Blog Archives

Mystery no more: Portfolio allocation, income and spending in retirement

4/28/2022

How do people manage their income and spending in retirement? How do they adjust their asset allocation as they transition into retirement? Certainly, there is survey data on the subject and much informed speculation. Yet the full picture—based on empirical evidence that shows how people actually behave—has remained elusive.
No longer.
Drawing on an Employee Benefit Research Institute (EBRI) database of more than 23 million 401(k) and IRA accounts, and JPMorgan Chase data for around 62 million households, this article studied 31,000 people as they approached and entered retirement between 2013 and 2018.

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6 Biggest Behavior Pitfalls for Investors

4/27/2022

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Avoid losses at all costs: Loss aversion
"I am the greatest1" Confirmation bias
Getting stuck on the first thing you see: Anchoring bias
The breaking news problem: Recency bias
There is safety in numbers ... right? Herding bias
The devil you know: Ambiguity aversion

If you want to know more details about these 6 pitfalls, Fidelity.com has a more detailed article explaining them.

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4 Reasons for Estate and Retirement Planning - Part B

4/26/2022

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We discussed the first 2 reasons here, now the next 2 reasons.

3. Lower tax rates

Now is an opportune time to plan while the federal estate exemptions are still high and income tax brackets are lower. As planned today, the Tax Cuts and Jobs Act will “sunset” in 2026, changing:
• The top marginal income tax rate reverts to 39.6%
• The estate and gift tax exemption amount reverts to $5 million, indexed for inflation

This could happen sooner than 2026, should legislation be passed.

4. Uncertain legislative environment

The Build Back Better Act that was heavily debated in 2021 has not passed; the Tax Cuts and Jobs Act (TCJA) is sunsetting; and other proposed changes could be in the works. Past proposals give us insight into potential changes lawmakers could consider and propose again in another bill. What could happen in the future? What could be taken away? How can you prepare now?

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4 Reasons for Estate and Retirement Planning - Part A

4/25/2022

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1. Rising inflation
Given the current environment, it’s likely inflation is also on the mind of everyone.

Inflation: In 2021, inflation was a staggering 7%— the highest the country has seen in 40 years! Inflation creates a “hidden tax” effect and the purchasing power will suffer.

Purchasing power effect: With inflation at 3.5%, purchasing power will be reduced by 51% in 20 years (in other words, your dollar today will be worth 49 cents in 2042). Retirees, widows, and widowers will suffer most.

Health care: Health care costs have been rising at a rate of nearly 5% for the past 40 years.

Longevity: The longer one lives, the more damaging inflation will be. The death of a spouse may cause the surviving spouse to experience the “widow(er)’s penalty”— the likelihood that the surviving spouse will experience higher taxes, higher health care costs, and a reduction in purchasing power caused by inflation.

2. Historically low interest rates
Changing interest rates affect estate planning. Some strategies are more effective in environments with higher interest rates, while others are more effective with lower interest rates.
• Lower IRC Section 7520 and applicable federal rates provide opportunities for tax-efficient wealth transfer
• For certain strategies to succeed, investments need higher returns than interest rates, and that’s easier with lower rates
• Lending strategies can be more advantageous in a lower interest rate environment

Coupled with high federal estate tax exemption amounts, people who use certain strategies in the lower interest rate environment have the ability to transfer wealth while incurring minimal or possibly no gift taxes.

We will discuss the next 2 reasons in the next blogpost.

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Is International Diversification Necessary?

4/21/2022

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Why Diversification
Diversification across asset classes is one of the core investment principles. By spreading out assets across a range of asset classes with varying degrees of correlation, one can reduce the overall risk to the portfolio (because a downturn in one asset class is likely to be ameliorated by the returns of the other less-correlated investments). And while many people diversify assets by investing in both U.S. and international equities, a combination of increasing correlations between U.S. and international stocks and relative underperformance by international stocks might have some wondering about whether they are actually adding value to the portfolios through international diversification.

The Problem with Diversification
A problem for investors looking to use international stocks to diversify their equity holdings has been high correlations between U.S. and international stocks in recent years. For example, between 2019 and 2021, the correlation between U.S. and developed market (ex-U.S.) stock returns was 0.93 and the correlation between U.S. and emerging markets was 0.82. Both of these figures are significantly higher than they have been in the past, reducing the international stocks’ diversification benefits in case of a market downturn.

