Your Future Depends on It

Life consists of many different, and small, actions that create outcomes in a desired manner. This is a double-edged sword for many of us. Should we wish to purchase a new car or save for the future education of our children? Can we live in the current home or should be buy a much larger one?

The biggest challenge that American citizens face is one of priorities. Our country offers so much in potential personal and financial growth opportunities it becomes overwhelming for many people causing difficulties. Do I wish we had a different system than the current capitalistic markets? No way! However, I do wish to help people make more sound decisions with their hard-earned money.

An analysis of the savings rate, defined as the ration of money saved by individuals or families to their disposable income (income after taxes), reflects periods of time in which savings diminishes far below the required level to sustain the futures of the savers. Based on a review of the personal savings rate in the United States for the years 1960 – 2020, savings ranges were a low of 3.6% in 2007 and a high of 13.7% in 2020. 

The explanations for the differences in savings rates could be many different reasons – concern for the future due to the pandemic as in 2020 or loss of a job due to economic downturn effects. One obvious impact for savings is the need for short-term may be the purchase of large, durable goods such as cars, appliances for the home, etc. Savings for long-term needs may be for the purchase of a home, college education for the children, retirement funding needs as well as many other purposes.

According to research performed by Jack Caporal of The Motley Fool, 40% of Americans are afraid they won’t be able to retire because of setbacks caused by the pandemic. One method of mitigating the impact of economic emergencies beyond your control is save more money. I know, this is simply said and difficult to accomplish.

To reach your goal of saving more for the future, you must be honest with yourself and know exactly where you are today. If you are saving 3% of your after-tax income and wish to be saving 10% of after-tax income, this is quite a large difference in your lifestyle. One of the best means of saving for the future is the pre-tax contributions to your employer’s retirement plan. If you don’t receive the money in hand, the likelihood that your lifestyle will not conflate to a higher level is remote. My mother’s old adage of, “Out of sight, out of mind,” bears out this truth about money.

Second, record and analyze every penny of after-tax dollars that you spend over a two-week period. Earnestly think about the future and how you might be able to limit your spending in areas that aren’t positive in your life such as smoking or tobacco use. By saving the money he would have spent on cigarettes, my older brother informed me that he had an additional $3,118 in his savings and, as a bonus, felt better about himself. If that isn’t a win-win situation, I don’t know that I could think of one!

Cash flow management is the foundation to financial success. All things spring from the flow of cash and assets in our lives. Live your life as you wish; however, if you want to live longer, quit worrying about the daily costs of life and truly enjoy your senior years, you must start today. One of the best actions to start saving and stay focused on the long-term perspectives you wish to achieve is to seek out a coach or someone that can give you honest advice for your best interest. A CERTIFIED FINANCIAL PLANNER™ professional can help you plan for the best outcomes in your life. What you do today is critical for your life. Your future depends on it.

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College Loan Confusion

College students have steep learning curves. In high school, they were tasked with doing well academically, participating in extracurricular activities, complying with the rules of their parents’ homes and, possibly, having a job. At college, they must decide what to study, how many credits to take, and other important decisions, while adapting to a new environment and learning to manage time, communicate with professors and administrators, network with peers, and manage finances.

A key aspect of finances for many college students is student loans. When scholarships, grants, income, and savings are not enough to cover the cost, students often borrow to pay for college. In fact, student loan debt just became the second highest consumer debt category, passing credit cards but still lagging mortgages. In 2020, student debt passed over $1.56 trillion. As part of the Covid-19, relief the government passed numerous student relief programs, but student loan debt continues to grow as the average student loan debt of the 2018 graduating class was roughly $29,200. On average, student loan debt in the us tops out at $32,731, with roughly 10.8 percent in delinquency or default. 

At graduation, accumulated debt may include:

  • Direct subsidized loans (the government pays interest while students are in school)
  • Direct unsubsidized loans (students owe interest while in school)
  • Direct PLUS loans (for parents and graduate students)
  • Perkins loans
  • State and private loans (usually co-signed with an adult) 

Different types of loans offer different interest rates and repayment schedules. The federal government finances some loans. Private lenders finance others. Some loans are need-based, while others are not. One option available now is to consolidate student loans on the private market. Companies have emerged offering lower rates to borrowers, but this comes with tradeoffs like giving up certain federal protections. 

