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Key Estate Planning Mistakes to Avoid: Too many people make these common errors.

Many affluent professionals and business owners put estate planning on hold. Only the courts and lawyers stand to benefit from their procrastination. While inaction is the biggest estate planning error, several other major mistakes can occur. The following blunders can lead to major problems.

Failing to revise an estate plan after a spouse or child dies. This is truly a devastating event, and the grief that follows may be so deep and prolonged that attention may not be paid to this. A death in the family commonly requires a change in the terms of how family assets will be distributed. Without an update, questions (and squabbles) may emerge later.

Going years without updating beneficiaries. Beneficiary designations on qualified retirement plans and life insurance policies usually override bequests made in wills or trusts. Many people never review beneficiary designations over time, and the estate planning consequences of this inattention can be serious. For example, a woman can leave an IRA to her granddaughter in a will, but if her ex-husband is listed as the primary beneficiary of that IRA, those IRA assets will go to him per the beneficiary form. Beneficiary designations have an advantage – they allow assets to transfer to heirs without going through probate. If beneficiary designations are outdated, that advantage matters little.1,2

Thinking of a will as a shield against probate. Having a will in place does not automatically prevent assets from being probated. A living trust is designed to provide that kind of protection for assets; a will is not. An individual can clearly express “who gets what” in a will, yet end up having the courts determine the distribution of his or her assets.2

Supposing minor heirs will handle money well when they become young adults. There are multi-millionaires who go no further than a will when it comes to estate planning. When a will is the only estate planning tool directing the transfer of assets at death, assets can transfer to heirs aged 18 or older in many states without prohibitions. Imagine an 18-year-old inheriting several million dollars in liquid or illiquid assets. How many 18-year-olds (or 25-year-olds, for that matter) have the skill set to manage that kind of inheritance? If a trust exists and a trustee can control the distribution of assets to heirs, then situations such as these may be averted. A well-written trust may also help to prevent arguments among young heirs about who was meant to receive this or that asset.3

Too many people do too little estate planning. Avoid joining their ranks, and plan thoroughly to avoid these all-too-frequent mistakes.

Warmest Regards,

april-signature

 

Citations.

1 – thebalance.com/why-beneficiary-designations-override-your-will-2388824 [10/8/16]

2 – fool.com/retirement/2017/03/03/3-ways-to-keep-your-estate-out-of-probate.aspx [3/3/17]

3 – info.legalzoom.com/legal-age-inherit-21002.html [3/16/17]

 

 

 

 

 

 

 

 

 

 

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Will You Avoid These Estate Planning Mistakes?

Too many wealthy households commit these common blunders.

Many people plan their estates diligently, with input from legal, tax, and financial professionals. Others plan earnestly, but make mistakes that can potentially affect both the transfer and destiny of family wealth. Here are some common and not-so-common errors to avoid.

Doing it all yourself. While you could write your own will or create a will or trust from a template, it can be risky to do so. Sometimes simplicity has a price. Look at the example of Warren Burger. The former Chief Justice of the United States wrote his own will, and it was just 176 words long. It proved flawed – after he died in 1995, his heirs wound up paying over $450,000 in estate taxes and other fees, costs that likely could have been avoided with a lengthier and less informal will containing appropriate language.1

Failing to update your will or trust after a life event. Relatively few estate plans are reviewed over time. Any life event should prompt you to review your will, trust, or other estate planning documents. So should a life event affecting one of your beneficiaries.

Appointing a co-trustee. Trust administration is not for everyone. Some people lack the interest, the time, or the understanding it requires, and others balk at the responsibility and potential liability involved. A co-trustee also introduces the potential for conflict.

Being too vague with your heirs about your estate plan. While you may not want to explicitly reveal who will get what prior to your passing, your heirs should have an understanding of the purpose and intentions at the heart of your estate planning. If you want to distribute more of your wealth to one child than another, write a letter to be presented after your death that explains your reasoning. Make a list of which heirs will receive particular collectibles or heirlooms. If your family has some issues, this may go a long way toward reducing squabbles and the possibility of legal costs eating up some of this or that heir’s inheritance.

Failing to consider what will happen if you & your partner are unmarried. The “marriage penalty” affecting joint filers aside, married couples receive distinct federal tax breaks in this country – estate tax breaks among them. This year, the lifetime gift and estate tax exclusion amount is $5.45 million for an individual, but $10.9 million for a married couple.1,2

If you live together and you are not married, it is worth considering how your unmarried status might affect your estate planning with regard to federal and state taxes. As Forbes mentioned last year, federal and state taxes claimed more than more than $15 million of the $35 million estate of Oscar-winning actor Phillip Seymour Hoffman. He left 100% of his estate to his longtime partner, and since they had never married, she could not qualify for the marriage exemption on inherited assets. While the individual lifetime gift and estate tax exclusion protected a relatively small portion of Hoffman’s estate from death taxes, the much larger remainder was taxed at rates of up to 40% rather than being passed tax-free. Hoffman also lived in New York, a state which levies a 16% estate tax for non-spouses once estates exceed $1 million.1

Leaving a trust unfunded (or underfunded). Through a simple, one-sentence title change, a married couple can fund a revocable trust with their primary residence. As an example, if a couple retitles their home from “Heather and Michael Smith, Joint Tenants with Rights of Survivorship” to “Heather and Michael Smith, Trustees of the Smith Revocable Trust dated (month)(day), (year)”. They are free to retitle myriad other assets in the trust’s name.1

Ignoring a caregiver with ulterior motives. Very few people consider this possibility when creating a will or trust, but it does happen. A caregiver harboring a hidden agenda may exploit a loved one to the point where he or she revises estate planning documents for the caregiver’s financial benefit.