Should You Diversify?
However, historical correlations suggest that international stocks could provide increased diversification benefits in the future. For example, as recently as 2019, the correlation between U.S. and developed market stocks was below 0.8 and the correlation between U.S. and emerging market stocks was less than 0.6. And looking back further, correlations between U.S. and non-U.S. stocks were as low as 0.12 during the 1970s, 0.29 in the 1980s, and 0.54 in the 1990s, making them significantly more valuable as a portfolio diversifier (of course, there is no guarantee that these historical conditions will return). Also, those looking for equity diversification could also look to emerging markets, which are typically less correlated with the U.S. than are developed markets.

In the end, having a diversified portfolio of assets with low correlations means that some portions of a portfolio will necessarily underperform others. And so, while some people might be frustrated by the recent underperformance (and higher correlations) of international markets compared to the U.S. in recent years, a return to lower correlations between the asset classes could increase the value of international stocks as a portfolio diversifier!

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Asset Allocation by Investment Accounts

4/20/2022

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Which investments do you put where to help enhance after-tax returns?

Each person will have to find the right approach for their particular situation. But generally, depending on your overall asset allocation, you may want to consider putting the most tax-advantaged investments in taxable accounts and the least in tax-deferred accounts like a traditional IRA, 401(k), or a deferred annuity, or a tax-exempt account such as a Roth IRA (see chart below).

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What is Active Asset Location Strategy - Part D

4/19/2022

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In last blogpost, we discussed how to rank investment on tax-advantaged scale. So, which investments do you put where to help enhance after-tax returns?

Each person will have to find the right approach for their particular situation. But generally, depending on your overall asset allocation, you may want to consider putting the most tax-advantaged investments in taxable accounts and the least in tax-deferred accounts like a traditional IRA, 401(k), or a deferred annuity, or a tax-exempt account such as a Roth IRA.

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What is Active Asset Location Strategy - Part C

4/18/2022

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We discussed if you can benefit from active asset location strategy here. Now we will continue the discussion.

If you are in a position to benefit from an asset location strategy, you have to choose which assets to assign to your tax-advantaged accounts and which to leave in your taxable accounts.

In general, the following are higher on the tax-advantaged scale:

Individual stocks are, as a general rule, relatively tax-advantaged if bought and held for longer than a year.
Equity index mutual funds and ETFs are generally quite tax-advantaged.
Tax-managed equity funds (that is, equity funds that name tax management as an explicit goal) tend to be highly tax-advantaged.

In general, these are lower on the tax-advantaged scale:

Bonds and bond funds (with the exception of municipal bonds and funds, and US Savings Bonds) are generally highly tax-disadvantaged, because they generate interest payments that are taxed at relatively high ordinary income rates. Potentially higher returning types of bond investments, such as US high yield and emerging markets bond funds, are the most tax-disadvantaged.

Actively managed stock funds with high turnover rates are less tax-advantaged because they tend to have high rates of capital gain distributions. They sometimes even distribute short-term capital gains, which are taxed at the higher ordinary income tax rates.

So, which investments do you put where to help enhance after-tax returns? See next blogpost for the answer.

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What is Active Asset Location Strategy - Part B

4/17/2022

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In last blogpost, we discussed what is active asset location strategy. Now we will discuss if you can benefit from it.

There are 4 main criteria that tend to indicate whether an asset location strategy may be a smart move for you. The more of these criteria that apply to your situation, the greater the potential advantage in seeking enhanced after-tax returns.

You currently pay a high marginal income tax rate: The higher the marginal income tax rate you currently pay, the bigger the potential benefits of asset location. Remember, as you earn more money, you may move into a higher marginal tax bracket. Consequently, the benefit of your additional income can be significantly reduced if you are being taxed at a higher marginal tax rate.
You expect to pay a lower marginal income tax rate in the future: If you expect your marginal income tax rate to be lower in the future than it is now, active asset location may allow you not only to defer your taxes but to reduce them as well. Note that it is very common for investors to see their marginal income tax rate fall following retirement, and if you have assets with a time horizon into retirement, this may well be the case for you.
You have significant assets in tax-inefficient investments held in taxable accounts: The more tax-inefficient investments, such as taxable bonds and taxable bond funds, you're currently holding in taxable accounts (see chart, below), the greater the potential to take advantage of asset location.
You are investing for the long term: Asset location strategies generally take time to work. While small tax benefits may be realized year over year, sizable benefits may be realized by allowing potential tax savings to compound. If relocating assets in a taxable account, you may incur initial tax costs when implementing an asset location strategy and it may take time for the benefits to outweigh the costs.