There are a lot of details to understand and track when students borrow. That’s one reason many colleges and universities require student borrowers to attend loan counseling sessions before receiving loans. Unfortunately, the survey found few students retain much of the information presented:

  • 94 percent of students did not know their repayment terms
  • 93 percent were uncertain what type of loan they held
  • 92 percent did not know their current loan interest rates
  • 75 percent understood how interest rates work

A Brookings Institute study found about one-half of students underestimate the amount of debt they have and one-third cannot provide an accurate estimate of their debt. The survey concluded:

“It is clear from the analysis presented here that enrolled college students do not have a firm grasp on their financial positions, including both the price they are paying for matriculation and the debt they are accruing. Without this information, it’s unlikely that students will be able to make savvy decisions regarding enrollment, major selection, persistence, and employment. Without knowledge of their financial circumstances, a student with a large sum of debt might be unprepared to compete for the jobs that would pay generously enough to allow them to repay their debt without having to enter an income-based repayment program.”

Unfortunately, student loan confusion doesn’t end with college. In large part, that’s because there a multitude of repayment options for college graduates. The Department of Education’s Federal Student Aid website offers an overview of the eight repayment options for Direct Loans and Federal Family Education Loans. These include:

  • Standard repayment plan (fixed payments)
  • Graduated repayment plan (increasing payments)
  • Extended repayment plan (fixed payments over 25 years)
  • Income-based Repayment Plan (income-based repayment)
  • Income Contingent Repayment (income-based repayment)
  • Income Sensitive Repayment Plan (income-based repayment)
  • Pay As You Earn Repayment Plan (income-based repayment)
  • Revised Pay As You Earn Repayment Plan (revised income-based repayment)

Of course, the choices available for repaying private student loans are different and vary by lender. In addition, marketplace and peer-to-peer lending platforms make it possible to refinance and consolidate student loan debt, sometimes at lower interest rates.

Tax implications may also play a role into loan repayment decisions. Interest paid on student loan debt may be tax deductible. Earlier this year, Forbes suggested it could reduce taxable income by as much as $2,500 for some Americans. However, this article cautioned monthly loan payments could limit the ability of many young Americans to save for financial goals like starting a business, buying a home, or retiring from work at a reasonable age.

A college degree is almost a necessity today. Pew Research Center has reported, “On virtually every measure of economic well-being and career attainment – from personal earnings to job satisfaction…young college graduates are outperforming their peers with less education.”

When a degree confers so many benefits, borrowing to pay for college appears to be a reasonable choice as long as students make sound repayment choices. In a world where so many repayment options are available, graduates may want to work with financial professionals to accurately determine which repayment programs may be the most beneficial. 

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Primed and Ready to Spend

For the past year-and-a-half, scientists raced to develop effective COVID-19 vaccines and governments and companies worked to make vaccines available. Today, seven vaccines are approved in 176 countries. More than 2 billion doses have been administered, and about 14 percent of the world’s population has been vaccinated. It’s a remarkable achievement.

While there is a lot of work left to do, the Centers for Disease Control offered new and more lenient guidance for fully-vaccinated people in May, and restrictions across the country are being lifted. The result has been a surge in social activities we used to take for granted. According to the latest Axios-Ipsos Coronavirus Index:

“…Americans’ reemergence is moving full steam ahead. A majority have dined in a restaurant or visited friends and relatives in the past week – and these numbers continue to climb each week…At the same time, Americans are reporting small improvements to their mental and emotional health.”

One unexpected side effect of the pandemic is Americans spent less and saved more than normal. As a result, credit card balances are lower and personal finances have improved.

You know what they say about money burning a hole in your pocket.

Americans are ready to spend some of their savings. While some remain reluctant to venture far from home, others are ready to travel. The 2021 Summer Travel Index showed:

  • 63% of survey participants planned to take a trip in the next three months
  • 74% planned to travel in the United States
  • 13% will travel abroad
  • 29% have weekend jaunts planned 
  • 28% will be traveling for 10 or more days

People who aren’t ready to travel are spending, too. Morning Consult asked Americans what they were excited about doing as the economy reopens and found that 46% were ‘very excited’ to return to a ‘normal’ routine. The list of activities includes eating at a restaurant, socializing, attending parties or weddings, going to the movies, visiting amusement parks or museums, and attending concerts and sporting events.

