average or the S&P 500 would not be exposed to opportunities outside of the US. You should examine your portfolio to determine whether you are properly diversified and invested for your specific situation.
If you would like help with this, give us a call and we would be happy to review your situation.
* 1,081 Monthly observations
**The S&P data is provided by Standard & Poor's Index Services Group. For illustrative purposes only. Index is not available for direct investment. Past performance is no guarantee of future results.
DJIA: A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. S&P 500: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.
Choosing Your Trustee: Things to Consider
Trusts are an integral part of many estate plans for a multitude of reasons including:
- avoiding the probate process
- maintaining control and use of estate assets within the family, or bloodline
- protecting spendthrift beneficiaries from their own poor judgment
- minimizing the impact of taxation on the transfer of wealth from one generation to another
- shielding assets against creditors and potential lawsuits
- providing for the support and care of a family member with special needs
A Trust is a written contract between the Grantor and the Trustee for the benefit of all Beneficiaries, which can include the Grantor and anyone else he chooses including spouse, children, grandchildren, friends, or charities. A Trust can be created during one’s life or by will upon death. The person who creates the trust is called the “Grantor.” A trust that is created at death of the Grantor by virtue of a will is referred to as a Testamentary Trust. A Trust created during the life of the Grantor is referred to as an “inter vivos” trust.
What Are Common Types of Trusts and Their Purposes?
One of the first considerations in selecting your trustee is the type of trust your trustee will administer. Because different trusts may require different trustee roles, selection of your trustee should, in part, be driven by the type and purpose of the trust.
A revocable or "living" trust is designed to hold your assets during your life. Most often, you will serve as the initial trustee of your revocable trust. However, if you become incapacitated or are unable to manage your financial affairs, your successor trustee will step in. The role of your successor trustee will be to manage the assets in your trust for your benefit and to make distributions to you or for your benefit to ensure that your needs are met. You want someone who is going to be aware of your needs and situation and will act in your best interests.
After your death, the role of your trustee will shift. Your revocable trust becomes "irrevocable" and its terms establish how your assets will be distributed, much like a will would. At this point, your trustee's role will be similar to the role of an executor under a will. Your trustee will be responsible for collecting, managing, and distributing your assets to your beneficiaries (or to trusts for their benefit, described below) in accordance with your trust agreement.
A trust for a beneficiary established under the terms of your revocable trust or by your will and funded after your death is an irrevocable trust. Likewise, in certain circumstances, you might establish an irrevocable trust during your lifetime, which means that you relinquish the right to change or terminate the trust. With any irrevocable trust, you must understand that you will be relying heavily upon your trustee to carry out your intent and the terms you have established in your trust.
Below are some of the purposes, including tax and non-tax reasons, for including an irrevocable trust in your estate plan:
- Irrevocable trusts frequently are used for estate tax planning. For example, establishing a "credit shelter trust" for the benefit of your surviving spouse will preserve your estate tax credit and shelter assets in the trust (and any appreciation on the assets) from taxation in your spouse's subsequent estate. If your taxable estate is in the ballpark of $5,450,000 individually, or $10,900,000 as a married couple as of 2016, your planning likely includes an irrevocable trust.
- An irrevocable trust can be used to control the disposition of your assets in the future. For example, in a blended family scenario where each spouse has children from prior marriages, an irrevocable trust will allow you to not only provide for your spouse, but also to control the disposition of the assets remaining in the trust following your spouse's death, including, if you desire, a requirement that all or a disproportionate share of the assets be directed to your children rather than your spouse's separate children.
- If you have a beneficiary who is too young to manage assets or otherwise is not financially responsible, an irrevocable trust may be appropriate in order to preserve and manage the assets you are designating for that beneficiary. Your trustee can judge how to distribute trust assets in a way that will make them last.
- Oftentimes, an irrevocable trust is chosen because of its asset protection benefits. Assets received in certain trusts are immune from claims of a beneficiary's creditors. Many people consider creating an asset protection trust if their potential beneficiary has heightened exposure to lawsuits because the beneficiary is involved in business or a high-risk profession (such as a doctor), or if the beneficiary is or may be involved in a divorce or similar dispute.
- Finally, an irrevocable trust often is used for a beneficiary with special needs. A special needs trust can be set up in a way that will not affect your beneficiary's receipt of governmental benefits. Similarly, if your spouse may need to qualify for Medicaid in the future, assets received in certain trusts will facilitate this.
In any of these scenarios, your trustee will manage the assets of your irrevocable trust and make distributions for the benefit of your beneficiaries pursuant to the terms set out in your trust agreement.
Once you have carefully chosen which trust, or trusts, is best for your estate plan, it is important to also carefully choose your trustee. The trustee will hold the investment and distribution power, and will be responsible for respecting and enforcing the terms of the trust as you have established them. A trust meant to protect assets is of little benefit if a poorly selected trustee squanders the assets. If your plan includes a trust – whether it is revocable or irrevocable – don’t stumble at the finish line by naming the wrong trustee.
What is the General Role of a Trustee?
The trustee you select will have special obligations to you as the creator of your trust, as well as the beneficiaries of your trust. The trustee's duties arise under the terms of your trust agreement as well as under Florida law. Some of the essential obligations include:
- Administering a trust by its terms. First and foremost, your trustee must administer your trust in good faith and in accordance with the terms and purposes you have established in your trust agreement.
