Dear Clients and Friends,
How long do you think it would take to become a millionaire if you invested one penny and it doubled every day? 1 year? 5 years? 10 years? The answer is just 27 days! At 37 days, you would be a billionaire, and at 47 days you would be a trillionaire! For me it highlights why Albert Einstein called compounding interest the “eighth wonder of the world,” saying, “he who understands it, earns it; he who doesn’t, pays for it.” Compounding interest is when the interest earned on an investment, like a bond, is reinvested and the total generates greater and greater additional interest. The same concept applies to dividends from quality stocks and these stocks are the building blocks to every one of our client portfolios. In addition to our extensive investment management, we also offer clients retirement, tax, estate, risk, real estate, business, family governance, and charitable planning services. Our private wealth advisors not only guide clients through all the phases of their financial life, but we also do so in a context that is holistic and comprehensive. As a firm, we devote as many resources to being consultative planners as we do to being quality investment managers integrating the accumulation, preservation, and transfer phases of wealth management.
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.
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, and implement risk management strategies. These strategies include people, process, technology, and insurance and they all combine to help mitigate the client risk in such areas as property loss, liability, medical costs, disability, death, long-term care, business continuity, and cyber threat. Reach out to your private wealth advisor to find out more.
October is Cyber Security Awareness Month!
Here are some of our top recommendations to protect you and your family against cyber threats:
- Use complex passwords that are at least 8 characters long and utilize a combination of uppercase, lowercase, numeric, and special characters.
- Use different passwords for each application and website you access.
- Use multi-factor authentication for all accounts that offer this security measure.
- Keep your operating systems (iOS, Windows, etc.) up to date.
- Never open attachments or click links in emails from senders you do not know.
- Never use public Wi-Fi but if you do, use a Virtual Private Network (VPN).
- Use full encryption for all your mobile devices (laptops, tablets, and smartphones).
- Use a complex password on your network router.
- Limit what you post on social media, especially when you are out of town.
- Do not allow applications to always use your location.
- Limit which applications that can access your contacts, calendar, photos, camera, and microphone.
- Never click on the “Unsubscribe Me” links in spam and promotional emails.
What’s Your Retirement Number?
No, not the amount you need to retire, but the age you will go to Heaven. According to the Society of Actuaries (SOA), a 65-year-old male today, in average health, has a 55% probability of living to age 85. For a similar 65-year-old woman, the probability of reaching 85 is 65%. If you are in excellent health, a 65-year-old male today has a 43% probability of living to age 90, and a similar 65-year-old female has a 54% probability of living to 90. Nearly one-third of today’s 65-year-old women are in excellent health and one-fourth of men are expected to be alive at 95. If you are interested, you can click on this link to try the SOA’s free Longevity Illustrator tool to get your estimate. The key point here is that longer lifespans and rapidly accelerating health care costs have dramatically changed the nature and severity of the financial risks faced you may face. These risks increase with age and can ruin any savings, investment, or financial plan. Here are several health and longevity-related threats that we monitor to safeguard the financial security of clients and their families more effectively:
- Healthcare Cost – According to the National Center for Health Statistics, 75% of men and 80% of women over 50 in the U.S. suffer from one or more chronic illnesses like diabetes, cardiovascular disease, asthma, cancer, and arthritis. According to National Health Expenditure data, per capita, spending on health care in the U.S. has increased roughly 6-fold in inflation-adjusted terms since 1970. Not only are health care costs expensive but it is worse when combined with travel expenses, lost wages, and in-home care expenses. In this area, we help clients with individual and business healthcare insurance and Medicare planning.
- Long-term Care Cost – According to the U.S. Department of Health and Human Services, there is a 70% chance the average 65-year-old will need some type of long-term care service. On average, men need 2.2 years of care and women need 3.7 years. The annual median cost for In-Home care is $54,000, Community and Assisted Living care is $52,000, and Nursing Home Facility care is $106,000. For higher-cost states like California, the cost for In-Home care is $66,000, Community and Assisted Living care is $60,000, and Nursing Home Facility care is $127,000. Keep in mind that these costs are not covered by Medicare. In this area, we help clients with long-term care insurance and elder care planning.
- Death and Disability – While most people are living longer, some may become disabled or die while they are still their family’s major provider. According to the American Heart Association, the average age of a first heart attack is 65 years for men and 71.8 for women. While the leading cause of death and disability is heart disease, it is followed closely by cancer, preventable injuries, respiratory disease, and stroke. In the area, we help clients with life and disability insurance.