While having extra money inspires many people to splurge, it’s important to keep a level head. Spending has risen sharply during 2021. According to the Bureau of Economic Analysis, spending increased:

  • 20.6% in January
  • 14.7% in February
  • 27.7% in March
  • 14.9% in April

While the idea of ‘revenge spending’ may be appealing, very few household budgets can withstand sustained increases in spending without significant increases in income. So, as you break free from pandemic restrictions, it may help to keep some basic principles in mind:

  1. Decide which savings habits you’d like to keep. During the pandemic, Americans saved a lot of money. The average household saved about $245 by not going out to eat, $1,400 by not vacationing, and almost $5,700 by not making major purchases, according to the Covid-19 & Finances Survey. Consider whether and how much to continue saving.
  2. Be aware of how much you are spending. When people have extra money saved, it’s just fine to splurge on something fun, especially after a long stretch of missing out on traditional everyday activities. Decide the amount to spend and then track how much has been spent. 
  3. Eliminate things that are not needed. During the last year, many people prioritized spending differently. Optional expenses, like dry cleaning, house cleaning, commuting, and happy hours, were eliminated. In some cases, the result was an increase in savings. Review your financial priorities to see if they have changed. 

Many people experienced financial insecurity during the pandemic lockdown. As a result, emergency savings accounts and other types of saving have become more important. If your financial priorities have shifted, be sure to talk to a CERTIFIED FINANCIAL PLANNER™. Spending less and saving more may help you build wealth and improve financial security.

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Planning Ideas for Life Transitions

Life has a funny way of creating stressful activities for us. During the span from birth to death, we experience many different situations that require the best in us at the worst of times. Consider the change in life caused by divorce. Many people face this difficult event and do so without proper advice and consultation from a CERTIFIED FINANCIAL PLANNER™ professional. This could spell disaster for the person.

A divorce requires a marital balance sheet from the litigating couple with appropriate titles of the assets disclosed to the court. In many families, one of the two parties has a significantly higher employer plan account such as a 401(k) plan and the other party may be entitled to a portion of this account during property settlement. The best method of transitioning this asset to the other party is through a Qualified Domestic Relations Order. This document, when properly prepared within the IRS regulations, allows the receiving party to accept the funds on a tax-deferred basis in the same manner the account owner held the funds.

The primary issue of this type of transfer is that the recipient of the funds must pay tax to remove funds from the receiving IRA. This may trigger additional penalties, depending upon the age of the recipient, and significant taxes. 

A better approach to property settlement is to allocate taxable and tax-deferred assets in a ratio that allows the receiving party to access needed cash for the transition of life without incurring penalties and taxes. The receipt of assets in a divorce are not taxable to the transferee party or deductible by the transferring party.

We believe it is a win-win for the divorcing couple to amicably allocate the assets in a manner that allows each party to continue life with the least amount of disruption. Further, you should request your attorney engage a Certified Financial Planner™ professional to assist in cash flow and income tax planning before the documents for property settlement are prepared. This approach saves the individual money, time and frustration in the process of getting on with life.

Another transition in life is the passing of a spouse. This is a different approach than the separation of a couple by divorce. It is necessary that proper titling of assets and structure of the estate be performed. Changes are being considered by Congress and the president that will require reconsideration of existing estate planning documents. For example, the estate exemption may be lowered considerably from its current amount of $11,700,000. Many families that previously assumed their assets would pass to their beneficiaries tax-free may find themselves with a rather large tax burden.

Benjamin Franklin stated it best, “In this world, nothing can be said to be certain except death and taxes.” If Mr. Franklin, and his heirs, would not be offended, I offer to include in his eloquent statement “…and changes in the tax laws of the United States.” 

Key points for your consideration are: 1) consult a CERTIFIED FINANCIAL PLANNER™ professional if considering a divorce; 2) if in divorce at the present, seek an analysis of the types of assets owned by the married couple; and 3) prepare a plan for post-transition that will allow you to minimize taxes and maximize cash flow so that you may achieve a lifestyle of your choosing.

Life may present you challenges but you don’t have to face them alone. Contact a CERTIFIED FINANCIAL PLANNER™ professional to help you plan for the best outcomes in your life. See you on the jogging trail!

