Estate planning challenges include mastering financial markets, tax laws, and other arcane technicalities. But often what’s the very trickiest, when deciding how to leave your assets, are the psychological issues.

These can range from an aversion to thinking about death to complicated feelings about children, in-laws, and other relations.

We have had several clients who have struggled with deciding how to allocate their assets after they were gone. One all-too-common issue is an emotional or moral paralysis. As an example, a married couple we work with know they need estate planning and have done most of the necessary work, but they just won’t sign the documents. They have paid to have their lawyer draft the documents, but even when these trust papers are complete and ready for their signatures, they can’t get to the dotted line.

We know they have been estranged from their children, and we have been working on this long enough that they have managed to reconcile with some of them. But they just won’t sign.

We have been working with a third party who brought us into this situation, so, unfortunately, we’re not close enough to the couple to figure out precisely what the problem is in signing the paperwork. Even though we have been working on this for almost five years, it’s at a stand-still. Rational considerations tell them that their high net worth and their business put far more at stake than just family matters.

But the less rational issues often overshadow the nuts-and-bolts, dollars-and-cents calculations. This is one reason we’re convinced that financial advisers can best serve our clients when we know them, not just as a portfolio of assets, but as people with families, histories, hopes, dreams, and worries.

Another of our clients had four children, but only two grandchildren. She couldn’t choose who she should leave her assets to, beyond the children. We finally left it at letting those four children make those decisions individually in their own wills. This wasn’t ideal, but the client couldn’t bring herself to decide. After, many, many discussions, letting the problem flow downstream to the next generation was the best we could come up with at the time.

This client didn’t want to give to charity or to name either of the grandchildren. Being in her 80s, she figured she had a slim likelihood of seeing anything happen. Well, guess what? Her grandson and a son both died, within months of each other. The trust she had set up for the son ended up going to the granddaughter, which she wasn’t happy about. All the conversations we’d had about that very possibility had been totally forgotten. Despite our best efforts up front, it took us a while to get back into her good graces.

A third client that had never married and had no children struggled with who he should leave his significant wealth to after he was gone. He did want to make specific bequests to a few friends, and to give the lion’s share to charities, but had a hard time deciding how much each should get. After many conversations, we finally found the underlying cause of it. His deep-seated fear was that, somehow, if he made a will, he would die. He never did get over the magical thinking that, by not making a will, he could live indefinitely. For many years, we managed his funds but he never did make a will. Finally, after he became ill, some distant relatives turned up and “helped” him make a will contrary to everything he had ever told me. Within weeks, he was dead.

Despite his uncertainty about what to do, he was always clear about what he didn’t want to happen. And yet his irrational fears meant he not only allowed but enabled all those things he didn’t want to happen.

Few issues are more challenging than when clients feel they are favoring one child over others. Maybe one can manage money better than another, or a child is married to someone the parents don’t like or trust. Perhaps the child has problems like addiction. Because the emotional challenges make it hard to think straight about such things, the best approach can be to work with an independent trustee or executor like Old North State Trust.

We don’t mean to scare people with horror stories. But these examples show that we have the experience to deal dispassionately, yet still empathetically, with these types of challenges. As disinterested third parties, we can deal with the heirs without drama when it’s time to distribute the funds.

A final example: one current client is a twenty-something who has never worked, does not work now, and has no intention of working. Yet he wants to live lavishly. His father, who recently died, was a well-respected doctor who worked hard all his life. The son believes he’s entitled to live the same lifestyle that his dad earned. We are now the one to tell him this isn’t going to happen.

No question these conversations have psychological ramifications, especially in a case like this where substance abuse mixes with feelings of entitlement. It’s necessary to approach these discussions in a way that won’t send the heir into a spiral but will let them clearly understand how things are going to work from now on.

 

 

 

 

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.

Most of us who make our livings watching the financial markets are aware of a phenomenon that is strange, but interesting. For reasons that may make sense – or make no sense whatsoever – a mythology has developed about certain trends or cycles that can affect market performance.