The best estate plans are clear in their language, clear in their intentions, and updated as life events demand. They are overseen through the years with care and scrutiny, reflecting the magnitude of the transfer of significant wealth.

Warmest Regards,

 april-signature

   Citations.

1 – raymondjames.com/pointofview/seven_estate_planning_mistakes_to_avoid [10/16/15]

2 – fool.com/retirement/general/2015/12/11/estate-planning-in-2016-heres-what-you-need-to-kno.aspx [12/11/15]

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Your Annual Financial To-Do List

Things you can do before & for 2016.

What financial, business or life priorities do you need to address for 2016? Now is a good time to think about the investing, saving or budgeting methods you could employ toward specific objectives. Some year-end financial moves may help you pursue those goals as well.

What can you do to lower your 2016 taxes? Before the year fades away, you have plenty of options. Here are a few that may prove convenient:

*Make a charitable gift before New Year’s Day. You can claim the deduction on your tax return, provided you itemize your 2015 tax year deductions with Schedule A. The paper trail is important here.1

If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity in December but only end up gifting $500 before 2015 ends, you can only deduct $500.1

Are you gifting appreciated securities? If you have owned them for more than a year, you will be in line to take a deduction for 100% of their fair market value and avoid capital gains tax that would have resulted from simply selling the investment and then donating the proceeds. (Of course, if your investment is a loser, it might be better to sell it and donate the money so you can claim a loss on the sale and deduct a charitable contribution equal to the proceeds.)2

Does the value of your gift exceed $250? It may, and if you gift that amount or larger to a qualified charitable organization, you will need a receipt or a detailed verification form from the charity. You also have to file Form 8283 when your total deduction for non-cash contributions or property in a year exceeds $500.1

If you aren’t sure if an organization is eligible to receive charitable gifts, check it out at irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.

*Contribute more to your retirement plan. If you haven’t turned 70½ this year and you participate in a traditional (i.e., non-Roth) qualified retirement plan or have a traditional IRA, you can cut your 2015 taxable income through a contribution. Should you be in the 35% federal tax bracket, you can save $1,925 in taxes as a byproduct of a $5,500 regular IRA contribution.3,4

If you are self-employed and don’t have a solo 401(k) or something similar, look into whether you can still establish and fund such a plan before the end of the year. For TY 2015, you can contribute up to $18,000 to any kind of 401(k), 403(b), or 457 plan, with a $6,000 catch-up contribution allowed if you are age 50 or older. Your TY 2015 contribution to a Roth or traditional IRA may be made as late as April 15, 2016. There is no merit in waiting, however, since delaying your contribution only delays tax-advantaged compounding of those dollars.4,5

*See if you can take a home office deduction. If your income is high and you find yourself in one of the upper tax brackets, look into this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. (The percentage of costs you may deduct depends on the percentage of the square footage of your residence you devote to your business activities.) If you qualify for this tax break, part of your rent, insurance, utilities and repairs may be deductible.6

*Open an HSA. If you are enrolled in a high-deductible health plan, you may set up and fund a Health Savings Account in 2016. You can make fully tax-deductible HSA contributions of up to $3,350 (singles) or $6,750 (families); catch-up contributions of up to $1,000 are permitted for those 55 or older who aren’t yet enrolled in Medicare. Moreover, HSA assets grow untaxed and withdrawals from these accounts are tax-free if used to pay for qualified health care expenses. HSAs are sometimes referred to as “backdoor IRAs,” because once you reach age 65, you may use withdrawals out of them for any purpose, although withdrawals will be taxed if they aren’t used to pay for qualified medical expenses.7

*Practice tax loss harvesting. You could sell underperforming stocks in your portfolio – enough to rack up at least $3,000 in capital losses. In fact, you can use this tactic to offset all of your total capital gains for a given tax year. Losses that exceed the $3,000 yearly limit may be rolled over into 2016 (and future tax years) to offset ordinary income or capital gains again.8

Are there other moves that you should consider? Here are some additional ideas with merit.

*Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pre-tax accounts and your most tax-efficient securities should be held in taxable accounts.