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Freedoms and Opportunities

Sunday, we celebrate the founding of our country, the United States of America! For 245 years this land has offered opportunities in abundance to those who wish to grow their wealth. Hard work and perseverance are the two primary ingredients to creating and maintaining your family’s security. Today, I may reminisce about the opportunities I personally experienced as a citizen of this great country but many people have enjoyed the fruits of this fine land.

The future of the United States of America has always been about freedom. People from hundreds of countries across the globe have sought America as a land for their realization of a more secure future for their families. One of the greatest tools that allows U.S. citizens and residents to achieve their dreams is capitalism. Think about the number of immigrants who achieved wealth and fame by bringing their work ethic and creativity to this country. For example, Pierre Omidyar, the founder of eBay. Pierre is a French citizen who had a goal of developing technology in the United States that would allow people all over the world to interact and share interests. With revenue in excess of $10 billion, I would say that Pierre has realized his goal!

Along with the freedoms we enjoy in our country, we must accept our responsibilities as citizens. Not only did Pierre become uber successful, he shared his wealth by establishing a philanthropic foundation that supports others who simply wish to receive a hand “up” not a hand “out”. By sharing his wealth with others to build a better community and create opportunities for promising Americans, Pierre has been recognized and honored with a Carnegie Medal of Philanthropy.

It is often forgotten that we have a duty, as Americans, to help our fellow man from the benefits we have gained our wealth. Libraries, schools, hospitals, and other critical structures in our communities, across this land, are built from the wealth earned by those capitalists that sought and achieved greatness. One of the greatest experiences a successful entrepreneur can acknowledge is the granting of opportunity to someone who, similar to himself, only needed someone to believe in their potential. 

Our local community has benefited greatly from the generosity of such wonderful entrepreneurs and business people like Clark and Wanda Bass, Mike and Nancy McGowan, Gary and Ruyana Fugitt and many others. These dynamic families saw a need in their local community, and the State of Oklahoma, and sought a means of providing support. To build on their initial and abundant contributions is the responsibility of the next generation – you and me.

Take a look around at the many benefits we share as citizens of this, the greatest country on the planet, the United States of America. I have been fortunate to travel to many countries and am always proud to see home. 

We are not a perfect country but we are country that continually seeks a better way of life for its citizens. You want to be a success in the United States of America? Roll up your sleeves, serve others in a manner that will help them solve their challenges and you will realize success beyond your imagination! Who knows? You may develop the next SpaceX, eBay or Facebook. When you do reach the pinnacle of success, remember your responsibilities and help others climb along with you to reach their potential.

May God continue to richly bless each of you as you seek your opportunities and may He bless the United States of America. Happy birthday, USA!

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The Secret To Investment Success

The most negative action to reaching your goals in investing your retirement assets is emotion. Markets, by their very nature, expand and contract in every cycle. Why is it important to state the obvious? When humans invest, two emotions play a part. For example, when the market indexes are setting new records for growth, investors tend to become greedy. As soon as the expansion has cycled down and contraction in the economy is prevalent, fear becomes the emotion of the day.

To control your emotions while investing for your future, it is critical that you understand three factors about the process. First, if you are investing for your retirement, you must acknowledge the process is a long-term perspective. The assets you accumulate in life must sustain for at least thirty to forty years in retirement. With this mindset, you establish a personal investment policy that helps you capture market gains with a minimal amount of risk that you are willing to accept.

By focusing on the term of your income needs in retirement, you can weather the, somewhat volatile, market cycles without excess worry. Let’s face it, everybody worries about something, right? When you initiate your savings plan during your career, the accumulation phase consists of thirty to forty years as well. What this means is that the same approach to investing for your retirement will serve you well in retirement!

The second negative to reaching investment success is continually changing your investments based on returns. There have been many occasions in which an investor has irreparably harmed their success for retirement by simply trading their account excessively. For example, we developed a plan for accumulating a client’s retirement assets. Based on the age of the person, his risk tolerance and projected cash flow needs in retirement, he only had to follow through on the plan. However, he allowed emotion to overtake him when a colleague appeared in his office one day and remarked about the excessively high returns, he was experiencing in his employer’s retirement plan. 

Our client decided the well-planned approach founded in logic was not meeting his needs because the markets would yield a much higher return. This is the emotion of greed taking control of the investment process. Within a year, the market cycle collapsed, and his portfolio had fallen by 50%. Imagine the next meeting we held with him and provided a comparison of his current allocation and results to that of the original allocation for his future. He was devastated and an emotional wreck!