If you are in a position to benefit from an asset location strategy, you have to choose which assets to assign to your tax-advantaged accounts and which to leave in your taxable accounts, see next blogpost here.

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What is Active Asset Location Strategy - Part A

4/16/2022

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There are 3 main investment account categories:

Taxable accounts such as traditional brokerage accounts hold securities (stocks, bonds, mutual funds, ETFs) that are taxed when you earn dividends or interest, or you realize capital gains by selling investments that went up in value.
Tax-deferred accounts like traditional 401(k)s, 403(b)s, annuities, and IRAs allow payment of taxes to be delayed until money is withdrawn, when all or a portion of it is taxed as ordinary income.
Tax-exempt accounts like Roth IRAs, Roth 401(k)s, and Roth 403(b)s, require contributions to be made with after-tax dollars and do not provide a tax deduction up front, but they allow the investor to avoid further taxation (as long as the rules are followed). Fully tax-exempt accounts such as health savings accounts (HSAs), allow you to make pretax or deductible contributions, earnings, or withdrawals, if used for qualified health expenses.

Asset location in action

Let's look at a hypothetical example. Say Adrian, age 40, is thinking about diversifying his portfolio by investing $250,000 in a taxable bond fund. For this example, we will assume Adrian pays a 35.8% marginal income tax rate on net investment income and the bond fund is assumed to earn a 6% rate of return each year—before taxes.

In what account should he hold the investment? The answer matters, and can mean the difference between paying taxes annually and deferring them until withdrawal.

Suppose Adrian has 2 accounts with sufficient assets to choose between, to hold the investment. One is his taxable brokerage account where interest earned on the investment will be taxed annually; the other is a traditional IRA he has been making after-tax contributions to for many years. Since Adrian began contributing to the IRA midway through his career, he never made any tax-deductible contributions. If Adrian chooses to hold the investment in the tax-deferred IRA, the return on his investment, after-taxes, could be nearly $72,000 greater than it would be in the taxable account when he begins withdrawals 20 years later at age 60, assuming his tax rate remains the same.

Tax deferral has the potential to make a big difference for investors—especially when matched with investments that may be subject to high tax rates, as interest on taxable bonds can be.

In next blogpost, we will discuss if you can benefit from active asset location strategy.

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6 Steps to Prepare the Worst Case Scenario Budget

4/15/2022

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1. Get Clear On Your Fixed Expenses
One of the first steps for getting a handle on your budget is understanding how much money you must spend each month. Fixed expenses are expenses that generally remain the same every month or expenses that you are required to pay or there will be consequences. This can include things like:

Rent/mortgage
Utilities
Debt/loan payments
Subscriptions
Insurance
Healthcare costs, such as co-pays and prescriptions

When you have a clear list of your fixed expenses, you have a good starting point for your budget. You’ll understand how much money must be going out each month to keep yourself housed and warm. Plus, you might be surprised by some of these expenses that you had forgotten about. This could be a good opportunity to cancel or negotiate items you no longer want to pay for.

2. Identify Which Expenses Can Be Cut
Obviously, there are some expenses that we can’t put on hold or cut entirely. Things like rent, utilities, and food are pretty essential. However, in times of crisis, we often are required to make some sacrifices and cut some things out. Get clear on which fixed expenses you would be safe and capable cutting or reducing if you were to lose your income or have some other financial emergency. That way, if crisis strikes, you’ll know exactly which expenses to cut, reduce, or pause. This will take some of the stress out of the situation if the time comes.

Debt and student loan payments can’t just be turned off, but there might be an opportunity for flexibility. If you have federal student loans, you can put your loans into forbearance if you’re in a moment of financial hardship. Alternatively, even if you have private debt, you may be able to reach out to the lender or bank to see if they’re willing to help you. In the beginning of the pandemic, many banks were helping customers who were struggling to make payments. Understanding what your options are ahead of time will help you when crisis hits.

3. Review Your Typical Flexible Spending
Flexible spending is spending that you generally have more control over, but it doesn’t mean it’s all spending that can be completely cut out. These categories can include:

Food (groceries and dining)
Transportation (gas, cabs, or public transit)
Shopping (clothes, toiletries, etc.)