- Lack of Financial Organization and Transparency – Oftentimes when someone dies, family members don’t know who to go to or how to access financial information, assets, and online information. This can cost time and energy, not to mention family stress and potential financial loss. In this area, we work with every client to make sure their information is organized using our secured online vault.
Obsolete or No Estate Plan?
According to a Gallup poll, less than one-half of adults in the U.S. have a will. The absence of an estate plan can threaten financial security and jeopardize successful inter-generational wealth transfers. The properly designed estate plan also helps to minimize probate time and cost, ensure family privacy, protect assets, and minimize taxes. Here are some estate planning goals we encourage:
- Establish a Power of Attorney – A power of attorney grants another person the ability to make financial or medical decisions for you should you become incapacitated. There are two types, one for financial powers and one for medical powers.
- Create a Living Will – A living will provides guidance for your loved ones regarding your preferences for end-of-life medical intervention in case you can’t communicate for yourself. It is a good practice to make sure your primary care physician so that it becomes part of your medical records.
- Make a Last Will and Testament – This is a key component of your estate plan and serves to outline who will receive your assets after your death. If you have minor children, it also designates who will be their guardian. Without a will, a judge likely will make both determinations. A will can be as simple or as complex as your estate requires. You’ll also need to designate an executor to oversee the management of your estate and carry out the instructions of your will.
- Consider a Trust – a trust gives you more control as to how assets are distributed and allows you to keep the details of your assets out of the public eye after you die. In addition, trusts also can reduce the taxes owed by your estate, protect assets from creditors, place conditions on how and when assets are distributed. If you establish a trust, you’ll need to name a trustee to be responsible for managing trust assets, filing taxes, and making distributions to beneficiaries according to the terms of the trust.
- Update Your Estate Plan Regularly – Once an estate plan is created it must be updated to reflect changes in your life. Remember most financial accounts, such as banks, insurance, retirement savings accounts, or brokerage accounts, require you to designate a beneficiary, and these beneficiary designations typically override any directions in a will.
Wealth Transfer Strategies to Consider Before 2026
Some of the high lifetime gift, estate, and generation-skipping tax exemption benefits of the Tax Cut and Jobs Act (TCJA) may expire soon or at least revert to their pre-TCJA levels at the end of 2025. Although we are not entirely sure what the new tax code will look like, we do know that most of our clients will feel an impact. To this end, we recommend that clients consider the following strategies to reduce their potential estate tax liability:
- 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 $65,000 (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 – You can gift cash and other assets to a qualified charity to reduce your estate and possibly your tax bill. One of the best strategies is to gift highly appreciated assets, like stock and real estate, to avoid capital gains taxes.
How to Defer Paying Real Estate Capital Gains
One of the most common tax strategies for real estate investors is the “1031 Exchange.” This strategy allows the seller of an investment property to defer paying capital gains by using the proceeds from that property to buy a “like-kind” replacement investment property. House flippers must have owned the property for two years to qualify. The benefit of a 1031 Exchange is that it allows you to use the appreciated value of the property to buy or diversify into better real estate. There is no limit to the number of times you can do a 1031 Exchange, but you only have 45 days to identify in writing a replacement property and 180 days to acquire that property. Unfortunately, if you decide to make their primary residence investment property, you won’t meet the requirements of a 1031 Exchange, but you may qualify for the tax exemption for primary residence sales—$250,000 for singles and $500,000 for married couples filing jointly.
For every client, we use robust financial planning software to build retirement plans that answer one major question – how much money do I have to save to retire and never worry about running out of money? The financial planning software provides clients with a secured, real-time dashboard to their assets, liabilities, and lifetime cash flows. The software also allows clients to run reports, budget, and store important documents like deeds, insurance, estate plans in a secured online vault. For every financial plan we build for a client, we also run Monte Carlo simulations to see how the plan will hold up under different conditions such as changes in income, expenses, life expectancy, inflation, and investment returns. Ultimately, the Monte Carlo simulations determine the financial plan’s probability of success.
An Increase in Your Social Security Check?
According to the Senior Citizens League, retirees may get an annual cost-of-living adjustment for 2022 of 6.2%. This surpasses the 2021 increase of 1.3%.
Pfizer-BioNTech COVID-19 Vaccine Booster Available
If you previously got your two doses of the Pfizer-BioNTech COVID-19 vaccine, you can get a booster shot 6 months after you complete your second dose if you’re 65 and older, or you’re 18+ and have certain underlying medical conditions, or work or live in a high-risk setting. Medicare covers a Pfizer vaccine booster shot at no cost.