The story does have a silver lining. We worked with him to formulate a plan that would place him back on track but required he work three years longer than he originally planned. Allowing your mind to host greed and fear has consequences. The probability of his lifetime plan for retirement being a success is very good.

Of the three negatives that can cause significant harm to your investment success is a concentration of investments. Diversification of risks within a portfolio helps you weather the market cycles by eliminating, or attempting to reduce, the impact of significant market volatility. In recent years, daily market swings have become the rule not the exception. Early in my career, I recall substantial swings in the S&P 500 Index would only be 10 or 15 points. In our current economic conditions, it is not uncommon to see fluctuations of 30 to 40 points in the index.

To allow yourself the highest probability of success in your investments, it is critical that you avoid emotions serving as guiding force, stick with your plan for saving and consistency will help you achieve your goals and diversify your portfolio to capture opportunities for reasonable returns in the long-term. A few small errors in investing can give rise to very large costs in your future savings. Seek the assistance of a CERTIFIED FINANCIAL PLANNER™ professional to help you establish a long-term plan that will give you confidence and clarity about your future. Until then, I’ll see you on the jogging trail!

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Timeline To Retirement

When making lifetime decisions it is critical that adequate time and consideration be given to the issue. Life has a way of paying us dividends based on the planning for events that we wish to occur. By reading this article, you will be more prepared to reach your desired results in life.

First, think about the desired outcome you seek. If you decide to retire, at some point in the future, it is integral to the level of success of this goal to plan accordingly. By initiating this process of systematic saving in your 20’s, the probability of success is higher than if you wait until you are age 60 to begin. 

We highly recommend that anyone planning to retire, in the next five years, give significant thought and planning to the design of this period of life. For example, will you travel, buy a second home, make substantial gifts to grandchildren or charity? These are worthy endeavors. However, to reach your goal you must plan for these expenditures.

Second, review your lifestyle needs. Oh, I didn’t define the difference between a need and a want. These two types of lifestyle goals are very different. Our brains are wired for gratification. I call this the “monkey” brain. We can’t seem to keep this “brain” focused on the important tasks in life because we are battling an insatiable hunger for fun and immediate responses. So many people have been trapped in poorly experienced retirements because of this phenomenon. 

To plan for long-term results that provide for your needs and wants, you must engage your “sage” brain which is the thought process that makes humans unique from animals. Your “sage” brain says, “When I start my first job, I will save 10% of my net earnings for my future.” The battle starts and “monkey” brain sees every toy that you have ever wished for and couldn’t afford. “Don’t worry about the future, live for today,” says “monkey” brain. You must be focused in the early years of life to create a future that is substantial.

Lastly, start today planning for your future. If you wish to live a life by design, it takes planning and soul searching. Retirement is a phase of life than can be tremendously enjoyable when planned accordingly. Seek out a CERTIFIED FINANCIAL PLANNER® to help you create your dream for the future. You will be glad you did!

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Small Mistakes, Big Consequences

As humans, we make mistakes all the time. Some mistakes may relate to your career choice. Other mistakes may relate to the location of your home. However, some of us make, seemingly, small mistakes and don’t realize the impact the outcomes will bring to our lives.

Small mistake #1: Failing to save for retirement early in your career. When a person is 23 years of age, the future seems so distant. Their entire career is just launching from the starting gates of their recent college graduation and time is their friend. Fast forward twenty-five years and the person is looking at their future with a different lens. Kids, mortgage, car payments, and other living expenses caused by the choices made many years earlier has redirected their otherwise retirement savings to current expenses of life.

The obvious outcome is one that none of us wishes to realize – working until we are much older than we would prefer. By initiating your future savings at the beginning of your career, time and compounding of money will help you realize your financial goals later in life. Start with your employer’s plan and contribute at least the amount the company will match. For example, if your employer matches 5% of your salary then you should seek a goal of contributing 5% of your salary. The math is easy on this one. You will have doubled your contribution amount annually with the employer’s matching contribution. Let’s assume the markets treated you favorable and the investment in your employer’s plan grew by 8% for the year. Now, you can experience growth far beyond your 5% initial deferral from your salary. 