- Exercising skill and care. Your trustee must administer your trust as a "prudent person" would. In taking any action, your trustee must consider your trust's purposes, terms, distribution requirements, and other circumstances of your trust and its beneficiaries.
- Duties of loyalty, fairness, and impartiality. Your trustee must act in the best interests of your beneficiary. This means that your trustee must avoid situations in which your trustee's personal interests conflict with those of your beneficiary. If your trust has more than one beneficiary, your trustee's decisions must be made by weighing each beneficiary's interests.
- Managing trust assets appropriately. Your trustee must invest and manage trust assets as a "prudent investor" would. This means that your trustee must consider the investments in the context of your entire trust. For example, an appropriate investment may depend on your trust's need for liquidity to make distributions, the types of assets in your trust, your beneficiary's other resources, or general economic conditions. Your trustee can delegate investment decisions to a financial advisor, but will still have an obligation to carefully select the advisor and monitor performance.
- Keeping records and communicating. Your trustee must keep records in connection with the administration of your trust, and provide information to your beneficiary as required in your trust agreement.
What Factors Should You Consider in Selecting Your Trustee?
TRUST PURPOSE. As noted earlier, you must consider the purpose of your trust. If the primary purpose is to provide asset protection for your beneficiary, it may be okay for your beneficiary to serve as trustee. However, if the goal of the trust is to preserve assets for a spendthrift beneficiary or for future generations, it could defeat the purpose of the trust for your beneficiary, or someone the beneficiary can influence, to serve as trustee.
FAMILY DYNAMICS. In addition, you should consider the relationship of your trustee and your beneficiary. Are they generally going to be able to work together? Will your trustee be comfortable standing up to your beneficiary if necessary? In tricky family circumstances, the best option for the trustee may be an unrelated third party, a bank, or a trust company.
JUDGMENT AND EXPERIENCE. Trust assets can waste away while under the care of an inexperienced trustee. A good trustee will exercise sound judgment in making investment and distribution decisions. Expertise helps, but common sense is just as good. You don’t need a Wall Street whiz to act as your executor or trustee. But you do need a person who knows when it’s time to involve an expert. “You need someone with good, basic business sense. I like people who aren’t afraid to research and ask for help, not know-it-alls who think they don’t need help.
AWARENESS OF YOUR BENEFICIARY'S NEEDS. A trustee often has some degree of discretion in determining whether to make distributions to a beneficiary. Your trustee should be someone who will be aware of, and sensitive to, your beneficiary's needs. You may want to consider a trustee who lives in the same community as your beneficiary, or is personally close to your beneficiary.
FAIRNESS. The lack of a conflict of interest is important in selecting your trustee. For example, a trustee who is a potential future beneficiary of your trust may be reluctant to make distributions, even if the current beneficiary needs them because a distribution now will lessen the amount of trust assets that will be available to your trustee as a beneficiary later. A good trustee will be able to make decisions without being influenced by personal interests.
ATTENTION TO DETAIL. Managing assets and keeping track of distributions and other trust matters requires a certain level of accountability and attention to detail. Your trustee ideally should be organized and responsible.
AVAILABILITY. This criterion has two aspects: permanency and proximity. Take into account the person’s age, health and the likelihood of that person being around to administer your estate. Obviously, a trustee has to outlive you, so you wouldn’t want to name your brother or sister if they’re your age or older. Every estate-planning expert has faced an executor or trustee who was unavailable when needed — whether because of disability, distance, or death. That’s why they harp on naming backups. Proximity should also be considered. In many states, a non-resident individual may act as a trustee, although as a practical matter, geographical considerations often argue against selection of an individual who lives a considerable distance from the beneficiaries of the trust. It can’t be emphasized enough to have flexible language in your trust instrument allowing you to "hire and fire" new trustees should circumstances change. You can name a successor yourself, allow your executor or trustee to name a successor, or designate a corporate executor or trustee. Another option to consider is to make provisions that give beneficiaries the power to change from one corporate fiduciary to another.
FEES. It is customary for corporate trustees to charge a fee for their services. Usually, this fee is based on a percentage of the income and principal of the trust. A distribution fee equal to a percentage of the principal disbursed from the trust may also be charged. Although this fee is typically based on a standard schedule of fees, it may be possible to negotiate the fee in the case of a trust with a large amount of assets. This may be an agreed-upon amount or a flat hourly charge. Many individuals name as trustees spouses, relatives, close friends, or even trust beneficiaries because they will serve as a personal favor or as an accommodation and will not charge a fee to act as a trustee. This may be an economic necessity where the value of the trust assets is small and payment of minimum fees to a corporate fiduciary would significantly reduce the income and principal of the trust. In larger trusts, when a relative or friend is trustee, it may be a good idea to provide for fees, even at a reduced schedule, in order to ensure prompt performance and avoid building a resentment toward onerous duties. There are many reasons for using a trust in your estate plan. To achieve your goals in using a trust, it is important to choose your trustee wisely. Selecting a Trustee can very complicated, and this list is by no means an exhaustive discussion of the issues you can face. But in general, a good trustee will exercise sound judgement, be fair, and follow the terms of your trust as you have created them, keeping your intentions in mind. Finally, the selection of your trustee should not be a decision that is made once and never revisited again. You should "kick the tires" on your estate planning documents every few years to make sure that your trustee selection (and the rest of your estate plan) is still appropriate. If you find that amendments to your plans and changes to your trustee are needed, you should act accordingly.