*Can you contribute the maximum to your IRA on January 1, 2016? The rationale behind this is that the sooner you make your contribution, the more interest those assets will earn. In 2016 the contribution limit for a Roth or traditional IRA remains at up to $5,500 ($6,500 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA, though: singles and heads of household with MAGI above $132,000 and joint filers with MAGI above $194,000 cannot make 2016 Roth contributions.5

What are the income limits on deducting traditional IRA contributions? If you participate in a workplace retirement plan, the 2016 MAGI phase-out ranges are $61,000-71,000 for singles and heads of households, $98,000-118,000 for joint filers when the spouse making IRA contributions is covered by a workplace retirement plan, and $184,000-194,000 for an IRA contributor not covered by a workplace retirement plan but married to someone who is.5

*Should you go Roth before 2016 gets here? You might be considering that. If you are a high earner, you should know that MAGI phase-out limits affect Roth IRA contributions. For 2015, phase-outs kick in at $183,000 for joint filers and $116,000 for single filers (those thresholds move north by $1,000 in 2016). Should your MAGI prevent you from contributing to a Roth IRA at all, you still have the chance to contribute to a traditional IRA in 2015 and then go Roth.5

Incidentally, a footnote: distributions from Roth IRAs, traditional IRAs, and qualified retirement plans such as 401(k)s are not subject to the 3.8% Medicare surtax affecting single/joint filers with AGIs over $200,000/$250,000. Dividends, net investment income from taxable interest, passive rental income, annuity income, short-term and long-term capital gains, and royalties are subject to that surtax if your AGI surpasses the aforementioned MAGI thresholds.9

Consult a tax or financial professional before you make any IRA moves to see how they may affect your overall financial picture. If you have a large traditional IRA, the projected tax resulting from a Roth conversion may make you think twice.

What else should you consider as 2016 approaches? There are some other things to note…

*Review your withholding status. Should it be adjusted due to any of the following factors?

>> You tend to pay a great deal of income tax each year.

>> You tend to get a big federal tax refund each year.

>> You recently married or divorced.

>> A family member recently passed away.

>> You have a new job at a much greater salary.

>> You started a business venture or became self-employed.

*If you are retired and older than 70½, remember your RMD. Retirees over age 70½ must begin taking Required Minimum Distributions from traditional IRAs and 401(k), 403(b), and profit-sharing plans by December 31. The IRS penalty for failing to take an RMD equals 50% of the RMD amount.10

If you have turned 70½ in 2015, you can postpone your initial RMD from an account until April 1, 2016. The downside of that is that you will have to take two RMDs next year, both taxable events – you will have to make your 2015 tax year withdrawal by April 1, 2016 and your 2016 tax year withdrawal by December 31, 2016.10

Plan your RMDs wisely. If you do so, you may end up limiting or avoiding possible taxes on your Social Security income. Some Social Security recipients don’t know about the “provisional income” rule – if your MAGI plus 50% of your Social Security benefits surpasses a certain level, then some Social Security benefits become taxable. Social Security benefits start to be taxed at provisional income levels of $32,000 for joint filers and $25,000 for single filers.11

*Consider the tax impact of 2015 transactions. Did you sell real property this year? Did you start a business? Have you exercised a stock option? Could any large commissions or bonuses come your way before January? Did you sell an investment held outside of a tax-deferred account? Any of this might significantly affect your 2015 taxes.

*Would it be worth making a 13th mortgage payment this year? If your house is underwater, it makes no sense – and you could argue that those dollars might be better off invested or put in your emergency fund. Those factors aside, however, there may be some merit to making a January mortgage payment in December. If you have a fixed-rate loan, a lump sum payment can reduce the principal and the total interest paid on it by that much more.

*Are you marrying in 2016? If so, why not review the beneficiaries of your workplace retirement plan account, your IRA, and other assets? In light of your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2016, you will need a new Social Security card. Additionally, you and your spouse no doubt have individually particular retirement saving and investment strategies. Will they need to be revised or adjusted with marriage?

*Are you coming home from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Make sure your employee health insurance is still there, and revoke any power of attorney you may have granted to another person.

Talk with a qualified financial or tax professional today. Vow to focus on being healthy and wealthy in the New Year.

Warmest Regards,

 april-signature

Citations.

1 – irs.gov/uac/Newsroom/Six-Tips-for-Charitable-Taxpayers [5/19/15]

2 – philanthropy.com/article/Donors-Often-Overlook-Benefits/148561/ [8/29/14]

3 – irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [3/18/15]

4 – turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/4-Last-Minute-Ways-to-Reduce-Your-Taxes/INF22115.html [10/20/15]

5 – forbes.com/sites/ashleaebeling/2015/10/21/irs-announces-2016-retirement-plans-contribution-limits-for-401ks-and-more/ [10/21/15]

6 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction [10/16/15]

7 – bankrate.com/finance/insurance/health-savings-account-rules-and-regulations.aspx [10/7/15]

8 – fidelity.com/viewpoints/personal-finance/tax-loss-harvesting [9/9/15]

9 – kitces.com/blog/how-ira-withdrawals-in-the-crossover-zone-can-trigger-the-3-8-medicare-surtax-on-net-investment-income/ [12/2/14]

10 – fool.com/investing/general/2015/09/29/mrd-requirements-for-your-retirement-accounts.aspx [9/29/15]

11 – ssa.gov/planners/taxes.html [10/20/15]

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Keeping All This Volatility in Perspective

These recent ups & downs are reminiscent of past Wall Street swings.