Oddly enough, some of these weird myths about the stock market seem to be mostly true! One is the so-called “January Effect.” Others, like the Super Bowl, the Presidential election, etc., are in the same category: weird, but true. Whether they are a sound basis for investment decision, of course, is another question.

And then there are plenty of other supposed cyclical effects that don’t hold up at all on close examination.

So why would investors trust something that seems like so much crystal-ball gazing or tea-leaf reading?

Because so much uncertainty encircles the investment process, investors will often grasp at something that appears to be solid.  The “January Effect” is one example of these “somethings.”  Simply put, the January Effect is the notion that the market usually rises in the month of January and that a good market performance in January bodes well for the entire year.  Over the last 60 years, when January logged a positive performance, the market was higher for the full year about 90% of the time.  When the market fell in January, the full year showed a negative return about 55% of the time.

There may be some basis for this, at least for the rising markets in the year’s first month. An analysis in “The Wall Street Journal” said so-called “tax loss selling” may explain much of the January effect. Investors seeking to minimize their tax burden will sell off securities that have underperformed. This can tend to artificially drive down those stocks’ prices in late December. But come January, the pressure to harvest losses to offset taxable gains disappears. And so, those prices tend to recover.

The January effect is most pronounced among small-cap stocks, the “Journal” article said, as well as with issues that are held more by individuals – motivated by tax considerations – than by institutional investors. Another factor that some analysts have seen is that the January effect is greater in years that tax rates decline. That’s because investors are more inclined to take advantage of offsetting losses under the prior year’s higher tax rates.

A similar phenomenon, but one without any actual connection to market activity, is the “Super Bowl Effect.”  More often than not, the stock market rises in the years when a team from the old National Football League (now the NFC) wins the Super Bowl. Hence, equity investors may have had another reason to cheer for the Atlanta Falcons this year. Sadly for those who believe in this notion, of course, the New England Patriots won this year, which should portend an off year for stocks.

According to an article in MarketWatch, this indicator has been right 40 of the 50 years the Super Bowl has been played. That 80% success rate is pretty astonishing in the world of market predictions, though it has not been quite so impressive in the last several years. The ratio of “correct” results since 2000 has been only 70%. MarketWatch editor Mike Murphy noted, “After being correct seven years in a row, 2016 defied the prognostication — the AFC’s Denver Broncos won the Super Bowl, but the stock market posted a yearly gain.”

Other “somethings” out there include the “Presidential Year Effect,” the “Halloween Indicator,” the “Mark Twain” effect, and so forth. All these observations are simple attempts to bring more certainty to the stock market.  And all these things are also totally absurd. Fun, perhaps, but absurd.

They are classic examples of “correlation without causation.” Just because two unrelated factors occur at the same time, one does not necessarily cause the other. The rooster’s crowing may be highly correlated with the rising sun, but the bird’s cry does not cause the sun to rise. Every year ice cream sales and accidental drownings show a remarkable correlation. Does eating ice cream cause drowning? Clearly not, but both tend to rise during the summer months.

The point is this: While these supposed effects are entertaining and sometimes mystifying, they aren’t a good basis for making decisions with your investments to buy, sell, or hold. There is no real substitute for keeping a careful eye on broader trends involving the market, the national and world economies, and what’s happening in specific industries or individual companies.

All that is hard work and time-consuming, of course. Which is why most investors do well working with experienced advisors who make it their business to understand actual economic trends. The mystical mumbo-jumbo is fun to talk about at parties, but not a good basis for making decisions about your nest egg.