Many items that fall under flexible spending are important and even imperative. But it’s still necessary to have an understanding of how much you spend outside of your fixed costs. If you don’t know how much you’re spending, it’s impossible to make changes, if necessary. This exercise will help you identify if you’re overspending in certain areas. It can also help you understand what can get reduced or cut completely if you fall into financial hardship.

4. Identify How Much Money You Can Live Off Of
Once you’ve gotten clear on what can be cut and what absolutely can’t, you’ll have clarity about how much money is the least that you could possibly live off of. You want to make sure that you’re prioritizing things like food, transportation, healthcare, and anything else that is important for your overall wellbeing and that of your family. If you were to lose your job, and you drastically reduce your household spending, this will help reduce the amount of debt you might accrue, or reduce the amount you have to withdraw from savings. Remember, hopefully this restriction will be temporary, until you get back on your feet.

5. Prioritize Your Emergency Fund
Prioritizing funding your emergency savings account should always be top of mind. That should be even more apparent after what we’ve gone through over the past two years. Anything can happen at any time, and it’s so important to have money set aside to protect us and our families during a crisis. If you haven’t already started saving for emergencies, get started today. Even if you need to start with $5 a month, do it. You can increase that over time. If you already have an emergency fund, check back in with it to make sure you’re comfortable with the balance. How long could you live on your worst-case scenario budget if you only had your savings to use? If that amount of time scares you, it’s time to start increasing your savings.

6. Keep A Record Of Your Worst Case Scenario Budget
Once you’ve done all this work to create a worst-case scenario budget, make sure you actually save the information! Create a spreadsheet or a list of your expenses that will stay and the expenses that will be cut. That way, you’ll know exactly what steps you need to take in the moment of crisis. Don’t give yourself more stress by requiring yourself to go through this process again when it’s unavoidable.

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6 Strategies For Retirement Income Planning - Part IV

4/14/2022

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We discussed the first 4 strategies here, now the last 2 strategies.

5. Dynamic income strategy
With a dynamic strategy, retirees adjust their spending based on the performance of their portfolio and its resulting effect on a Monte Carlo simulation. For example, a retiree targeting an 85% chance of success in a Monte Carlo simulation might increase their income if this figure rises to 95% but decrease income if it falls below 75%. This ‘guardrails’ approach can also be improved by introducing risk-based measures as well.

While retirees will appreciate the opportunity to increase their incomes, they will also have to be prepared for reduced incomes when their probability of success hits the lower guardrail.

6. Insurance strategy
Finally, retirees can use an insuring strategy, in which they use their assets to purchase a guaranteed income stream, typically through an immediate fixed annuity. This has the advantage of guaranteeing a certain income for the life of the retiree (or both members of a couple) regardless of market conditions, and unlike the asset-liability management approach, it also covers the uncertainty of longevity (as annuity payments can be ‘for life’).

However, purchasing such an annuity is an irrevocable commitment of capital, and includes costs associated with the product.

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6 Strategies For Retirement Income Planning - Part III

4/13/2022

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We discussed the first two of six strategies here. Now the next two strategies.

3. A "bucket" strategy
For retirees who are nervous about having to sell investments in a down market, a ‘bucket’ strategy can be useful. With this method, the retiree sets aside a cash-like ‘bucket’ of money to cover their expenses in the short term (perhaps two to three years) and allows the rest of their assets to be invested. In this way, the retiree will not have to sell invested assets to fund their lifestyle (until the short-term ‘bucket’ runs out) or be tempted to move their assets to cash in a downturn.

However, a simple rebalancing has been shown to be a potentially superior strategy (in part by ensuring that liquidations come from asset classes that are up the most in value, similar to what bucket strategies are intended to accomplish).

4. Variable income strategy
With a variable retirement income strategy, retirees plan to spend different amounts of income in the various stages of retirement. For example, research from David Blanchett demonstrated a ‘spending smile’, with inflation-adjusted spending among retirees declining throughout most of retirement, only increasing in their final years. Using a variable strategy could allow retirees to spend more in their early years, while saving for potential healthcare costs in their later years.

However, some retirees might resist declines in real spending throughout the middle part of their retirement.

We will discuss the last 2 strategies here.

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6 Strategies For Retirement Income Planning - Part II

4/12/2022

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In last blogpost, we mentioned 6 strategies for retirement income planning, now we will discuss the first two.