Fall might be anything but calm on Wall Street. Volatility is back, in a big way: the CBOE VIX has risen more than 105% since the end of July. Additionally, 11 of the 15 trading days ending September 9 were “all or nothing” days in which more than 80% of the S&P 500 moved either higher or lower. In the last 25 years, the index has not had a 15-day period like this.1,2

Contrast that with the first 159 trading days of 2015, in which just 13 such days occurred according to Bespoke Investment Group research. In fact, during the first half of 2015 the Dow Jones Industrial Average was never more than 3.5% up or down YTD, on pace for the most placid year in its history.2

Writing in the Financial Times, the noted economist and portfolio manager Mohamed El-Erian recently identified a few factors driving these market swings – factors that may not subside anytime soon. Fundamentally, he cited the “spreading economic slowdown” in China and other emerging markets “eroding a fundamental underpinning of high and stable asset prices” – and bursting some asset bubbles in the process. Markets can be roiled with the emergence of “major global challenges away from the direct reach of the U.S. Federal Reserve and the ECB,” he adds, as too many (institutional) investors look to central bank activity for either direction or reassurance. Lastly, investors worldwide are wondering if the Fed will raise short-term interest rates next week.3

So, this turbulence may persist for several more weeks or months. How does an investor cope with it? It helps to put all of this recent volatility into perspective.

Remember that historically, the ups of the market have outweighed the downs. If your time horizon is relatively long, this particular fact may provide encouragement: as Ibbotson notes, since 1926 there has never been a 20-year stretch in which a diversified portfolio invested in large U.S. firms has had a negative inflation-adjusted total return. From 1926-2014, such a model portfolio (with dividends encompassing roughly 40% of the total return) yielded approximately 10% a year on average.4

These recent ups & downs compare to others. On August 24, the S&P 500 lost 3.2% and was down more than 4% during the course of the day. That was quite troubling, but not quite extraordinary: it was the fifty-fifth day since 1983 in which the broad benchmark had dropped 3.5% or more in a trading session.4,5

How has the S&P recovered from days like these? Historically speaking, it has recovered more often than not. Looking at the 12-month periods after the preceding 54 such trading days, there were 45 year-over-year advances and 9 year-over-year retreats.  How far did the S&P fall, on average, during those 12-month retreats? The answer is 7.7%. How high did it rise, on average, during those 45 annualized ascents? A remarkable 27.6%. So while history tells us nothing of tomorrow, it does seem that the S&P has recovered amazingly well from the bulk of its major one-day drops in the last 32 years.4

After a long, steady ascent, it is easy to become lulled into thinking that the market only goes up. We all know differently, but even so it can be a rude awakening when the major indices rollercoaster or plunge. Even so, we should be patient rather than let emotion take over. As the late Paul Harvey said, “In times like these, it helps to recall that there have always been times like these.”6

Warmest regards,

april-signature

Citations.

1 – investing.com/indices/volatility-s-p-500-historical-data [9/10/15]

2 – cnbc.com/2015/09/10/this-market-is-setting-a-wild-volatility-record.html [9/10/15]

3 – cnbc.com/2015/09/08/why-higher-market-volatility-is-the-new-norm.html [9/8/15]

4 – tinyurl.com/oksgh26 [8/25/15]

5 – thestreet.com/story/13263507/1/stocks-end-brutal-week-as-market-nears-correction.html [8/21/15]

6 – content.time.com/time/arts/article/0,8599,1882444,00.html [3/1/09]

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Mid-Life Money Errors

If you are between 40 & 60, beware of these financial blunders & assumptions.

Between the ages of 40 and 60, many people increase their commitment to investing and retirement saving. At the same time, many fall prey to some common money blunders and harbor financial assumptions that may be inaccurate.

These errors and suppositions are worth examining, as you do not want to succumb to them. See if you notice any of these behaviors or assumptions creeping into your financial life.

Do you think you need to invest with more risk? If you are behind on retirement saving, you may find yourself wishing for a “silver bullet” investment or wishing you could allocate more of your portfolio to today’s hottest sectors or asset classes so you can catch up. This impulse could backfire. The closer you get to retirement age, the fewer years you have to recoup investment losses. As you age, the argument for diversification and dialing down risk in your portfolio gets stronger and stronger. In the long run, the consistency of your retirement saving effort should help your nest egg grow more than any other factor.

Are you only focusing on building wealth rather than protecting it? Many people begin investing in their twenties or thirties with the idea of making money and a tendency to play the market in one direction – up. As taxes lurk and markets suffer occasional downturns, moving from mere investing to an actual strategy is crucial. At this point, you need to play defense as well as offense.

Have you made saving for retirement a secondary priority? It should be a top priority, even if it becomes secondary for a while due to fate or bad luck. Some families put saving for college first, saving for mom and dad’s retirement second. Remember that college students can apply for financial aid, but retirees cannot. Building college savings ahead of your own retirement savings may leave your young adult children well-funded for the near future, but they may end up taking you in later in life if you outlive your money.