 

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

There has been a lot of discussions lately about the merits of being a Fiduciary and whether the Fiduciary Rule will be enacted or if it will indeed be struck down by President Trump.  Fiduciaries have been around for hundreds of years.  In fact, the idea of fiduciaries started back in feudal times when knights went off to fight in the Crusades and had to leave their estates for many years.  They needed someone that they could trust their livelihoods with that would treat the property the way that the knight would treat it.  This is the fiduciary standard.  People are often confused and believe that the fiduciary is to treat the assets the way they would treat their own assets, but this is not the case.  A fiduciary must act as the owner would act.  He must place himself in the position of the owner and act as the owner would act.  A fiduciary must be impartial between beneficiaries and his first duty must be to the client, above himself or anyone or anything else.

 

Some may think this is a huge burden, but it’s actually a privilege.  In fact, being a fiduciary allows you a unique perspective into the lives of your clients that you can’t get in any other profession. You become a part the family, a confidante, more than just a financial advisor.  Yes, you manage their investments and help them with their estate and retirement planning, but it is so much more.  We’ve had clients that tell us that we’re the only ones they can share their problems and concerns without judging them.  They have concerns about their children that they don’t want to share with others.  They share their worries about the future, not just financial worries, but concerns about their children, grandchildren, church, and anything else that is on their minds.  We can’t solve all their problems, but we can listen and offer advice on the things we have expertise in and what we’ve seen that works in other situations.  Our clients are grateful for the help we offer and appreciate a sympathetic ear from someone they know cares and understand their situation. We even have a client that calls one of our advisors Mama!  That’s a great feeling and one that you can’t get as just a financial advisor or a transactional business.  It’s a bond formed by trust and respect and by being in the trenches with the client.  Yes, there are challenges, but they are far outweighed by the benefits of knowing you are helping people.

 

 

 

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.

Health care has been on everyone’s mind recently with all the excitement about whether Obamacare would be repealed, replaced, or improved. (Or, for now, left alone.) A large portion of our clients are in the age range that they have made, or soon will make, the shift from private insurance to Medicare, the closest thing we now have to universal health coverage.

For those people, how to maneuver through Medicare’s complex interface of public and private coverage options is a serious issue. For example: even with publicly financed insurance through Medicare, you’ll need a “Medigap” policy, bought on the private market, for the 20 percent or so of expenses that aren’t covered.

We find ourselves answering a lot of questions about such things as when to start drawing benefits, how to choose the best combination of plans, etc. Health coverage is a major component of retirees’ living expenses. Recent statistics show that retirees spend, on average, three times as much for health care than the overall working-age population. So, it’s a very good idea to include health-care planning in your strategy for retirement, and get advice from your financial adviser.

A couple of our clients recently asked us to do some research about when they should start receiving their benefits. Both become eligible this year. Both will need some income to replace an annuity that will cease upon retirement. Both needed advice about how to factor health-care costs and benefits, along with Social Security payments, into their cash-flow projections.

We had another client ask about a letter she received, stating that her part D — prescription-drug coverage — premiums would no longer be deducted from her monthly Social Security benefits. This was one of those odd things that pop up from time to time and can be baffling to try to make sense of for anyone to comprehend. Just for that example alone is why you should have someone you can consult.

The Social Security Administration, which administers Medicare, does have online tools for figuring out these kinds of issues. Unlike trying to get a clear answer from an SSA employee (hard to do, and not always reliable) these tools are helpful, but you should know what you’re looking for on these sites. Another reason why it makes sense to get help from someone who has navigated these perilous waters more than once!

Obviously, we can’t explain all the nuances in one brief article, but these are some essential elements that everybody should be aware of when approaching retirement.

Medicare has four components. The first, Part A, covers hospitalization. For most people, Part A is fully paid from the taxes that have been withheld from our paychecks. Enrollment is automatic when you sign up for Social Security.

It’s not so simple with Part B, which covers doctors’ visits and most routine health care. That requires a premium payment, like private insurance, but with a twist.

It’s very important to sign up for Medicare as soon as you’re eligible. Normally that means within three months of turning 65. Anyone who started drawing Social Security benefits before 65 will be automatically enrolled as of their 65th birthday unless they opt out, but that doesn’t apply to people who wait until age 65. The most important thing to remember is that a stiff penalty applies for late enrollments in Part B. Stiff, and permanent.