Small mistake #2: Failing to live within your means. A philosophy practiced in our retirement planning business is one of “pay yourself first” for our clients. You want to do things differently in your life than most of your friends – save first, spend second. What this means is that you will treat your retirement contributions as a priority before incurring and spending your earnings on current pleasures of life. Too often we experience clients that meet with us that have all the toys of the day but lack any liquid savings or future investments.

Maximize your probability for retirement success by implementing a budget and focus on “paying yourself first”. By taking a more realistic approach to your future, you will continue to enjoy life and enjoy it more abundantly when you retire. Of course, prudent investment selection and monitoring are critical during the accumulation phase of life. You may wish to seek the guidance of a Certified Financial Planner practitioner to initiate your plan and provide you annual feedback on your progress.

Small mistake #3: Allowing your credit card balance to remain unpaid after one month. This is something that too many of us fall victim to early in life and it is a difficult problem to solve if left unattended. Based on a survey performed by Nerdwallet in January, 2021, the average balance carried on a credit card is $7,149 and the U.S. household will pay interest charges of $1,155 on average for 2021. Further, the survey discovered 63% of the responses indicated that they feel their household finances have worsened from that of the previous year.

The best method of controlling the interest accruing on credit card balances is to remember the card is for emergency purposes only. Do not use a credit card for a purchase that can’t be paid in full with your current savings or income. To be obvious, the use of a credit card is a means to live outside your current means. 

To resolve this mistake, use a debit card that immediately withdraws the funds from your bank account. Another method of solving the credit card debt issue is to ask your credit card issuer to draft the full payment each month from your checking account. This is a critical step since you must be certain the funds are available for the payment each month.

Lastly, place your credit card in a small plastic bowl of water. Place the bowl in the freezer and leave it there for about 3 days. Remove the bowl and note the credit card is safely stored in a block of ice that requires thought and effort to free the card. I know this sounds silly, but it is effective for those people who are impulse buyers with their credit cards.

Don’t wait to improve your life by eliminating or resolving these three little mistakes from your life. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to guide you in managing your cash flow to maximize your future savings. What have you got to lose? Worry, anxiety, stress, etc. See you on the golf course!

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It’s About More Than Numbers

Too often we paint someone with a broad brush as to their contributions to the world solely based on the group in which they are a member. For example, medical doctors may specialize in a field that allows them to focus on a specific area of the human body. These physicians are capable of providing you general advice and medical care but may also provide you greater, more detailed, information pertaining to a particular illness such as kidney ailments or cancer of the brain.

Wealth advisors are individuals who may specialize in certain areas of financial matters that a particular segment of the population needs. For example, many wealth advisors focus on corporate executives and their unique compensation opportunities. Other advisors may focus more on the intricacies of Social Security Benefits and less about long-term market investments.

To be certain, your life is more complex than simply working with numbers to reach your lifetime goals and dreams. It is vital that you consider the qualitative factors in your life as much, if not more so, than you do the quantitative factors. My case in point is the life of a lady we will call “Jane”. By all outward appearances, Jane had all that was needed to sustain her the remainder of her life and leave a legacy for her children to expand their wealth. A couple of years after her husband’s passing, we asked Jane if we could meet to discuss the important matters in her life. She assumed we were talking about her accounts and showed up with her Financial Organizer we provided when initiating the relationship.

Immediately, we recognized that Jane had not understood what we wished to discuss with her. After explaining the importance of happiness in her life, we asked her a few simple questions to initiate this subject. “What is one thing that happened recently that made you smile and one thing that was difficult?” She looked up at me and began to create a big smile on her face. She exuberantly stated, “I had the best time recently volunteering as a cancer patient attendee!” I asked her, “What of that process made you so happy?” She responded in a way that made me realize she had found a new purpose in life. “When John was dying, I had no one that understood, truly understood, what I was going through at that time in my life. By helping these terminally ill individuals live a more fulfilling life and knowing that someone understands the palette of emotions they are experiencing, helped me heal and find happiness again.”

We continued to discuss this wonderful opportunity for Jane to serve and offered her some qualitative advice. “Why don’t you establish a self-help group or lead others in the process of caring for terminally ill individuals that provides dignity, understanding and compassion?” This new form of serving her fellow man gave Jane the emotional support she needed to truly live again after the loss of her husband.