1. Asset liability management
A conservative way to ensure that a retiree’s expenses will be covered is asset-liability management, by which an individual invests money today to meet a future liability (their retirement expenses in future years) with a high degree of certainty. Under this method, a retiree could decide how much income they want in the future, and invest an amount of money that will achieve that goal using conservative investments (e.g., Treasury Inflation-protected securities, or TIPS).

However, given the conservative investments (and low current yields), this method can require a significant initial outlay of funds, and, because individuals do not know their exact longevity, it would be impossible to know how many years of income would be required.

2. Static inflation adjusted withdrawal

The second method is to take static inflation-adjusted withdrawals from a portfolio each year. For example, the 4% rule developed by Bill Bengen suggests that, based on historic market returns and certain assumptions, retirees can afford to take out 4% of their portfolio in the first year, and adjust that amount for inflation in subsequent years (and while the 4% rule was developed in the 1990s, it remains an effective strategy today).

This method allows for a steady, inflation-adjusted stream of income for the retiree (although its inflexibility could leave a retiree with significant unspent assets at their death if investment returns are strong).

In next blogpost, we will discuss the next 2 strategies for retirement income planning.

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6 Strategies For Retirement Income Planning - Part I

4/11/2022

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With many seniors living into their 90s and beyond, the assets of retirees have to cover a longer period than they would have a few decades ago (making them susceptible to sequence of return risk, though this risk can have extraordinary upside potential as well!). With this in mind, there are 6 strategies to help protect against longevity risk.

Asset liability management
Static inflation adjusted withdrawal
A "bucket" strategy
Variable retirement income strategy
Dynamic income strategy
Insurance strategy

We will introduce each of the above 6 strategies in the next blogposts. The key point is that there are a variety of ways to prevent individuals from running out of money in retirement, and the best method for a given individual is likely to depend on, among other factors, their risk tolerance and spending flexibility.

In next blogpost, we will introduce the first 2 strategies.

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What To Do With an Inverted Yield Curve?

4/10/2022

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Many investors pay close attention to the yield curve, which, in a common form, represents the difference between the 2-Year U.S. Treasury rate and the 10-Year U.S. Treasury rate. A yield curve inversion occurs when the 2-Year rate exceeds the 10-Year rate, and this has served as a signal for future trouble in the economy. In fact, every recession since the mid-1970s has followed an inverted yield curve (although it can take up to two years following the inversion for the recession to begin). And so, with the yield curve inverting on March 31, many market observers are wondering whether the inversion presages a stock market downturn.

Because recessions are typically associated with negative equity returns, this could persuade some investors to pull their money out of the market now. However, this brings up a few issues.

The first issue with this, though, is that the stock market often surges between a yield curve inversion and an eventual downturn. For example, the S&P 500 returned 28.4% between the December 2005 yield curve inversion and the beginning of the bear market in October 2007.

More broadly, looking at the six yield curve inversions since 1978, 1-year returns following an inversion average 4.7% compared to 9.0% in all other 1-year periods, and annual returns two years out average 4% compared to 8% for other two-year periods. And while those looking to avoid below-average stock market returns might turn to bonds for relative strength in these periods, it turns out that 5-Year U.S. Treasuries underperform U.S. stocks on average in 1- 2- and 5-year periods after an inversion (suggesting that while below-average stock returns might be on the horizon, moving to bonds is not necessarily an attractive alternative).

In the end, the recessions (and any associated stock market declines) that follow yield curve inversions can be thought of as the price investors pay for participating in the market (and the strong returns associated with non-recessionary periods). While history suggests that you might not want to make dramatic changes to your portfolios because of the recent yield curve inversion, it can be an opportunity to consider whether your portfolios are aligned with your objectives and risk tolerance to get ahead of a potential market downturn in the years ahead!

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Trust Basics - 3 Types of Trusts

4/9/2022

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In last blogpost, we discussed why creating a trust. Now we will review different types of trusts.

Living (revocable) trust

A living trust is a special type of trust. It's a legal entity that you create while you're alive to own property such as your house, a boat, or investments. Property that passes through a living trust is not subject to probate--it doesn't get treated like the property in your will. This means that the transfer of property through a living trust is not held up while the probate process is pending (sometimes up to two years or more). Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. The transfer can be immediate, or if you want to delay the transfer, you can direct that the trustee hold the assets until some specific time, such as the marriage of the beneficiary or the attainment of a certain age.