The penalty is a whopping 10 percent of the premium for every year past the eligibility date that a recipient fails to enroll. For example: If you think you don’t need Medicare Part B at 65, but by the time you’re 70 deteriorating health has changed your mind, you will pay 50 percent more on your premiums than if you had signed up right away. And that penalty is forever. You’ll pay it until the day you die.

Similar penalties apply for parts C and D. Those are the optional “Medicare Advantage” managed-care plans and prescription drug coverage plans. The idea, of course, is to strongly encourage everyone to sign up as soon as possible rather than play the “wait and see” game.

One other wrinkle can complicate matters further. Say you’re employed and have a good health insurance plan, and don’t intend to retire at 65. That employee health coverage provides a loophole, allowing you to defer Medicare enrollment — but only if you’re not getting Social Security. When to start collecting Social Security benefits, and when to enroll in Medicare, can be tricky decisions that are best discussed with an expert as part of your overall retirement planning.

Then there’s the question of whether to go with traditional Medicare, which typically includes Part B, Part D, and a supplemental Medigap policy. The alternative is a “Medicare Advantage” plan. This can cost less than the traditional option because it includes prescription coverage and plugs the coverage holes that Medigap policies are designed to fill. The downside is that, as managed care plans, Advantage policies limit you to a specific network of providers.

This may not be a problem for retirees in relatively good health. Still, it’s important to be sure your doctors and other providers are part of the insurer’s network before enrolling in an Advantage plan.

It’s possible to switch back to traditional Medicare – parts B and D. An enrollment period from mid-October to early December each year allows recipients to change their coverage. Here’s one more Catch 22, though. If you need a Medigap policy more than six months after turning 65, you may not be able to get it or may be charged higher premiums, because of pre-existing conditions. That’s not true during that initial six-month window when insurers must cover you at the lowest possible rate regardless of health.

The same annual enrollment window also allows for changing Part D prescription plans. It’s a very good idea to review your options, because insurers may change coverage from year to year. This can be complex and is another area where an experienced financial planner can offer useful advice.

A couple of other considerations should be discussed with your adviser. One of those should be part of your tax planning strategy. Just as with certain taxes, Medicare premiums go up for people over a certain income level. That’s $85,000 for individuals and $170,000 for couples.

Then there’s the matter of health savings accounts or HSAs. While these have tax advantages for working people, they aren’t compatible with Medicare. That means you must stop contributing to your HSA when you sign up for Medicare. However, for some people who are still working after 65, it can make sense to defer Medicare and continue to use an HSA. The details can be tricky, and making the wrong decision can be expensive. So, this is definitely an issue to discuss with your financial planner well before you turn 65.

The good news: For half a century now, Medicare has been a vital component of retirees’ financial security. There’s really no bad news, just the reality that Medicare is a machine with many moving parts, and it’s wise to have an expert help ensure you’re managing the controls correctly.

 

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

 