As wealth advisors that specialize in retirement planning, we place a significant amount of importance on helping clients understand, and navigate, the maze of life after the loss of someone special. We are proud of our technical competence and expertise. More importantly, we are most humbled that our clients know that we are here as a resource for more than numbers.

As humans, we are all different in some way. However, we all need emotional support, in addition to financial advice, to truly live a rewarding life. It is not all about the numbers unless you are talking about the lives you touched in deep, emotional moments that helped them see life in a better way. 

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Estate Tax Changes May Affect You

Big projects and changes in the operations of government are always sought by new presidents with in their first one hundred days in office. President Biden is no exception to this trend.

However, one of the areas of change proposed by the new administration is estate taxation. Under current law, most citizens’ estates in the United States would be well under the exemption allowed of $11,700,000. For those whose estates exceed this exemption amount, the rate at which their estate value is taxed is 40%. The current law is set to “sunset” after 2025 and the exemption would be returned to $5.5 million which would subject many more estates to taxation.

Biden has proposed a significant reduction in the estate exemption to $3.5 million and a limit of $1,000,000 on lifetime transfers. To provide some historical context, when I began my career as a CPA, the estate exemption was $600,000. While seemingly low, it did require many families to liquidate assets of their estates to pay the assessed tax. There were exceptions to the $600,000 exemption for farms and other “family-owned” businesses.

In the proposal to reduce the estate tax exemption, the proposed lifetime transfers limit of $1,000,000 will require many families to perform considerable planning to minimize the tax burden caused by such a low threshold. Under current law, the lifetime transfers, called “inter vivos gifts”, would be exempt from tax up to the amount of the estate exemption of $11.7 million. By uncoupling the exemption and gift tax amounts, many families will reassess their gifting plans for the next generation.

One of the most significant changes in the proposed law is the removal of the “step-up” in basis doctrine allowed by law for more than 50 years. Many attempts have been made over the years to repeal this valuable tool for estate planners. To understand how drastic this change would be to most American families, let’s consider the family home being bequeathed to the children of a decedent. When the parents purchased the home and 640 acres in 1960, the price paid of $25,000 would be their basis in the property. However, during the period of ownership by the parents, natural resources and subsurface mineral deposits of a vast amount were discovered. The land is now worth $5 million (keep in mind this is meant to be an educational example). Under current law, the heirs could sell the property immediately after the death of the parents and receive $5 million tax-free. Fast forward to 2022, assuming Congress passed the bill requiring taxation on capital gains and the lowering of the estate tax exemption to $3.5 million, the heirs of the estate would receive only $4.4 million after the payment of estate tax. The capital gains assessed on the conveyance would be another $1,386,000 to be paid by the heirs upon sale of the property. 

To summarize our very simple example, the total value of the property inherited would be $5,000,000. However, under the proposed law changes by the current administration of our government, total taxes in the amount of almost $2,000,000 would be assessed the transactions. Today, if this same scenario occurred, the family would be exempt from all estate and gift taxation as well as no capital gains tax producing a savings of $2,000,000 to the family.

Allow me to reminisce for a moment. In 2010, the United States had an unlimited estate exemption meaning any citizens dying in the year could pass all of their estate assets to their heirs without U.S. estate tax being assessed. The owner of the New York Yankees, George Steinbrenner, had an estimated net worth of $1.4 billion at the time of his death in 2010. His passing in 2010 enabled his heirs to receive his net worth without paying any estate tax to the United States. 

This is the thought behind the removal of the “step-up” in basis doctrine and lowering of the estate tax exemption. However, many Americans who have worked diligently to provide for their families and became successful over time may now be caught in the net of taxation at a time they can least afford it. Most family-owned small businesses may be worth more than $3.5 million but lack the liquid assets to pay the tax burden. This scenario would require the sale of the company, or at least its assets, to pay the tax. This draconian approach to taxing the middle class will not bring much treasury to the coffers of the United States. 

Estate laws are very complex. If you wish to maximize the amount of assets you wish your heirs to inherit, now is the time to create a plan. Seek out the advice to take advantage of opportunities to reduce the burden of taxation on your wealth. Contact a CPA and CERTIFIED FINANCIAL PLANNER™ professional to assist you in creating and maintaining a plan for your future. I’ll see you on the jogging trail!

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