Living trusts are attractive because they are revocable. You maintain control--you can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it.

Living trusts can also be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your own affairs, your trustee (or a successor trustee) steps in and manages your property. Your trustee has a duty to administer the trust according to its terms, and must always act with your best interests in mind. In the absence of a trust, a court could appoint a guardian to manage your property.

Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors, and you are subject to income taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust.

Irrevocable trusts

Unlike a living trust, an irrevocable trust can't be changed or dissolved once it has been created. You generally can't remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust is a valuable estate planning tool. First, you transfer assets into the trust--assets you don't mind losing control over. You may have to pay gift taxes on the value of the property transferred at the time of transfer.

Provided that you have given up control of the property, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As a bonus, property in an irrevocable trust may be protected from your creditors.

There are many different kinds of irrevocable trusts. Many have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an irrevocable trust to generate income for you.

Testamentary trusts

Trusts can also be established by your will. These trusts don't come into existence until your will is probated. At that point, selected assets passing through your will can "pour over" into the trust. From that point on, these trusts work very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed to your heirs. Since you have a say in how the trust terms are written, these types of trusts give you a certain amount of control over how the assets are used, even after your death.

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Trust Basics - Why Create a Trust

4/8/2022

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In last blogpost, we discussed what is a trust. Now we will discuss why create a trust.

Since trusts can be used for many purposes, they are popular estate planning tools. Trusts are often used to:

Minimize estate taxes
Shield assets from potential creditors
Avoid the expense and delay of probating your will
Preserve assets for your children until they are grown (in case you should die while they are still minors)
Create a pool of investments that can be managed by professional money managers
Set up a fund for your own support in the event of incapacity
Shift part of your income tax burden to beneficiaries in lower tax brackets
Provide benefits for charity

The type of trust used, and the mechanics of its creation, will differ depending on what you are trying to accomplish. In fact, you may need more than one type of trust to accomplish all of your goals. And since some of the following disadvantages may affect you, discuss the pros and cons of setting up any trust with your attorney and financial professional before you proceed:

A trust can be expensive to set up and maintain--trustee fees, professional fees, and filing fees must be paid
Depending on the type of trust you choose, you may give up some control over the assets in the trust
Maintaining the trust and complying with recording and notice requirements can take up considerable time
Income generated by trust assets and not distributed to trust beneficiaries may be taxed at a higher income tax rate than your individual rate

The duties of the trustee

The trustee of the trust is a fiduciary, someone who owes a special duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries at all times. For example, the trustee must preserve, protect, and invest the trust assets for the benefit of the beneficiaries. The trustee must also keep complete and accurate records, exercise reasonable care and skill when managing the trust, prudently invest the trust assets, and avoid mixing trust assets with any other assets, especially his or her own. A trustee lacking specialized knowledge can hire professionals such as attorneys, accountants, brokers, and bankers if it is wise to do so. However, the trustee can't merely delegate responsibilities to someone else. Although many of the trustee's duties are established by state law, others are defined by the trust document. If you are the trust grantor, you can help determine some of these duties when you set up the trust.

In next blogpost, we will discuss the different types of a trust.

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Trust Basics - What is a Trust

4/7/2022

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Whether you're seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility--many types of trusts exist, each designed for a specific purpose. Although trust law is complex and establishing a trust requires the services of an experienced attorney, mastering the basics isn't hard.

What is a trust?

A trust is a legal entity that holds assets for the benefit of another. Basically, it's like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust depend largely on your goals.

For example, if you want the trust to generate income, you may want to put income-producing securities, such as bonds, in your trust. Or, if you want your trust to create a pool of cash that may be accessible to pay any estate taxes due at your death or to provide for your family, you might want to fund your trust with a life insurance policy.

When you create and fund a trust, you are known as the grantor (or sometimes, the settlor or trustor). The grantor names people, known as beneficiaries, who will benefit from the trust. Beneficiaries are usually your family and loved ones but can be anyone, even a charity. Beneficiaries may receive income from the trust or may have access to the principal of the trust either during your lifetime or after you die. The trustee is responsible for administering the trust, managing the assets, and distributing income and/or principal according to the terms of the trust. Depending on the purpose of the trust, you can name yourself, another person, or an institution, such as a bank, to be the trustee. You can even name more than one trustee if you like.