  • Avoid Distractions- from both time and money. Focus on the task at hand, as well as the resources you have and the objectives you want to achieve.
  • Be open to new ideas- We live in a fast-paced world and technology is ever changing. It helps with organization and helps to usher in a brave new world of investment opportunities.
  • Cash is king. Make sure to have a rainy-day fund.  Rule of thumb is 6 months of expenses.  This will save you time overall if you don’t have to get a second job to cover in case of emergency!
  • Don’t accept failure. There will be times when you fall short of your goals, but when that happens, pick yourself up, dust yourself off and keep going!
  • Enjoy life- with both your time and money. Set aside time every day to have fun.  Set aside a “fun” fund to do what you enjoy.  It will make the other time and money more enjoyable.
  • Find a good advisor. It’s hard to go it alone, whether we’re talking about money or time or life in general.  We all need a little advice occasionally.  Find someone you can trust to point you in the right direction, or at least to bounce ideas off.
  • Get started. Everyone procrastinates, but you must start sometime and there’s no time like the present!
  • Have a plan. The best laid plans sometimes go awry, but you can always get them back on track.  Without a plan, you have no starting point, no goal, and no way of tracking your progress.
  • Invest both time and money in educating yourself to find out what you don’t already know. It takes work to manage these things.  Invest in yourself.
  • Jump in. There’s no right time to start on a project like this one.  Sure, you can make a New Year’s resolution to do so, but more than likely, you’ll just break it like the one to exercise more or lose weight.  So, just do it.
  • Kindle good relationships. You don’t have to do everything yourself.  We weren’t meant to walk alone.  Let someone help.
  • Take advice.  It helps with both managing time and money.  Just like you can’t do everything yourself, you can’t know everything either.  Get good advice and listen to it.
  • Make good choices. We’ve all made bad decisions, but we should choose to learn from them and go on to make good choices.
  • Negotiate- We know we’re supposed to do this at a car dealership, but why not do so with our time and other monetary decisions? Time is just as precious, if not more so, than money, so let’s act like it.
  • Operate under the assumption that your time is a precious commodity and you can’t waste it. You’ll manage it much more wisely.
  • Put in the work and reap the rewards. If you manage your time and money wisely, you’ll have more of both and can enjoy the fruit of your labor.
  • It’s not so much about quantity as it is quality.  We’re all given the same 24 hours in a day, but it’s how we spend those hours that make a difference.
  • Realize- that there are multiple ways to achieve the same results. Are you doing things the same old way and getting the same old result?  It may be time to rethink things.  Is your portfolio lagging?  It may be time for a fresh look.  Take a step back and look at life from a new perspective.
  • Seize the day! There’s no time like the present to put your plan in action and begin doing things differently.  Eliminate time wasters from your day now.  Eliminate money wasters from your habits now.  Ask for a review of your portfolio now.  There’s no time like the present to start!
  • Test the waters. Start small.  Try new techniques and, if they don’t work, try something else.  But, if you don’t try, you’ll never succeed.
  • Understand the pitfalls. With new investments, there are always certain risks, but risk generally brings rewards.  Make sure that you understand the risk that is associated with the investment.  That doesn’t mean it isn’t a valid investment and appropriate for your portfolio.  In fact, a riskier investment, by itself, could lower the overall risk of a portfolio due to the way it interacts with the rest of the portfolio.  Talk to your advisor for a better understanding.
  • Value- your time and money, but not above the most important things in your life. Remember what and who are most important.
  • Work smarter, not harder. Use the tools at your disposal- your advisors, technology, etc. to make life easier.  That’s what they are there for.
  • (e)Xpect results, not miracles. You’re only human.  Rome wasn’t built in a day.  But, if you set goals and really work toward them, then should be able to expect to achieve them.
  • You are the master of your own destiny. Don’t expect or blame anyone else for your results.  You should work at managing time and money yourself and, ultimately, you are responsible for the end result.
  • Zeal- it takes a certain amount of zeal, as with anything you really want to achieve to be successful. So, have at it!  Expect to be successful.  Expect results.  Expect to do well.  Achieve those results!

 

 

 

 

 

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

It’s a more common dilemma than you might think: A successful person has a substantial estate to pass down, but a member of the family’s next generation has proven to be a poor money manager. In other words, the owner’s own child or children might quickly squander a carefully accumulated inheritance.

But it’s still possible to design a trust that will benefit grandchildren, without letting their irresponsible parent or parents misuse assets that are meant to benefit the next generation.

We recently heard about a not-so-young man who has quit or been fired from a long sequence of jobs and has taken huge sums of money from his parents that he mostly spent on fun and games. Now divorced, he has been stingy with child support. His teenage children and their mother must rely on welfare just to get by! His own father, now elderly, has a sizeable estate. The older man’s challenge, now, is whether he can find a way to help his needy grandchildren. Or will he take the easiest option, and just leave his money to his son? A son who is sure to fritter it away, just as he’s done with all the other money his parents have given him over the years.

