Over the next 25 years, 45 million households will be receiving an inheritance after the passing of a loved one, according to analytics firm Cerulli Associates. The transfer of assets from baby boomers to millennials and beyond will be in excess of $68 trillion.
According to a poll by the Ohio State University, most Americans will only save about half of their inheritance. That means most Americans will essentially use it for immediate gratification purchases. Firsthand, I’ve seen how some beneficiaries used their inheritance on special breed dogs, new cars, lavish vacations, and other items.
I won’t discount that some of these impulse purchases are due to a form of mourning after the loss of a loved one. However, if we can plan properly for when these inevitable wealth transfers occur, a person’s financial plan can allow the inheritance to flow nicely into it. Here are a few examples of what to do if you know that you’ll be receiving an inheritance either soon or in the future.
Follow the Wishes of the Deceased
If your loved one had wishes on how the money was to be spent or who it was to be spent on, hopefully they had those conversations with the beneficiaries already. If not, well-crafted estate documents should explain their wishes and instructions.
Take It Easy
It’s ok to think of some of this money as a windfall. Weigh the cost of the total inheritance against the price of what you want. Discuss the idea with your trusted financial advisor. Having a second opinion from a great advisor can be helpful, especially if they can calculate how it will affect any future compounding of your own pile.
Assemble the Team
If you don’t already have a trusted fiduciary advisor, now is the time to interview and acquire one. Similarly, find a trusted estate attorney because your finances may get a bit more complicated after you receive the inheritance. Now it’s time for you to make your own instructions for your wishes by drafting estate documents to surpass you. Hire a CPA to weigh in on the potential taxes of your decisions as well. A team approach will pay dividends in planning opportunities down the road.
Review Your Finances
If you don’t already have one, build an emergency fund with your new inheritance. Depending on your financial
situation, having three to six months’ worth of necessary expenses in an easily accessible high yield account will help you sleep at night knowing that you can cover an emergency purchase on a rainy day or help with expenses if you are furloughed or lose your job.
Other Items to Think About
Sometimes, people don’t just inherit cash or securities. Sometimes, they inherit houses, cars, or jewelry. The estate documents of the deceased may explain how to handle these other items. If not, this is another area where that team approach can help you. You may now be in the realm of capital gains tax, and items kept need to be added to your estate documents. Will a second home become a rental property where liability protection may become necessary?
Use your inheritance wisely, and do not try to handle it all on your own. For some, emotions can cloud financial judgement. Trusted professionals are here to guide you through it all, and most of them have extensive experience to provide insight. Remember to seek out true fiduciaries that will steer you in a direction that benefits you and not them. We are here to help!
Derek M Oxford | CFP®, AEP®
In normal years, the due date for filing individual federal income tax returns is April 15th. This year, the IRS moved the deadline to July 15th due to the coronavirus pandemic. Fortunately for taxpayers, this 90-day extension of the deadline will not cause any interest or penalties. This relief also applied automatically to all taxpayers. Unlike a normal extension, no additional forms were required.
Need more time? You can get an extension.
If you can’t file your return by the July 15th deadline, you can still get an automatic extension until October 15th by using IRS Form 4868. This form can also be filed electronically. Filing for an extension until October 15th will not prevent penalties and interest. The IRS encourages to pay in full with the extension request. If that isn’t possible, information on payment options are available on www.IRS.gov.
Always file a return, and pay what you owe.
One of the biggest tax mistakes you can make is to not file a return because you owe money to the IRS. If your return shows you owe tax, always file on time and pay by the due date if possible. If you can’t pay the entire amount, file your return, pay what you can, and make arrangements with the IRS to pay the difference. You may owe interest and penalties on the unpaid tax, but filing your return on time will help you avoid additional penalties. It will also give you the option to work with the IRS to pay the unpaid balance.
