Dear Clients and Friends,
One aspect of our firm that I am proud of is our client care. Early in my career I worked at a top management consulting firm and had the privilege of seeing how several Fortune 500 companies operated. What I remembered was that many companies focused solely on financial performance measurements. Years later other measurements were added that focused on operations and customer service performance. And finally, human capital was added to provide companies with a balanced measurement of performance. What the best companies found was that human capital was key – if you hired the right people, they worked together to create operational excellence. Then, out of operational excellence, came better customer service, and together everything resulted in improved financial performance. In our firm, we take time to assess, hire, and develop our people. At the heart of our hiring, we look for competence, character, communication, and compassion. As a result, we have a high-performing team where everyone works together, with leadership from the top, to provide quality client care in every aspect of our business – from investment management, retirement, tax, and estate planning to risk management, real estate, business, and charitable planning.
In this month’s issue of The Financierge, we discuss some of the latest topics reflective of the diversity of the planning and thought leadership we provide our clients within our wealth services platform.
Do You Have a Risk Manager?
One of the key areas in our client financial planning is risk management. Not only do we protect clients from the risk of portfolio volatility, but we also look for risks that can take a financial plan of course. Our risk management strategies include people, processes, technology, and insurance that all combine to help reduce risk in property loss, liability, medical costs, disability, death, long-term care, business continuity, and security threat. Our job is to be your risk manager.
Long-term Care Insurance
Longevity and growing healthcare costs can be big risks to financial plans. Many people think that Medicare and Medicaid will pay for long-term care, but that is not true, and the result could leave you without the level of care you need. Here are some of our thoughts on Long-term Care insurance:
- What Do Medicare and Medicaid Cover? Both programs generally help people with improving or correcting specific medical or health problems, but not with day-to-day custodial care, or what are known as Activities of Daily Living (ADLs). Medicare will only cover rehabilitative care following a hospital stay which limits the availability of benefits. On the other hand, Medicaid is a program for individuals with limited resources and income which means most people won’t qualify for these benefits. So, if you eventually need help with ADLs like eating, bathing, getting dressed, getting around or personal hygiene, those services wouldn’t be covered by Medicare or Medicaid. You would need private long-term care insurance to help you pay for that.
- Long-Term Care Insurance Provides Security – Owning a long-term care insurance policy gives policyholders a sense of security by allowing them to have control over where, when, and how they receive care.
- Long-Term Care Insurance Protects a Lifestyle – Owning a long-term care insurance policy protects the lifestyle of spouses and family members by allowing funds earmarked for income to remain untouched.
- Long-Term Care Insurance is Comprehensive – Most policies will pay for all types of long-term care, including adult daycare, assisted living, nursing home, and home health care.
- Long-Term Care Insurance is Flexible – Benefits like built-in cash options and care coordination help balance the care provided by family with professional services. These options also offer flexibility throughout the progression of care.
- Long-Term Care Insurance has tax advantages– Individuals and business owners may be able to take advantage of tax savings by deducting their eligible premium annually.
Is Life Settlement Right for You?
Life Settlement is a process where you sell your unwanted life insurance to an investment company at a discount, and they take over to premiums. The good and bad news is that the closer you are at going to Heaven, the more valuable the policy is. There is no cost to review and remember it isn’t just for permanent, whole life policies, but it could also be for term or group life policies that can be converted to permanent policies.
Wealth Transfer Strategies to Consider Before December 31st
This is another reminder to consider the following wealth transfer strategies before year-end:
- Annual and Lifetime Exclusion Gifts – In 2021, the annual gift tax exclusion is $15,000 per beneficiary ($30,000 for married couples). This reduces your estate and any gifts you make under the current $11.7 million per person exclusion won’t be subject to future estate taxes.
- Trusts – If you don’t want to gift assets outright to your beneficiaries, you may want to consider gifting to a trust account. These accounts allow you to retain a level of control over the gifted assets and protect assets over a beneficiary’s lifetime, or when they reach a certain age.
- Education Funds – You can pay anyone’s educational expenses tax-free if you pay the institution directly. This applies to any level of education and you can also prepay multiple years if allowed by the institution. You can also contribute to a Section 529 Education Savings Plan (529 plan) up to the annual gift tax exclusion tax-free. You can also “superfund” a 529 plan and make a lump sum gift up to five years of contributions or $75,000 (5 x $15,000) without incurring federal taxes.
- Medical Expenses – Similar to funding educational expenses, you can pay for anyone’s medical expenses tax-free if you pay the provider directly. You can also pay for any legal medical and dental expenses incurred during a given tax year not reimbursed by insurance.
- Charitable Donations – See Charitable Planning below.