Has paying off your home loan taken precedence over paying off other debts? Owning your home free and clear is a great goal, but if that is what being debt-free means to you, you may end up saddled with crippling consumer debt on the way toward that long-term objective. In June 2015, the average American household carried more than $15,000 in credit card debt alone. It is usually better to attack credit card debt first, thereby freeing up money you can use to invest, save for retirement, build a rainy day fund – and yes, pay the mortgage.1

Have you taken a loan from your workplace retirement plan? Hopefully not, for this is a bad idea for several reasons. One, you are drawing down your retirement savings – invested assets that would otherwise have the capability to grow and compound. Two, you will probably repay the loan via deductions from your paycheck, cutting into your take-home pay. Three, you will probably have to repay the full amount within five years – a term that may not be long as you would like. Four, if you are fired or quit the entire loan amount will likely have to be paid back within 90 days. Five, if you cannot pay the entire amount back and you are younger than 59½, the IRS will characterize the unsettled portion of the loan as a premature distribution from a qualified retirement plan – fully taxable income subject to early withdrawal penalties.2

Do you assume that your peak earning years are straight ahead? Conventional wisdom says that your yearly earnings reach a peak sometime in your mid-fifties or late fifties, but this is not always the case. Those who work in physically rigorous occupations may see their earnings plateau after age 50 – or even age 40. In addition, some industries are shrinking and offer middle-aged workers much less job security than other career fields.

Is your emergency fund now too small? It should be growing gradually to suit your household, and your household may need much greater cash reserves today in a crisis than it once did. If you have no real emergency fund, do what you can now to build one so you don’t have to turn to some predatory lender for expensive money.

Insurance could also give your household some financial stability in an emergency. Disability insurance can help you out if you find yourself unable to work. Life insurance – all the way from a simple final expense policy to a permanent policy that builds cash value – offers another form of financial support in trying times.

Watch out for these mid-life money errors & assumptions. Some are all too casually made. A review of your investment and retirement savings effort may help you recognize or steer clear of them.

Warmest Regards,

april-signature

  

Citations.

1 – nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/ [6/25/15]

2 – tinyurl.com/oalk4fx [9/14/14]

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Reasons Not To Write Your Own Will

Do-it-yourself is cheaper, but you could do some things wrong.

Maybe you have seen those will-in-a-box kits. Maybe you have even considered picking one up. Think twice about that. While you can draft a will on your own, there are plenty of reasons why you may not want to go that route. Most people do it to save money, but they may overlook or forget to take care of some important details – details that may eventually cost them much more than the amount they could save. Some of the big mistakes include…

Ignoring state law differences. Many will kits and online wills and trusts do not take state laws regarding the administration of probate or trusts into account. An estate planning attorney will inform you of these state laws; a will kit or website may not.

Blind faith in software. While software or an online form can help you draft a will, there is no guarantee that the technology will ask you the specific, unique questions an attorney might pose in regard to the fine points of your estate. It may not even make you aware of them.

Not revoking an earlier will. Most wills contain boilerplate language that automatically revokes any preceding will. If you are writing your will totally on your own (some people still do), you may not realize the necessity of such a clause.

Assumptions. If you will property to an heir, what happens if you outlive that heir? What if you will an asset to a friend or relative today, and that asset is gone when your will is executed someday? These are things to think about that most people writing a will have not considered.

Vagueness. Sometimes executors are not given sufficient power by the language of a will. Sometimes a home will be left to a spouse in trust, but with no one assigned to pay for upkeep of the home during the rest of that widow’s lifetime. Alternate executors are sometimes omitted from wills, and names of non-profit groups can easily be misstated or misspelled, inviting complication and possible dispute of charitable intent.

Not getting it notarized. Regardless of how “official” your homemade will looks, it still requires witnessing and signing to be legally valid. There are many stories of people finding out that the will or living trust they paid money for is not actually binding as it has never been notarized.

Wills, trusts, and estate plans should be crafted with the help of attorneys. Fortunately, many financial professionals have relationships with attorneys. Instead of searching the Internet or the Yellow Pages for a stranger, ask the financial advisor you consult for a referral.

Warmest Regards,

april-signature

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Retirement Planning Can Start with an IRA

These accounts make a good “first step” in retirement saving.

Sooner or later, people decide to start saving and investing for retirement. When that starting point arrives, taking that “first step” can seem like a big deal. Opening an Individual Retirement Account (IRA) amounts to an easy “first step” in retirement saving for many.

When you invest through a traditional or Roth IRA, you give those invested assets the potential to grow with compounding and you also position yourself for present or future tax savings.

How does an IRA work? An IRA is not an investment in itself, but an account into which various investments can be placed. It is yours; you control it. In that way, it differs from an employer-sponsored retirement account that you lose immediate control over when you leave a job.1

IRAs are tax-advantaged. In both Roth and traditional IRAs, account earnings compound with tax deferral until withdrawn – that is, they grow without being taxed.

With a traditional IRA, contributions are usually tax-deductible, based on your income, but withdrawals are taxed as ordinary income after age 59½ (a 10% penalty often applies to withdrawals made before that). With a Roth IRA, tax-deductible contributions are not permitted, but your earnings can be withdrawn tax-free. (Contributions will not be taxed when you withdraw them either, as long as you are the original IRA owner and have had the Roth IRA for more than five years.)1

So there you have the main difference between a traditional IRA and Roth IRA: while both give you a chance to build retirement savings with tax advantages, the traditional IRA offers you a sizable tax break today while the Roth IRA offers you a big tax break tomorrow. Or to put it another way (as some have), a traditional IRA lets you amass tax-deferred savings while a Roth IRA lets you amass tax-exempt savings.1,2