Unfortunately, we have run into this situation with several clients. And many factors can interfere with finding the best solution to the problem. First, sadly, most people lack the ability to see their way past their children’s wiles and to recognize that they should pass them by and let their estate go directly to the following generation.

And even those who recognize the problem may run into the problem of the so-called “generation skipping tax.” This is a little-known provision of federal tax law. It states that when you leave an inheritance that “skips” a generation — and heirs in that generation are still living — you will have to pay a tax. And that is a whopping 50 percent! That provision applies only to estates over $1 million, and with a larger inheritance, that first million is exempt, but estates of this size are quite common these days. So, it’s important to be aware of this provision.

On the other hand, if for any reason members of the next generation have died, then the grandchildren’s generation “steps up” and the tax doesn’t apply.

Our advice to anyone concerned about that big potential tax bite: don’t let the tail wag the dog. If you have good reason to believe your money would be squandered if you did leave it to your immediate offspring, you might as well secure it for the next generation, tax, or no tax.

Here’s one way we can help accomplish that goal and minimize the tax impact. We set up what is called a GST: a “generation skipping trust.” It contains no more than $1 million, so it’s not subject to the generation-skipping tax. And the sum is put in trust for the grandkids. If any funds are left over, then they can be put in trust for the unreliable child — the grandchildren’s parent. That trust is set up with very strict usage rules, governed by a trustee like Old North State Trust that will be sure to carry out the owner’s wishes.

One example of this is a client of ours who had two children, both of whom were drug addicts. As it happens, both these children have now died prematurely, so, unfortunately, the problem has taken care of itself. But the client’s trust had been set up so her children had to pass a drug test before they could get any money.

We have other family situations where drugs aren’t the problem, but the kid (and we use the term “kid” loosely) just wouldn’t work. So, in these cases, the trust’s terms provided that the child must provide us with a W2, proving he’s gainfully employed before he can get any money from the trust. Even then, the funds may be used only for certain things, such as medical expenses.

When considering your own estate options, you certainly can cut out anyone, and leave your assets to anyone else of your choosing. But in doing so, you should understand how best to accomplish your goals, and what the consequences will be. Nevertheless, whatever those consequences, it’s always better to do the choosing yourself. The alternative is to let the state decide, which almost never matches up with what a responsible person would have chosen for his or her family.

 

 

 

 

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

What does the death of Carrie Fisher and Debbie Reynolds teach us?

 

A motto we truly believe in and have stressed to every client as we meet to create their estate plan is to plan for the worst and hope for the best.  Did Carrie and Debbie plan for the worst and hope for the best?  Can you imagine losing two generations so suddenly and within days, weeks, and months of each other, with no estate plan for either?  We can tell you, it would not be a very smooth transition for those left behind. We never think the worst-case scenario will happen to us, but, trust us, we’ve seen it.  It’s been said that a parent should never have to bury their child.  We agree, but it does happen.  No one could have foreseen Carrie Fisher dying before her mom, Debbie Reynolds.  Carrie was only 60 and Debbie 84.  Both had extensive careers in the entertainment industry and even had a documentary coming out together soon. Unfortunately, we don’t get to choose the time or manner of our passing.  In fact, we have a client that lost her child and grandchild within a month of each other, and she is in her eighties!  No one would have ever thought that would happen, but it did.  Fortunately, she listened to our advice when we were planning for her estate, and we planned for the worst.  We had her ducks in a row and, at least from a financial standpoint, the order of her heir’s deaths didn’t affect anything.  The same thing can be said in Carrie and Debbie’s case.  It appears that their plans were in order and their assets will pass equally to Debbie’s remaining child, her son and to her only grandchild, Carrie’s daughter.  In Carrie’s case, her assets will be distributed to her surviving daughter.  Since Debbie’s son has no children, then her assets will ultimately pass to Carrie’s daughter as well.