Southern California Residential
According to several realtors, Orange County (and perhaps similar U.S. markets) residential housing sales continue to be fueled by low interest rates, high demand, and low supply. Since 2012, the housing market has favored most sellers. Many thought the pandemic would slow residential sales, but low interest rates, inventory, and demand caused home values to increase 20% year-over-year. Currently, homes are on the market an average of 23 days with many homes receiving multiple offers usually above list price. If interest rates, demand, and supply stay the same we should see more of the same until eventually mortgage rates or home values increase to slow demand.
Zillow Residential Opportunities?
Zillow is exiting their iBuyer home buying program. As a result, there may be some bargains as Zillow unloads some 7,000 homes across the country.
Commercial Property Is Up 10% from Pre-pandemic Levels
The Green Street Commercial Property Price Index® increased 6.3% in August. The all-property index has increased 17% this year and is now 8% higher than it was before the coronavirus pandemic began. According to Peter Rothemund, Co-Head of Strategy research at Green Street, “Rent growth is better than expected, interest rates are still extraordinarily low, and as a result, property prices keep setting new highs. That’s not true for mall, office, or lodging, all of which remain short of pre-Covid marks, but those sectors are the exceptions. Even with the laggards, commercial property in aggregate is up nearly 10% from pre-pandemic levels, and prices of the best performers—industrial and self-storage—are up four times that amount.”
Medicare Open Enrollment Period Ends December 7, 2021!
For those of you with Medicare, your Open Enrollment Period started October 1, 2021, and ends December 7, 2021. This is a time to make Medicare coverage changes by enrolling in a stand-alone Medicare prescription drug plan for the first time, switching Medicare prescription drug plans, enrolling in a Medicare Advantage plan, or switching plans, disenrolling from your Medicare Advantage plan and returning to Original Medicare, or dropping your Medicare prescription drug plan. To compare plans, visit https://www.medicare.gov/plan-compare/.
Medicare Covers the Cost of COVID-19 Vaccine Booster Shots
For those of you with Medicare, 65 or older, and fully vaccinated, you can get a free COVID-19 vaccine booster shot. You can also get a booster shot if you’re over 18 and have underlying medical conditions, live in a long-term care facility, or work or live in a high-risk setting. Booster shots are now available for the Pfizer, Moderna, and Johnson & Johnson COVID-19 vaccines. You can get a booster shot at least 6 months after you complete your second dose of the Pfizer or Moderna vaccine. You can get a booster shot at least 2 months after your first dose of the Johnson & Johnson vaccine.
We’re Keeping a Pulse on Tax Changes
As of November 5, 2021, here are some of the tax changes we are tracking:
- Individual Income Tax Rates – The top tax rate is proposed to be 39.6% compared to the current 37%. The bracket would apply to individuals earning more than $400,000, or $450,000 for married couples filing jointly.
- Capital Gains and Dividends – The House bill set the target for the highest capital gains rate to be 25% compared to the current 20%. It applies to those in the top tax bracket for long-term capital gains, which in 2021 covers individuals earning more than $445,850, and married joint filers earning more than $501,600 (exclusive of the 3.8% Medicare surtax on net investment income for individual taxpayers with more than $200,000 in modified adjusted gross income (MAGI) or couples with more than $250,000 in MAGI). The draft bill also contains a transition provision that applies the new 25% rate to gains realized after September 13, 2021, unless the seller had a binding contract before that date.
- Estate and Gift Tax Exemption – The current $11.7M estate and gift tax exemption is set to expire at the end of 2025, but the latest version of the House bill would revert the thresholds back to 2010 levels, indexed for inflation, and that would be effective as of the end of 2021. That would basically cut the current per-person exemption in half.
- Surtaxes and Limitations – The proposed legislation includes a 3% surtax applicable to married taxpayers with a modified adjusted gross income of more than $5 million.
- Contribution Limits on Large Retirement Plans – The bill adds several provisions for large balances in tax-deferred retirement plans. One restriction prohibits high earners in the new 39.6% bracket from making new contributions to a traditional IRA or Roth if the total value of an individual’s IRA and defined contribution retirement accounts generally exceeds $10 million as of the end of the prior taxable year. The proposal also increases the required minimum distributions for individuals in the 39.6% tax bracket whose combined qualified accounts that exceed $10 million. In addition, the bill proposes to eliminate a strategy called “backdoor” Roth conversions for individuals in the 39.6% tax bracket.
- Corporate Tax – The bill moves the top corporate tax rate from 21% to 26.5%.
- Expanded Wash Sale Rules – The bill proposes a change to the tax treatment of an IRS provision known as the wash sale rule, where you can’t take a deduction for a loss on the sale of an investment if you replaced it with the same or a “substantially identical” investment 30 days before or after the sale. This would also apply to currencies, commodities, and digital assets after December 31, 2021.