Should you open a traditional IRA or Roth IRA? Several variables should be considered as you make your choice, and a chat with a financial professional can help you weigh them. One key question to consider: do you think you will be in a lower tax bracket when you retire? If you do, a traditional IRA might be the better choice. If you have decades to go until retirement and think you will retire to a higher tax bracket than you are in today, the Roth IRA may be the better choice. Some savers “hedge their bets” and open Roth and traditional IRAs.3

Given compounding, the future tax break offered by a Roth IRA may be profound indeed. Roth IRAs also have two other compelling features. One, you never have to make mandatory withdrawals from them starting in your seventies (as with traditional IRAs). Two, you can keep contributing to them all your life, whereas contributions to a traditional IRA are prohibited after the year in which you turn 70½. Certain couples and individuals cannot have Roth IRAs, however, as they have incomes well over $100,000 (the precise thresholds are periodically adjusted upward for inflation).1

Some traditional IRA owners convert their accounts to Roth IRAs. That is a taxable event, and if the traditional IRA is large, a Roth conversion may not be worth the effort: the resulting income tax bill may be too large to handle and even offset the potential long-range benefits.3

How do you open an IRA? Just about any financial professional can help you do that; you can even do it online and at many bank and credit union branches. You should try to open one with low annual fees, as even a 1% annual account fee subtly eats into your IRA balance. Quite often, opening an IRA is just a matter of filling out an application (and a beneficiary form) and writing a check. Alternately, you may be able to transfer money from a bank account to start an IRA.4

What are the drawbacks of IRAs? First, their annual contribution limits. Right now, you can only contribute a maximum of $5,500 a year to a traditional or Roth IRA ($6,500 if you are 50 or older). If you have multiple IRAs, your total yearly contributions to all of them must not exceed that limit or you will incur an IRS penalty. This annual contribution ceiling is low compared to common workplace retirement plans such as 401(k)s and 403(b)s.5

Many Americans would like a retirement account that never loses money. A Roth or traditional IRA is not that account. IRA assets are not usually allocated to riskless investments, and when you have investment risk, you have potential for investment losses. IRAs are not insured by the FDIC or any other federal agency.1

In response to the desire for riskless retirement saving, the federal government recently created the myRA, a Roth IRA whose value is guaranteed to increase. Its return is pegged to the return of the government securities fund for federal employees, which averaged 3.39% a year from 2003-2013. The myRA yearly contribution limits are exactly the same as yearly Roth IRA contribution limits. After 30 years or when its balance hits $15,000, a myRA converts to a private-sector Roth IRA. A myRA is basically a vehicle to help Americans who have few or no avenues to save for retirement due to their line of work or income levels.6,7

Warmest Regards,

april-signature   

 

Citations.

1 – us.hsbc.com/1/2/home/invest-retire/retirement/ira [2/16/15]

2 – fool.com/money/allaboutiras/allaboutiras03.htm [2/16/15]

3 – schwab.com/public/schwab/nn/articles/Roth-IRA-Conversion-Look-Before-You-Leap [5/1/14]

4 – fool.com/money/allaboutiras/allaboutiras14.htm [2/16/15]

5 – fool.com/retirement/iras/2015/01/11/ira-contribution-limits-in-2014-and-2015-and-how-t.aspx [1/11/15]

6 – money.usnews.com/money/retirement/articles/2014/11/24/how-retirement-benefits-will-change-in-2015 [11/24/14]

7 – myra.treasury.gov/about/ [11/24/14]

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Long-Term Investment Truths

Key lessons for retirement savers.

You learn lessons as you invest in pursuit of long-run goals. Some of these lessons are conveyed and reinforced when you begin saving for retirement, and others you glean along the way.

First & foremost, you learn to shut out much of the “noise.” News outlets take the temperature of global markets five days a week (and even on the weekends), and fundamental indicators serve as barometers of the economy each month. The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. While the day trader sells or buys in reaction to immediate economic or market news, the buy-and-hold investor waits for selloffs, corrections and bear markets to pass.

You learn how much volatility you can stomach. Volatility (also known as market risk) is measured in shorthand as the standard deviation for the S&P 500. Across 1926-2014, the yearly total return for the S&P averaged 10.2%. If you want to be very casual about it, you could simply say that stocks go up about 10% a year – but that discounts some pronounced volatility. The S&P had a standard deviation of 20.2 from its mean total return in this time frame, which means that if you add or subtract 20.2 from 10.2, you get the range of the index’s yearly total return that could be expected 67% of the time. So in any given year from 1926-2014, there was a 67% chance that the yearly total return of the S&P might vary from +30.4% to -10.0%. Some investors dislike putting up with that kind of volatility, others more or less embrace it.1

You learn why liquidity matters. The older you get, the more you appreciate being able to quickly access your money. A family emergency might require you to tap into your investment accounts. An early retirement might prompt you to withdraw from retirement funds sooner than you anticipate. If you have a fair amount of your savings in illiquid investments, you have a problem – those dollars are “locked up” and you cannot access those assets without paying penalties. In a similar vein, there are some investments that are harder to sell than others.

Should you misgauge your need for liquidity, you can end up selling at the wrong time as a consequence. It hurts to let go of an investment when the expected gain is high and the P/E ratio is low.

You learn the merits of rebalancing your portfolio. To the neophyte investor, rebalancing when the market is hot may seem illogical. If your portfolio is disproportionately weighted in equities, is that a problem? It could be.

