Articles for May 2019

Major Risks to Family Wealth

Will your accumulated assets be threatened by them?

All too often, family wealth fails to last. One generation builds a business – or even a fortune – and it is lost in ensuing decades. Why does it happen, again and again?

Often, families fall prey to serious money blunders. Classic mistakes are made; changing times are not recognized.

Procrastination. This is not just a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.

As a hypothetical example, say there is a multimillionaire named Alan. The named beneficiary of Alan’s six-figure savings account is no longer alive. While Alan knows about this financial flaw, knowledge is one thing, but action is another. He realizes he should name another beneficiary, but he never gets around to it. His schedule is busy, and updating that beneficiary form is inconvenient.

Sadly, procrastination wins out in the end, and as the account lacks a payable-on-death (POD) beneficiary, those assets end up subject to probate. Then, Alan’s heirs find out about other lingering financial matters that should have been taken care of regarding his IRA, his real estate holdings, and more.1

Minimal or absent estate planning. Every year, there are multimillionaires who die without leaving any instructions for the distribution of their wealth – not just rock stars and actors, but also small business owners and entrepreneurs. According to a recent Caring.com survey, 58% of Americans have no estate planning in place, not even a basic will.2

Anyone reliant on a will alone risks handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need a greater degree of estate planning. If they want to endow charities or give grandkids a nice start in life, the same applies. Business ownership calls for coordinated estate planning and succession planning.

A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades, and perhaps, generations. Without it, heirs may have to deal with probate and a painful opportunity cost – the lost potential for tax-advantaged growth and compounding of those assets.

The lack of a “family office.” Decades ago, the wealthiest American households included offices: a staff of handpicked financial professionals who worked within a mansion, supervising a family’s entire financial life. While traditional “family offices” have disappeared, the concept is as relevant as ever. Today, select wealth management firms emulate this model: in an ongoing relationship distinguished by personal and responsive service, they consult families about investments, provide reports, and assist in decision-making. If your financial picture has become far too complex to address on your own, this could be a wise choice for your family.

Technological flaws. Hackers can hijack email and social media accounts and send phony messages to banks, brokerages, and financial advisors to authorize asset transfers. Social media can help you build your business, but it can also expose you to identity thieves seeking to steal both digital and tangible assets.

Sometimes a business or family installs a security system that proves problematic – so much so that it is turned off half the time. Unscrupulous people have ways of learning about that, and they may be only one or two degrees separated from you.

No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least, read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately explained.

No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make decisions in private, and it may be years before heirs learn about those decisions or fully understand them. When heirs do become decision-makers, it is usually upon the death of the elders.

Horizontal decision-making can help multiple generations commit to the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement.

You may plan to reduce these risks to family wealth (and others) in collaboration with financial and legal professionals. It is never too early to begin.

Mike Moffitt may be reached at ph#641-782-5577 or email: mikem@cfgiowa.com.

Website:  www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak Securities, Inc. and Cornerstone Financial Group are separate entities.

Citations.

1 – thebalance.com/what-is-a-payable-on-death-or-pod-account-3505252 [1/15/19]

2 – cbsnews.com/news/failing-to-have-a-will-is-one-of-the-worst-financial-mistakes-you-can-make [3/13/19]

 

Trade War Hysterics

Since hitting new all-time highs three weeks ago, the S&P 500 has fallen about 2.2% as trade negotiations with China hit a snag.  Two weeks ago, the US announced new tariffs on Chinese imports.  Then, China announced new tariffs on some US goods. Many fear a widening trade war.

Don’t get us wrong.  We want free trade, and we understand the dangers of trade wars and tariffs (which are just taxes on consumers).  At the same time, we think trade deficits themselves are not a reason for trade wars.  We all run personal trade deficits with the local grocery store and benefit from that.  Even if the entire world went to zero tariffs, the US would almost certainly still run trade deficits, even with China.

But today, the trade deficit with China is partly due to the fact that China has higher tariffs on imports than the US does – working to eliminate these lopsided tariffs is worthwhile.

In 1980, China was an impoverished nation.  Then it began adopting tools of capitalism – property rights, markets, free prices and wages.  Chinese businesses started to import the West’s technology, and growth accelerated.

Initially, China didn’t have to worry about intellectual property.  When you replace oxen with a tractor, all you have to do is buy the tractor, not reinvent the internal combustion engine.  But China has now picked, and benefited from, the lowest hanging fruit.  So, China decided to steal the R&D of firms located abroad.  Some estimates of this collective theft run into the hundreds of billions of dollars.

That’s why normal free market and free trade principles don’t neatly apply to China.

Remember President Reagan’s old story supporting free trade?  “We’re in the same boat with our trading partners,” Reagan said.  “If one partner shoots a hole in the boat, does it make sense for the other one to shoot another hole in the boat?”  The obvious answer is that it doesn’t, and so our own protectionism would hurt us.

But China hasn’t just shot a hole in the boat, they’ve become pirates.  If Tony Soprano and his cronies robbed your house, would free market principles require you to trade with them to buy those items back?  Of course not!

It’s true tariff increases will not help the US economy.  But $100 billion of tariffs spread over $14 trillion of consumer spending is not a recession inducing drag.  It’s true some business, like soybean farmers, are hurt.  But the status quo means accepting hundreds of billions in theft from companies that are at the leading edge of future growth.

Either way, if tariffs nick our economy, China’s gets hammered.  Last year we exported $180 billion in goods and services to China, which is 0.9% of our GDP.  Meanwhile, China exported $559 billion to the US, which is 4.6% of their economy.  We have enormous economic leverage that they simply can’t match.