- State and Local Tax (SALT) Deduction – The SALT deduction lets taxpayers who itemize to deduct their aggregated state and local taxes on their annual tax return. Currently, there appears to be a $80,000 deduction for state and local taxes from 2021 to 2031. What is unknown still is if there will be income limits for the deduction.
- Grantor trusts – Assets in grantor trusts would be included in the taxable estate if the deceased is deemed the owner of the trust, sales between individuals and their grantor trusts would be taxed, and distributions from a grantor trust to an individual other than the grantor or the grantor’s spouse would be treated as a taxable gift from the grantor.
- Valuation Discounts – Taxpayers would not be able to claim discounts for gift and estate tax purposes on transfers of interests in entities that hold non-business assets.
2021 Charitable Impact Strategies
We are again highlighting several ways to maximize charitable planning before year-end:
- Give Appreciated Non-Cash Assets Instead of Cash – You can donate appreciated non-cash assets (including publicly traded securities, restricted stock, and private business interests) held for more than one year and generally eliminate the capital gains tax you would otherwise incur if you sold the assets first and then donated the proceeds. This could potentially increase the amount available for charity by up to 20% while increasing your tax savings. Annual income tax deduction limits for gifts to public charities, including donor-advised funds, are 30% of adjusted gross income (AGI) for contributions of non-cash assets held more than one year and 60% of AGI for contributions of cash.
- Leverage a Charitable Deduction – If your itemized deductions for 2021 are below the level of the standard deduction, it might make sense to combine 2021 and 2022 charitable contributions into 2021, itemize deductions on your 2021 tax returns, and take the standard deduction on your 2022 return.
- Use a Qualified Charitable Distribution – If you are near retirement or reviewing estate plans, you might consider making a qualified charitable distribution (QCD) of individual retirement account (IRA) assets. Whether itemizing deductions or claiming the standard deduction, individuals age 70½ and older can direct up to $100,000 per year tax-free from their IRAs to charities through QCDs. The QCD also reduces the donor’s taxable income in future years, the donor’s taxable estate, and IRA beneficiaries’ tax liability.
- Take an Additional Charitable Deduction – If you are taking the standard deduction, you can take an additional deduction of up to $300 for cash contributions for individual filers and $600 for married couples filing jointly can claim up to $600.
Donor-Advised Fund (DAF) Benefits
A Donor Advised Fund (DAF) allows you to make an irrevocable contribution and get an immediate tax deduction within the constraints of your Adjusted Gross Income (AGI), it supports qualified charities now or over time, contributions grow tax-free, and donations can be anonymous. While there are tax advantages of contributing to a DAF, there are other valuable benefits such as enabling allowing you to better organize your giving, develop a charitable mission statement, engage family members, and provide greater support to causes you’re passionate about.
Strategies to Help Preserve Your Business
Without the right strategic planning, funding, and execution, your business may fail to survive or transition to the next generation. Here are four strategies to preserve your business’ future:
- Key-Employee Insurance – It is important to protect your business from the death of a key employee whose knowledge and contributions are invaluable, and their loss would impact sales, brand value, key relationships, credit, or goodwill. One strategy is to implement a key-employee insurance plan. In this strategy the company purchases and owns a life insurance policy on the life of a key employee. In the event of a key employee’s premature death or disability, the insurance offers liquidity to keep the business running by hiring additional human capital and/or replacing lost profits.
- Business Succession Planning – When you have a successful business, it is important to plan for the transfer to the next generation through a buy-sell agreement. The benefit of a buy-sell agreement is that it guarantees a market for the business interest, creates an estate tax value of the decedent’s business interest, provides liquidity for the payment of death estate taxes, ensures the will remain with surviving owners, and makes the business a better credit risk. The first step in creating a buy-sell agreement is to determine how the business will be valued (optimally done by an outside valuation company) and how business interests will be transferred to surviving owners in the event of an owner death, disability, retirement, or deadlock (disagreement on a critical business decision). The second step is to make sure the buy-sell agreement is funded. Generally, there are two types of buy-sell agreements, a Cross-Purchase (Shareholder) Buy-Sell Agreement and a Stock Redemption (Entity) Buy-Sell Agreement. With a Cross-Purchase agreement, each business owner has a life and/or disability insurance policy on each of the other business owners based on each business owner’s share of the business. In this way, there is a buy-out of the deceased owner. This option can be cumbersome with multiple owners. A more practical solution is the Stock Redemption Agreement. With a Stock Redemption agreement, the business owns a disability and/or life insurance policy on each business owner. Upon death or disability, insurance proceeds are paid to the business and the business buys-out the deceased owner. Business succession for families can be a bit more complex and may require consideration of how to equalize inheritance among heirs not involved in the business using succession trusts.