Across a sustained bull market, it is common to see your level of risk rise parallel to your return. When equities return more than other asset classes, they end up representing an increasingly large percentage of your portfolio’s total assets. Correspondingly, your cash allocation shrinks as well.

The closer you get to retirement, the less risk you will likely want to assume. Even if you are strongly committed to growth investing, approaching retirement while taking on more risk than you feel comfortable with is problematic, as is approaching retirement with an inadequate cash position. Rebalancing a portfolio restores the original asset allocation, realigning it with your long-term risk tolerance and investment strategy. It may seem counterproductive to sell “winners” and buy “losers” as an effect of rebalancing, but as you do so, remember that you are also saying goodbye to some assets that may have peaked while saying hello to others that you may be buying at the right time.

You learn not to get too attached to certain types of investments. Sometimes an investor will succumb to familiarity bias, which is the rejection of diversification for familiar investments. Why does he or she have 13% of the portfolio invested in just two Dow components? The investor just likes what those firms stand for, or has worked for them. The inherent problem is that the performance of those companies exerts a measurable influence on the overall portfolio performance.

Sometimes you see people invest heavily in sectors that include their own industry or career field. An investor works for an oil company, so he or she gets heavily into the energy sector. When energy companies go through a rough patch, that investor’s portfolio may be in for a rough ride. Correspondingly, that investor has less capacity to tolerate stock market risk than a faculty surgeon at a university hospital, a federal prosecutor, or someone else whose career field or industry will be less buffeted by the winds of economic change.

You learn to be patient. Even if you prefer a tactical asset allocation strategy over the standard buy-and-hold approach, time teaches you how quickly the markets rebound from downturns and why you should stay invested even through systemic shocks. The pursuit of your long-term financial objectives should not falter – your future and your quality of life may depend on realizing them.

Warmest Regards,

 april-signature

Citations.

1 – fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088 [6/4/15]

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Investing in Agreement With Your Beliefs

The case for aligning your portfolio with your outlook & worldview.

Do your investment choices reflect your outlook? Are they in agreement with your values? These questions may seem rather deep when it comes to deciding what to buy or sell, but some great investors have built fortunes by investing according to the ethical, moral and spiritual tenets that guide their lives.

Sir John Templeton stands out as an example. Born and raised in a small Tennessee town, he became one of the world’s richest men and most respected philanthropists. Templeton maintained a lifelong curiosity about science, religion, economics and world cultures – and it led him to notice opportunities in emerging industries and emerging markets (like Japan) that other investors missed. Believing that “every successful entrepreneur is a servant,” he invested in companies that did no harm and which reflected his conviction that “success is a process of continually seeking answers to new questions.”1

Among Templeton’s more famous maxims was the comment, “Invest, don’t trade or speculate.” Having endured the Great Depression as a youth, he had a knack for spotting irrational exuberance.2,4

As the 1990s drew to a close, he correctly forecast that 90% of Internet companies would go belly-up within five years. In 2003, he warned investors of a housing bubble that would soon burst; in 2005, he predicted “financial chaos” and a huge stock market downturn. To Templeton, a rally or an investment opportunity had to have sound fundamentals; if it lacked them, it was dangerous.3,4

Warren Buffett leaps to mind as another example. The “Oracle of Omaha” is worth $70 billion, and Berkshire Hathaway’s market value has risen 1,826,163% under his guidance – yet he still lives in the same house he bought for $31,500 in 1958, and prefers cheeseburgers and Cherry Coke to champagne or caviar. He was born to an influential family (his father served in Congress), but he has maintained humility through the decades.5

Money manager Guy Spier dined with Buffett in 2008 at one of the billionaire’s annual charity lunches, and in his book The Education of a Value Investor (co-written with TIME correspondent William Green), he shares a key piece of advice Buffett gave him that day: “It’s very important always to live your life by an inner scorecard, not an outer scorecard.” In other words, act and invest in such a way that you can hold your head high, so that you are staying true to your values and not engaging in behavior that conflicts with your morals and beliefs.5

Buffett has also cited the need to be truthful with yourself about your strengths, weaknesses and capabilities – as you invest, you should not be swayed from your core beliefs to embrace something that you find mysterious. “You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s not terribly important how big the circle is. But it’s terribly important that you know where the perimeter is.”5

Speaking to a college class some years ago in Georgia, he cited the real reward for a life well lived: “When you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”5

Values and beliefs helped guide Templeton and Buffett to success in the markets, in business and in life. For all the opportunities they seized, their legacy will be that of humble and value-centered individuals who knew what mattered most.

Today, socially responsible investing looks better than ever. Investors who want to their portfolios to better reflect their beliefs and values often turn to “socially responsible” investments – or alternately, “impact” investments that respond to environmental issues, women’s rights issues and other pressing societal concerns. When they emerged in the late 1980s, people were skeptical about how well such investments would perform; that skepticism is still around, but it appears to be unwarranted. Since 1990, the average annual total return for the S&P 500 has been 9.93%; the Domini 400, considered the prime index tracking socially responsible companies, has an annual total return of 10.46% by comparison. So aligning your portfolio with your outlook and worldview looks like even more like a win-win these days.6

Warmest regards,

april-signature

Citations.