If You are Turning 65, Don’t Forget to Sign Up for Medicare to Avoid a Penalty
For those turning 65, you most likely need to sign up for Medicare Part A (hospital insurance) and Part B (medical insurance) during your Initial Enrollment Period (IEP) to avoid a penalty unless you have a group health plan coverage, or you or your spouse are working for the employer that provides your health coverage. Here are some guidelines to keep in mind:
- Your enrollment period lasts for 7 months – 3 months before your 65 birthday and 3 months after. If you don’t sign up, you may have to wait to sign up and pay a monthly late enrollment penalty for as long as you have Part B coverage. The penalty goes up the longer you wait.
- You may also have to pay a penalty if you must pay for Part A which is typically free for individuals who have worked at least 40 quarters of any job where they paid Social Security and Medicare taxes. If you must pay Part A, it will be either $259 or $471 per month in 2021 depending on how long you or your spouse worked or paid into the system. If you don’t sign up for Plan A when you first become eligible, your monthly premium could potentially go up 10% and you’ll have to pay that higher premium for twice the number of years you didn’t sign up.
- For Part B, you must pay premiums which in 2021 is $148.50 a month or more, depending on income. Those who do not enroll in Part B when they first become eligible, and without a qualified reason, could have their premiums permanently increased 10% for every 12-month period they could have had Part B.
- If after 65, you or your spouse stop working or lose your group health plan coverage (whichever happens first) you will have 8 months to sign up for Medicare even if you choose COBRA.
- Once you’re enrolled in Original Medicare (Part A and Part B), you may have other types of Medicare coverage available to you like Medicare Advantage plans and stand-alone Medicare Part D prescription drug plans. Medicare Advantage plans offer an alternative way to get Original Medicare (Part A and Part B benefits). Many of these plans offer additional benefits like routine vision, dental services, prescription drug coverage, or health wellness programs. Stand-alone Medicare Part D prescription drug plans can work with your Original Medicare coverage to help pay for your medications. Both these types of Medicare plans are available through Medicare-approved private insurance companies.
Medicare Open Enrollment Period Starts October 15, 2021!
For those of you with Medicare, your Open Enrollment Period is October 1, 2021, to December 7, 2021. This is a time to make Medicare coverage changes like 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.
Key Considerations for 2021
The new tax bill is progressing but still has a long way to go until it’s signed into law. There are several changes including an increase in the top income tax bracket, the top rate for capital gains, and the top corporate tax rate. Here are what we are tracking for your financial planning:
- 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 taxpayers with a modified adjusted gross income of more than $5 million. There are also increased income limitations on a new deduction from the 2018 tax law changes, called 199A deductions, which concern pass-through income.
- 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 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.
- Other Items We Are Tracking – The bill does not include the elimination of the step-up of basis at death, restrictions, or modifications to catch-up contributions for retirement plans and IRAs, and the repeal or modification of the limits on state and local tax (SALT) deductions.
2021 Charitable Impact Strategies
We help clients incorporate philanthropy into their financial planning. Here are some ways to maximize charitable planning for 2021:
- 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.
According to a 2021 Northern Trust Survey, only about 30% of owners of closely-held businesses have a formal, written succession plan. Since the sale of these businesses typically represents a major source of retirement income, it is important to make sure you have your plan in place. We work with clients to establish your team, establish goals, value your business, and identify your ideal ownership transfer strategy to ensure business continuity. While purpose always drives technique, we have found revocable living trusts, entity formation, buy-sell, and key person insurance are the primary techniques for basic succession planning. To maximize proceeds for owners/retirees, we see guaranteed payments, deferred compensation, an employee stock ownership plan (ESOP), a merger & acquisitions, 3rd-party sale, and strategic buyers. For maximizing the benefit to heirs/beneficiaries, we see recapitalization, gifts of interest, a Grantor Retained Annuity Trust (GRAT), an Intentionally Defective Grantor Trust (IDGT) sale, and an installment sale. For minimizing income taxes, we see QRP, ESOP, QSBS, installment sale to 3rd party or NGT, charitable bequests, and 1031 exchanges. For minimizing estate and gift transfer taxes, we see recapitalization, gifts, GRATs, and IDGTs. For more information ask your private wealth advisor about our investment banking services.
Family & Lifestyle
College Planning – FAFSA is Open!