Having a few extra months for tax filings was a welcome bit of good news amid the pandemic. That extra time is almost over, and tax day is right around the corner. Be sure to file on time, pay on time, and don’t let taxes derail your financial plan.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
This year has been a rollercoaster ride. The COVID-19 crisis and the ensuing shock to the global financial markets have captured the headlines and changed the way we live. With everything that has occurred, it is not surprising that the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which took effect January 1, 2020, has been nearly forgotten. The SECURE Act was drafted to help Americans save for retirement, and made several positive changes such as raising the age for required minimum distributions (RMD), as well as removing the age limit for making IRA contributions. This provided a great benefit to savers, but the SECURE Act also had some downsides, such as the demise of the “Stretch IRA”.
The SECURE Act and Inherited IRAs
For over 30 years, the “Stretch IRA” has been the cornerstone of estate planning as it relates to passing on wealth held in retirement plans. By handing down your retirement plan or IRA to a “designated beneficiary”, the required minimum distributions could be “stretched out” over the beneficiary’s life expectancy, providing a tax efficient means of passing on wealth. The SECURE Act changed all that by requiring most IRA beneficiaries to distribute the account completely within ten years beginning the year following the account owner’s death. There are exceptions for five special types of beneficiaries, now referred to as “eligible designated beneficiaries”, which includes the surviving spouse of the account owner, the minor child of the account owner, a disabled beneficiary, a chronically ill beneficiary, and a beneficiary less than 10 years younger than the account owner. These eligible designated beneficiaries can for the most part follow the old rules. Also, the changes primarily only apply to retirement accounts inherited beginning in 2020.
Those who have retirement plan beneficiaries that do not meet the definition of “eligible designated beneficiaries” should review their estate plan in light of these changes to determine if the current rules will require changes to their plan.
Other Estate Planning Implications
Trusts have long been used by estate planning attorneys as a valuable tool to distribute retirement accounts to beneficiaries while retaining some control over the distributions after the account owner’s death. As long as the trust was structured as a “see through” trust, meaning that there was a clearly identifiable person listed as beneficiary, then the retirement plan could be passed on to the trust and the required minimum distributions were based on the trust beneficiary’s life expectancy. But, the new rules create a problem – many trusts drafted prior to the SECURE Act no longer qualify for this special treatment, and the consequences can be significant. Instead of allowing the trust beneficiary to take distributions over their life expectancy, many of these trusts will now be forced to distribute the entire IRA account balance to the beneficiary within ten years following the account owner’s death. Some trusts, written as “conduit trusts”, will now prevent distributions until year ten, at which time the entire account balance must be distributed, resulting in a hefty tax bill.
Trusts are complex documents, and there are many different types which are each affected differently by the SECURE Act. If you have a retirement account or IRA with a trust listed as beneficiary, you should meet with your estate planning attorney and trusted financial advisor to determine how you are affected.
Rick Bernard | MBA
We have all been in a position, at least once in our lives, which required us to trust someone with something very important to us, sometimes by choice, sometimes by necessity. Over the years, I have met many individuals and families who have had that trust broken a time or two. When this happens with a Financial Advisor, skepticism and mistrust can, unfortunately, keep people from taking much needed action with their financial goals.
If you are at a point in your financial life where you are tired of stressing over market performance, are stressed about what current events mean for your portfolio, or simply have financial matters that keep you up at night, then consider working with a financial advisor. Do not let the need for a financial advisor go unmet, due to any of the following myths.
Myth #1: I Don’t Have Enough Money to Work with a Financial Advisor.
This is the most cited reason why many individuals or families do not seek the advice from a Financial Advisor. While it is true that many advisors will have a minimum amount of investable assets that they require from potential clients, it is also true that many do not. Regardless of how much you have or think you may have; it is important to reach out to different advisors and start a conversation. Not every advisor has a minimum and many are willing to work with you to help you grow. There’s an advisor out there for everyone.
Myth #2: Financial Advisors are too Expensive.