An extended US-China trade battle means US companies will shift supply chains out of China and toward places like Singapore, Vietnam, Mexico, or “Made in the USA.”  If that happens, the Chinese economy is hurt for decades.

Anyone can invent a scenario where some sort of Smoot-Hawley-like global trade war happens.  Realistically, though, that appears very unlikely.  We’re not the only advanced country China’s piracy has victimized, and China may realize it’s more isolated than it thought.  In the end, China wants to trade with the West, not North Korea, Russia, and Venezuela.  China needs the West.  And all these trade war hysterics just aren’t warranted.

Brian S. Wesbury – Chief Economist, First Trust

Robert Stein, CFA – Deputy Chief Economist, First Trust

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L.P. and reflects the current opinion of the authors.  It is based upon sources and data believed to be accurate and reliable.  Opions and forward looking statements expressed are subject to change without notice.  This information does not constitute a solicitation or an offer to buy or sell any security.

This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Mike Moffitt may be reached at phone: 641-782-5577or email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com

Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak Securities, Inc. and Cornerstone Financial Group are separate entities.

 

TOD or Living Trust?

A look at two basic methods for shielding assets from probate.  

How do you keep assets out of probate? If that estate planning question is on your mind, you should know that there are two basic ways to accomplish that objective.

One, you could create a revocable living trust. You can serve as its trustee, and you can fund it by retitling certain accounts and assets into the name of the trust. A properly written and properly implemented revocable living trust allows you to have complete control over those retitled assets during your lifetime. At your death, the trust becomes irrevocable and the assets within it can pass to your heirs without being probated (but they will be counted in your taxable estate). In most states, assets within a revocable living trust transfer privately, i.e., the trust documents do not have to be publicly filed.1

If that sounds like too much bother, an even simpler way exists. Transfer-on-death (TOD) arrangements may be used to pass certain assets to designated beneficiaries. A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish.2

This is not an either-or decision; you can use both of these estate planning moves in pursuit of the same goal. The question becomes: which assets should be transferred via a TOD arrangement versus a trust?

Many investment & retirement savings accounts are TOD to begin with. The beauty of the TOD arrangement is that the beneficiary form establishes the simplest imaginable path for the asset as it transfers from one owner to another. The risk is that the instruction in the beneficiary form will contradict something you have stated in your will.

One common situation: a parent states in a will that her kids will receive equal percentages of her assets, but due to TOD language, the assets go to the kids not by equal percentage, but by some other factor, with the result that the heirs have slightly or even greatly unequal percentages of family wealth. Will they elect to redistribute the assets they have inherited this way (in fairness to one another)? Perhaps, and perhaps not.

How complex should your estate planning be? A conversation with a trusted legal or financial professional may help you answer that question and illuminate whether simple TOD language or a trust is right to keep certain assets away from probate.

Mike Moffitt may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com    

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak Securities, Inc. and Cornerstone Financial Group are separate entities.

Citations.

1 – investopedia.com/articles/pf/06/revocablelivingtrust.asp [3/7/2019]
2 – investopedia.com/terms/t/transferondeath.asp [4/25/2019]

Wise Decisions with Retirement in Mind

Certain financial & lifestyle choices may lead you toward a better future.  

Some retirees succeed at realizing the life they want; others don’t. Fate aside, it isn’t merely a matter of stock market performance or investment selection that makes the difference. There are certain dos and don’ts – some less apparent than others – that tend to encourage retirement happiness and comfort.

Retire financially literate. Some retirees don’t know how much they don’t know. They end their careers with inadequate financial knowledge, and yet, feel they can plan retirement on their own. They mistake retirement income planning for the whole of retirement planning, and gloss over longevity risk, risks to their estate, and potential health care expenses. The more you know, the more your retirement readiness improves.

Retire debt free – or close to debt free.  Who wants to retire with 10 years of mortgage payments ahead or a couple of car loans to pay off? Even if your retirement savings are substantial, what will big debts do to your retirement morale and the possibilities on your retirement horizon? On that note, refrain from loaning money to family members and friends who seem quite capable of standing on their own two feet.1

If the thought of using some of your retirement money to pay outstanding debts hits you, set that thought aside. You have dedicated that money to your future, not to bill paying. On second or third thought, other sources for the cash may be apparent.

Retire with purpose. There’s a difference between retiring and quitting. Some people can’t wait to quit their job at 62 or 65.  If only they could escape and just relax and do nothing for a few years – wouldn’t that be a nice reward? Relaxation can lead to inertia, however – and inertia can lead to restlessness, even depression. You want to retire to a dream, not away from a problem.

A retirement dream can become even more captivating when it is shared. Spouses who retire with a shared dream or with utmost respect for each other’s dreams are in a good place.

The bottom line? Retirees who know what they want to do – and go out and do it – are positively contributing to their mental health and possibly their physical health as well. If they do something that is not only vital to them, but important to others, their community can benefit as well.

Retire healthy. Smoking, drinking, overeating, a dearth of physical activity – all these can take a toll on your capacity to live life fully and enjoy retirement. It is never too late to quit smoking, stop drinking, or slim down.

Retire in a community where you feel at home. It could be where you live now; it could be a place that is hundreds or thousands of miles away, where the scenery and people are uplifting. It could be the place where your children live. If you find yourself lonely in retirement, then look for ways to connect with people who share your experiences, interests, and passions; those who encourage you and welcome you. This social interaction is one of the great, intangible retirement benefits.

Mike Moffitt may be reached at phone: 641-782-5577or email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak Securities, Inc. and Cornerstone Financial Group are separate entities.

Citations.

1 – fool.com/retirement/2019/03/24/3-things-you-should-do-in-your-40s-to-prepare-for.aspx [3/24/19]