1 – forbes.com/sites/alejandrochafuen/2013/05/07/how-to-invest-think-and-live-like-sir-john-templeton/ [5/7/13]

2 – record-eagle.com/news/local_news/jason-tank-finding-the-right-mindset-is-good-start/article_42c81b99-c7c9-5fa1-83b3-4fa2f9c1c641.html [5/5/15]

3 – csmonitor.com/Commentary/Opinion/2008/0711/p09s01-coop.html [7/11/08]

4 – crossingwallstreet.com/archives/2014/02/sir-john-templeton-the-last-yankee.html [2/10/14]

5 – observer.com/2015/05/ive-followed-warren-buffett-for-decades-and-keep-coming-back-to-these-10-quotes/ [5/4/15]

6 – marketwatch.com/story/socially-responsible-investing-has-beaten-the-sp-500-for-decades-2015-05-21 [5/21/15]

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Estate Planning for Your Digital Assets

Have you addressed this issue?

Social media and email accounts. Creative works, photos and keepsakes kept on home computers, the cloud or external storage drives. E-commerce accounts. Domain names. Bitcoin. These are all examples of digital assets. You will manage them closely as long as you live – but what will happen to them once you die?

Have you talked about it with those you love? In a recent survey of baby boomers, antivirus software provider AVG Technologies found that only 16% of respondents had thought about what would happen to their digital assets after their deaths. A mere 3% had alerted or prepared their loved ones in regard to this issue.1

If you have a will or a revocable trust, you must plan for the transfer and/or administration of digital assets just as you have for tangible assets. Your digital assets may or may not be of great financial value, but they need protection against exploitation as well as abandonment.

Distributing digital assets is part of fiduciary duty. That is what makes articulating your wishes so important. A financial professional or financial firm acting in a fiduciary role on your behalf has an obligation to distribute your digital assets – but many social media and e-commerce websites will not readily allow this without the permission given by the user or his or her heirs.2

How about social media & email accounts? Facebook has a legacy contact feature for its users. You can appoint a custodian for your page after you are gone: your legacy contact will be able to respond to friend requests, change your cover photo and profile picture, and write a notice of your memorial service or funeral; he or she will not be permitted to log in with your password or username, read messages sent to you or modify your account settings. Alternately, you can simply tell Facebook that you would like to have your account immediately deleted at your death. Google has an Inactive Account Manager option that will let you leave instructions for what should be done with your Google Drive docs or Gmail account once you are deceased.3

As for LinkedIn, a loved one fills out an online form on behalf of the deceased, which is reviewed by LinkedIn pursuant to getting in touch with that person. The notifying party will need to supply your name, profile URL, email address and date of death plus information on the company you last worked for and a link to your obituary. Twitter handles accounts of the deceased in similar fashion, and it can also remove images in a person’s account per request; the Twitter account is frozen at death, with access barred even to immediate family.4,5

Computer files. Your executor or trustee should be provided with the location of your computers, tablets or e-readers after your death and the passwords to them if you have set password protection. Locating backups may also become crucial. Remember that annual fees for antivirus programs and website hosting may no longer need to be paid; the executor or trustee will need to be informed about those user agreements.

E-commerce accounts. Most of us have eBay, iTunes or PayPal accounts, all with monetary value (with a PayPal account, the value may reach into the five-figure range). Moreover, these accounts can serve as pathways toward our banking and credit card information.

What if your idle e-commerce account is hacked after your death? What if the account balance is drained or the cybercriminal uses the account to go on a shopping spree? What if your username and password could be stolen and used at other websites you have accessed? These what-ifs need to be considered – and addressed during your lifetime and in your estate plan.

Domain names. How can you keep a website going after you die? One way is to pay for a decade (or more) of hosting or domain name ownership with such URL longevity in mind, and letting your trustee or executor know just how to renew the agreement. Only that trustee or executor should have access to that knowledge – unless you want business partners or a future owner to know how the arrangements work.

Bitcoin. You can create a copy of your Bitcoin wallet file for a trusted beneficiary, or arrange Bitcoin transfer to your beneficiary dependent on multiple signatures or the signature of an oracle server, or at a specific date. Or, a wallet file may be divided into component pieces for different heirs, with the heirs having to unite the components to form the Bitcoin wallet.6

Does your will or trust need amending? Language regarding your digital assets is essential. At the very least, you want to tell your executor or trustee where digital assets are stored. Even better, the amendment should give your executor or trustee the authority to administer, archive, alter or destroy digital assets in addition to the power to direct them to heirs or other named beneficiaries. That means turning over your online passwords to your executor or trustee at your death, or having them access password management software used to create them.

Warmest Regards,

april-signature

Citations.

1 – globalnews.ca/news/1940177/digital-wills-should-we-start-including-a-digital-legacy-clause-in-our-wills/ [4/15/15]

2 – tinyurl.com/kbno2wu [5/11/15]

3 – cnet.com/news/facebook-to-allow-legacy-contacts-for-when-you-die/ [2/12/15]

4 – help.linkedin.com/app/answers/detail/a_id/2842/~/deceased-linkedin-member—removing-profile [11/3/14]

5 – support.twitter.com/articles/87894-contacting-twitter-about-a-deceased-user-or-media-concerning-a-deceased-family-member [5/18/15]