We have all seen the movies where stockbrokers drive expensive cars, fly in private jets and vacation on luxury boats, dare I say: Wolf of Wallstreet? No wonder some folks are afraid of them! One of the major considerations when working with a financial advisor is both how much and how an advisor should be paid. Historically, advisors were stockbrokers and were paid on commissions. As the industry evolved, some financial advisors switched to an asset under management fee, where advisors are paid a fee based on the amount of assets they manage. Now, some advisors are paid on a retainer basis, or even a combination of these methods. While there are pros and cons to each method of payment or compensation, often clients are unsure of how their advisor is being paid. Never be afraid to ask a potential advisor, or your current advisor, how they are being paid and if they are required to put your best interests before their own.
Myth #3: I Can Reach My Goal without a Financial Advisor.
Absolutely, it is possible for you to reach your goal without a financial advisor but having an advisor can make a huge difference. Why? The simplest answer is that we are all emotionally attached to our finances. Many of us work for years trying to accumulate wealth and it isn’t always so clear what to do with that wealth when you’re emotionally tied to it. Having a trusted, fiduciary advisor to guide you through decisions or make recommendations can be a massive help, especially during stressful times. Additionally, sometimes our financial situations are extremely technical and could use someone professionally trained to make the right decision.
Anthony Corrao | CFP®
Simply put, a fiduciary is someone who has a legal obligation to put your interest ahead of their own. A fiduciary financial advisor is a financial advisor who is legally obligated to act in your best interest when providing financial advice. Now, if you are like most individuals, you are probably thinking “That makes a lot of sense. Don’t all advisors make recommendations in my best interest?” Sadly, the answer is… no, not at all.
Something that began to gain a lot of notoriety in the financial industry in the past few years has been the term fiduciary and what it means for advisors and their clients. In 2016, the Department of Labor tried to put in place a Fiduciary Rule. Ultimately, this rule was struck down by an appeals court, but the effects of its message continue to live on. One of the main effects of this rule that continues to live on was the divide between a fiduciary advisor and a non-fiduciary advisor.
Many financial advisors are not fiduciaries. Non-fiduciary advisors are held to a lower standard, the suitability standard. Suitability is a standard in which the advisor only needs to believe that a recommendation is merely suitable based on a client’s financial situation, not in their best interest. Again, if you are like most clients you may be thinking, “I want to do what is best for me, not something that is merely suitable. Why would my advisor recommend something that is suitable and not in my best interest?”
Often, the difference between suitable and your best interest for a non-fiduciary advisor is decided by how much the advisor can make. Consider a client and an advisor weighing two similar investments, one of which pays a higher commission than the other. A fiduciary would be legally bound to recommend the one with lower fees, avoiding the higher commissioned product. A nonfiduciary advisor doesn’t have too. A non-fiduciary advisor can recommend an investment or a product that pays them higher fees even though a less expensive option may exist. That is a massive conflict of interest. Suitability does not require an advisor to place your interest of their own, nor does it require the advisor to avoid such conflicts. Only fiduciary advisors are required to fully disclose all material information and avoid conflicts of interest.
Not all non-fiduciary advisors are bad guys that are out to charge you as much as possible, but it is important to understand, they are legally allowed to do so, and some do. At CPS Investment Advisors, we are fiduciary financial advisors. We do not use any investment products that charge commissions, we only charge a single transparent fee for management. When evaluating potential advisors ask them if they are a fiduciary. If the answer is anything other than yes, or if the advisor says, “We are fiduciary-like”, then run away. You expect your doctor to make recommendations with your best interest at heart, so why don’t you expect the same from your financial advisor?
Michael Scott | MBA, CFA
Senior Portfolio Analyst
Deciding how to invest your savings is one of the most important decisions you will make. Fortunately, successful investing doesn’t need to be complicated. You can make good investment decisions if you understand a few simple concepts and have a financial plan. The two most important concepts investors need to understand are risk vs. reward and asset class diversification.
Risk vs Reward
Investment options range from “very safe” to “very risky”. Riskier investments usually offer the chance for higher returns over the long run. Riskier investments also have a greater possibility of loss. Academic research shows that the most effective way to invest is by blending assets of different risk levels. This process is called diversification and is a key part of building a high-quality investment portfolio.
The three major asset classes appropriate for most investors are stocks, bonds, and cash.