In next blogpost, we will discuss why creating a trust.

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Why a Will is the Cornerstone of Your Estate Plan - Part C

4/6/2022

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We discussed the importance of a will in last blogpost. more benefits of a will are discussed below.

Wills can fund a living trust

A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will "pours over" your estate to your living trust.

Wills can help minimize taxes

Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

Assets disposed of through a will are subject to probate

Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.

Will provisions can be challenged in court

Although it doesn't happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include:
• You lacked testamentary capacity when you signed the will
• You were unduly influenced by another individual when you drew up the will
• The will was forged or was otherwise improperly executed
• The will was revoked

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Why a Will is the Cornerstone of Your Estate Plan - Part B

4/5/2022

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In last blogpost, we discussed some benefits of a will, we will keep discussing below.

Wills allow you to nominate an executor

A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

Wills specify how to pay estate taxes and other expenses

The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

Wills can create a testamentary trust

You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

We will discuss the other benefits of a will in next blogpost.

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Why a Will is the Cornerstone of Your Estate Plan - Part A

4/4/2022

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If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn't have to be drafted by an attorney to be valid, seeking an attorney's help can ensure that your will accomplishes what you intend.

Wills avoid intestacy

Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state's distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.

Wills distribute property according to your wishes

Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.

Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other gifts.

Wills allow you to nominate a guardian for your minor children

In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

In next blogpost, we will keep discussing the importance of the will.

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What is Chronic Illness Rider and How it Works - Part B

4/3/2022

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In last blogpost, we explained the key features of chronical illness rider.

A Case Study
Jeffrey purchased a $1 million life insurance policy at age 50. His policy includes the Chronic Illness Rider. Some years later, he is diagnosed with a chronic illness and is unable to perform two of six ADLs. His doctor estimates he has two years to live. Jeffrey has a maximum total acceleration limit of $800,000, and has requested a $100,000 acceleration benefit.

In Jeffrey’s case, with a two-year life expectancy, his actuarial discount is 9 percent. This means, since he requested a $100,000 acceleration, he will receive $90,900. He can use this benefit to: pay medical bills, stop working and spend time with family, take a dream vacation with his loved ones, or even to pre-plan and pre-pay his funeral.

Calculating Jeffrey's Benefits

Requested acceleration: $100,000
Minus the 9% actuarial discount (4.5% discount rate X 2-year current life expectancy): $9,000
Minus the flat charge: $100
Acceleration amount: $90,900

After taking his accelerated benefit, Jeffrey still has $900,000 in remaining death benefit and $700,000 in remaining accelerated death benefit option.

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What is Chronic Illness Rider and How it Works - Part A

4/2/2022

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With the Chronic Illness Rider, if you are chronically ill (can’t perform two of six activities of daily living) or have severe cognitive impairment, you can accelerate a portion of the death benefit early. This can provide funds for you to pay for long-term care expenses – or for whatever else you choose. By having these funds, you can avoid spending down personal assets to pay for your long-term care services.

Key features of Chronical Illness Rider

Benefits are available as a lump-sum payout, up to the IRS per diem limit
Accelerated benefits can be taken once every 12 months
No upfront cost – an actuarial discount and flat $100 fee are charged only if your client uses the benefit
Maximum cumulative chronic illness benefit is up to 80 percent of the policy face amount at the time of the first acceleration request (with a maximum of $1 million)

What is the Actuarial Discount?
When insurance companies price the cost of life insurance, they plan on the beneficiary receiving the full death benefit upon the insured’s death. Since the insured is taking a portion of his or her death benefit early, you are getting an advance payment. The actuarial discount is based on the insured’s life expectancy and the Moody’s Corporate Bond Yield average, and it’s the insurance company's way of taking into account the time value of money between the advance payment date and the insured’s actual life expectancy (when the insured is expected to die). The shorter the insured's remaining life expectancy, the less his or her actuarial discount will be.

In next blogpost, we will show a case study of how it works.

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Why a Will is the Cornerstone of Your Estate Plan - Part C

Why a Will is the Cornerstone of Your Estate Plan - Part B

Why a Will is the Cornerstone of Your Estate Plan - Part A

What is Chronic Illness Rider and How it Works - Part B

What is Chronic Illness Rider and How it Works - Part A

PFwise.com - April 2022 Newsletter

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