- Executive Benefit Plans – Another strategy you can use to preserve your business’ future is an Executive Benefit plan. This strategy is used to attract, retain, and reward key employees of the business. There are generally two main types of plans, an Executive Bonus Plan (EBP) and a Restricted Bonus Plan (RBP). In an EBP, the company pays a bonus to the key employee in an amount equal to the annual premium on a life insurance policy owned and insured by the employee. The employee, as the owner of the policy, has the right to name beneficiaries of the policy, access tax-free cash values, and the policy can even include a long-term care rider. When the EBP has a vesting schedule to retain the employee, it becomes restricted or an RBP.
- Deferred Compensation and Supplemental Executive Retirement Plans (SERP) – Employees are limited to the amount they can contribute to a qualified plan, like a 401(k). In a non-qualified plan, like a deferred compensation plan, employees can save more for retirement. Contributions to the plan cannot be made on a pre-tax basis like a 401(k), but contributions can grow on a tax-deferred basis like a 401(k). The amount that can be contributed to a salary deferral plan is unlimited and sometimes the company may match the contribution. A SERP is another type of non-qualified plan whereby the company makes all the contributions on behalf of the executive. When the employer makes the contributions to the plan, they are non-deductible. However, when the benefits are paid out, the employer gets the tax deduction and the employee pays taxes as the benefit is received. These types of plans generally have vesting schedules when the company matches contributions and are used as an incentive to retain employees.
Family & Lifestyle
Why We Love Health Savings Accounts
A Health Savings Account (HSA) is a medical savings account used for the payment of qualified medical expenses not covered by insurance or other benefit plans. HSAs are only available to individuals covered by high deductible health plans (HDHP), but here are several benefits they offer:
- Triple Tax Advantage– Contributions are tax-deductible, contributions grow tax-free, and withdrawals for qualified medical expenses are tax-free. For 2021, the maximum HSA contribution for individual coverage is $3,600, and $7,200 for family coverage. (Note: For 2021, your high deductible health plan (HDHP) plan must have a deductible of at least $1,400 for individual and $2,800 for family coverage, and the HDHP’s maximum out-of-pocket amounts cannot exceed $7,000 and $14,000, respectively.) There is also a catch-up limit of $1,000 for participants who are 55 or older on December 31. Furthermore, there is no income phase-out, so HSAs are available to everyone and you don’t have to itemize to deduct it. For 2022, the maximum HSA contribution for individual coverage is $3,650, and $7,300 for family coverage with the $1,000 catch-up for participants over 55.
- Multiple Contribution Sources– You, your employer, or anyone can contribute to your HSA.
- Age 65 Withdrawal Benefit– At age 65 and over, non-medical withdrawals avoid a 20% penalty and are taxed at your current tax rate. Medical expense withdrawals remain tax-free.
- Can Pay for Retiree Health Insurance– HSAs can be used to pay for your Medicare, COBRA, and long-term care premiums.
- Lifetime Carryforward– HSAs can be carried forward for your lifetime and upon death, transferred to your spouse tax-free. Unused assets named to a non-spouse beneficiary are taxed as ordinary income.
- Some HSAs Allow Investing– Some HSAs have simple savings plans with minimal interest while others allow self-directed investing for greater potential growth. This is an area where we can help you decide how to allocate and diversify your investment fund choices.
- HSAs are Portable– Once you have an HSA, it stays with you even if you retire, become unemployed or change jobs.
- No Required Minimum Distributions– You are not required to take Required Minimum Distributions at age 70½ on HSA accounts unlike your 401(k) and IRA accounts. This makes HSAs a more tax-efficient way for you to pay for medical expenses in retirement, especially if the alternative is taking a taxable 401(k) or IRA distribution.
Just for Fun
Don’t underestimate the value of fun to balance out your life. Here are some fun days to celebrate in November:
- November 5th – National Doughnut Appreciation Day
- November 6th – National Nachos Day
- November 11th – Veterans Day
- November 12th – Happy Hour Day
- November 14th – National Pickle Day
- November 25th – Thanksgiving
- November 26th – Black Friday
- November 27th – Small Business Saturday
- November 29th – Cyber Monday
At The Bahnsen Group, our objective is to provide you with comprehensive and holistic services to help you grow, protect, and steward your wealth toward a multigenerational legacy of both success and significance. Please reach out to me or your private wealth advisor if you have any questions or we can do anything for you. Thank you for your time and may you and your family be blessed.
Warm and best regards,
Don B. Saulic, CFP® CPA
Managing Director, Partner