Cash is usually considered to be the safest option, along with debt obligations of the US Government, which are often referred to as “Treasuries”. Cash, and mutual funds that invest in cash equivalents like money market funds, have the lowest risk. These kinds of investments also provide lowest potential returns. Often the return on cash is not even enough to keep pace with inflation. Keeping too much cash in your investment portfolio can cause you to lose real purchasing power over time.
Investment grade municipal and corporate bonds have more risk but are still generally considered safe investments. Bonds represent the debt of a company. Bonds are also known as “fixed income” investments. When companies borrow money, they issue bonds. Investing in a bond is the same as loaning money to the company that issued the bond. Bond investors expect to earn interest on their investments, and to have the loan principal paid back at some point in the future. If the company that issued a bond has financial difficulties, they may be unable to make the promised principal and interest payments. This risk is called default risk or credit risk. Investing in a fixed income mutual fund instead of individual bonds can help protect against default risk. Bonds are usually less risky than stocks, but riskier than cash.
Stocks, often called “equities”, are riskier than bonds, but also offer the chance for higher returns over the long run. Stocks represent ownership of a company. When you own a stock, you own a small slice of that company. Some investors choose to buy individual stocks, while others buy mutual funds or exchange traded funds. When you invest in an equity fund, you own shares in the fund and the fund may own stocks. Stocks offer higher potential returns, but also come with more risk than investing in bonds or cash.
There are some kinds of financial instruments with much greater risk than stocks, such as derivatives, futures, and options. These high-risk instruments are not appropriate investments for the vast majority of individual investors.
Which Should You Choose?
The mix of stocks, bonds, and cash is also known as your “asset allocation”. A high-quality investment plan makes use of all three of these asset classes. The right asset allocation depends on factors such as your savings goals, your time horizon, and your risk tolerance. Your financial plan should incorporate all these factors. The right asset allocation is ultimately the one that best supports your financial plan and maximizes the probability of successfully achieving your financial goals.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
If you’re like one third of the world’s population as I write this article, you’re most likely staying indoors to keep yourself and your family safe and healthy due to COVID-19. Besides becoming a master of your streaming digital subscription or DIY home improvement champion, here are a few positive financial tasks you can check off your list with that newly acquired time.
Review Your Expenses
For some, income may be hard to come by as of late, so take the time to review your expenses to see if you can do without them during these slim moments in your life. Cancel that magazine subscription you’ve been putting off. Instead of your morning coffee from that big chain, buy a cheaper cup from a local coffee shop and support small business as the same time. Focus your income draws on the necessities like food, rent/mortgage, and utilities.
Review Your Debts
It is ideal to not carry a revolving debt balance on your credit card, but if you do, consider finding ways to minimize that interest payment each month. Look for 0% interest cards with incentives to transfer that debt to give you time to pay it off without interest. Even with interest rates at low levels, credit card companies are still charging a hefty amount. The same goes for other loans you may have outstanding.
Think About Refinancing Your Mortgage
Mortgage rates are still historically low compared to five, ten or twenty years ago. We could all use a bit more discretionary cash right now. Find a trusted mortgage officer to help guide you through the process of what a refinance looks like, what closing costs you may or may not incur, and how much the refinance would save you on a monthly basis and in the long-run. Other options are now available as well to consolidate a first mortgage and line of credit on your home at a locked in fixed rate.
Update That Resume
Some of us may have been laid off or furloughed during tough times. Updating your resume to begin the search for a different path could create new and exciting opportunities. At the same time, hiring managers are not just looking at your resume anymore. Find some time to go through your personal social media pages for images and statements a new employer might not find as appealing. Remember to be true to yourself, but think twice about posting those pictures from that St. Patrick’s Day party a few years back.
Remember that times may be tough now, but know there is light at the end of the tunnel. The economy comes back and it will before you know it. Ensure you’re saving for retirement, spending less than what you bring home, saving that extra amount for a rainy day (or a few months), and take time for personal self-care every once and awhile.
Derek M Oxford | CFP®️