The 2022-2023 FAFSA (Free Application for Federal Student Aid) opened October 1, 2021, and is the single most important part of the financial aid process (both need-based and merit aid). Students need to file an application if they want to receive a Pell grant or apply for subsidized student loans or work-study programs. Additionally, many schools require the FAFSA as part of their scholarship application and use a student’s FAFSA information to award their own grants and scholarships. It is best to apply as close to you can to October 1 opening date because, for many colleges, award money is based on a first-come, first-served basis. Most college planning experts recommend that students from higher-income households also fill out the FAFSA (and, if your college instructs you, the CSS/Financial Aid PROFILE form). Although many people assume that filling out the form would be a waste of time, and they’re not sure if they would qualify for aid anyway, dedicating an hour to file can determine a student’s eligibility for myriad grants and aid for all income levels. The FAFSA costs nothing to complete and uses financial information from 2020. It could be well worth the time spent if it saves your family money. Here are some additional college financial aid strategies:
- Roll UTMA/UTGA accounts into 529s – This will lower your Effective Family Contribution (EFC), since these custodial accounts are treated as student assets, while 529s are treated as parental assets. Student assets are included in the EFC formula at 20% to 25%, while parental assets are included at only 5.6%. For purposes of maximizing financial aid, you probably want to avoid custodial accounts altogether.
- Spend Down Children’s Assets for College First – Since children’s assets count against you more in the financial aid formula than parental assets, prioritize spending assets held in the children’s name first. You might want to spend some of these funds on college tutoring or computers ahead of the college financial assessment years.
- Maximize Saving in Retirement Accounts – Unlike money saved in your taxable brokerage accounts, money in your IRAs, 401ks, and other qualified accounts isn’t counted towards EFC.
- Pay Debt to Reduce Parent Assets – Using cash to pay off credit card debt, car loans, or to pre-pay your mortgage debt lowers the FAFSA’s “assessable assets” and results in a lower Effective Family Contribution (EFC). Similarly, you might want to pre-pay large expenses, like a new car or computer, ahead of filing the FAFSA. Be careful of selling investments to pay off debt and lower assessable assets; this can backfire as capital gains will increase reported income.
- Don’t Convert Liquid Assets into Annuities or Insurance – Since annuity and insurance assets aren’t assessable assets under the FAFSA, some product providers and insurance agents recommend a college financial aid strategy of converting cash or brokerage assets into annuities and insurance assets. However, it’s possible these conversions could cost you more in fees than the 5.64% decrease in EFC. Moreover, converting liquid assets into illiquid assets without increasing the rate of return is seldom a good idea.
- Consider Roth IRAs – If children are getting earned income through part-time employment and/or summer jobs, consider redirecting college savings from assessable assets like 529s to non-assessable Roth IRA assets. Roth IRAs are fantastic savings vehicles for college, regardless if they are opened by the parent or the child. You will also have more investment options in the Roth IRA than a 529 account, and distributions from a Roth IRA used for Qualified Higher Education Expenses avoid the 10% early withdrawal penalty. Moreover, distributions from Roth IRAs are principal first, so you can withdraw the original contributions from the Roth IRA to pay for other expenses without subject to taxation or an early withdrawal penalty.
- Structure Divorce Settlements with Student Aid – For parents going through a divorce, structure the divorce settlement with student aid in mind. For divorced parents, the FAFSA will only look at the financial information for the custodian parent, the parent that the child stays with for the majority of the year. To maximize financial aid parents might want to consider designating the lower-income spouse as the custodial spouse since only the custodial spouse’s income and assets are assessed by the FAFSA.
- Coordinate Grandparent College Contributions – Encourage grandparents to redirect their gifts to college-bound grandchildren to the parents of the college student, which avoids the gifts becoming assessable income of the student. The grandparents could also just deposit assets in a 529, which is assessed at a much lower rate than direct gifts, or buy non-cash items for the student’s education like computers or airplane tickets. Alternatively, grandparents pay the institution directly or can pay down student loans after graduation.
Just for Fun
Here are some fun days to celebrate in October:
October 4th – Cinnamon Roll Day (If you missed it you can still celebrate it)
October 9th – International Beer and Pizza Day
October 10th – National Angel Food Day
October 11th – Southern Food Heritage Day
October 14th – National Dessert Day
October 17th – National Pasta Day
October 18th – National Chocolate Cupcake Day
October 22nd – Eat a Pretzel Day
October 25th – National Art Day
October 26th – National Pumpkin Day
October 28th – National Chocolate Day
October 31st – Halloween
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