 

That’s the true value of a good plan- when life hands you the unexpected (and when does it not?) then you can rest assured that the plan is there to take care of what you didn’t account for and make sure your wishes are carried out as planned.  We all have unexpected bumps in the road, be it a death, illness, expense, etc., but a good plan makes the difference between these difficulties being manageable and becoming catastrophic.  We can’t plan for everything, but we can plan for enough that we make the best of a bad situation when one presents itself.  It is a good idea to have a respectable, knowledgeable partner that will help with these difficult arrangements.  At ONST, we’re here to help you plan for those contingencies you may not have thought of or may not know how to plan for properly.  We can help you plan and implement that plan to smooth out those bumps in life’s road when they come along.  We’ll be here for you and your heirs from cradle to grave and beyond!

 

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Last month, in the aftermath of the presidential election, we offered some thoughts about how investors should think about the uncertainties of a new administration. But we now know a lot about who President-elect Donald Trump proposes to put in key positions, and of course about some of what he has proposed that will directly affect the economy.

Some of this will be under the new president’s direct control. Other matters depend on what Congress does with his budget and tax proposals.

One very important policy issue involves the Securities and Exchange Commission and its makeup under a Trump administration. In recent news analyses, The Wall Street Journal has projected that newly appointed SEC members will likely reverse some Obama administration policies that affect the stock, bond, and commodity markets.

High on that list are various rules put in place after the 2008-09 financial crisis, notably under the Dodd-Frank Act. Where expert observers have to admit some uncertainty, though, is how the likelihood of business-friendly regulators paring back some of those rules stacks up against what Trump had to say during the campaign. Many of his public pronouncements were highly critical of Wall Street and financial elites. They were targets of campaign rhetoric about Wall Street’s negative impacts on ordinary citizens and small businesses.

So, will the SEC’s enforcement regime change under the Trump administration? Probably not, the Journal predicted. What is more likely is that initiatives from the past eight years of a Democratic administration will be reversed, such as limits on compensation for corporate executives.

Another prominent Trump promise was to reform the federal tax code. While just about anybody in Congress, on either side of the aisle, will say they want to do just that, the particulars – whose favorite loopholes get closed, and which arcane provisions remain in place – have the potential to create hundreds, if not thousands, of bitterly fought battles.

That means that actually rationalizing and simplifying the tax code, which everybody favors in principle, may be less likely than changes to the basic rate structure. And that is what lies at the core of Trump’s tax proposals.

 

Those include:

  • Reduce marginal income tax rates for everyone, both, individuals, and corporations. That would leave just three individual tax brackets, at 12, 25 and 33 percent of ordinary income. Capital gains brackets would remain unchanged at zero, 15 percent and 20 percent. The standard deduction would more than double for individuals and couples, but personal exemptions would be abolished. Itemized deductions would be capped at $100,000 for individuals and $200,000 for couples.
  • The corporate tax rate would be reduced from 35 percent to 15 percent. What remains unclear is whether that would apply to all businesses or just those “C” corporations that pay income taxes directly. Under current law, other types of business, “S” corporations and partnerships, pass income directly to their owners, where it is taxed at their individual rates.
  • Abolish what remains of the federal estate tax. In its place, beneficiaries would be subject to income tax on gains on inherited assets if and when they are sold, but only above $5 million for individuals and $10 million for couples.
  • Repeal the Alternative Minimum Tax, which was first enacted to ensure that despite loopholes the wealthiest individuals and corporations can’t completely avoid federal taxation. Inflation over the last several decades has meant the AMT is now catching more and more taxpayers with moderate incomes, making it increasingly unpopular in Congress.
  • Repeal the “Net Investment Income Tax” or NIIT, which is now 3.8 percent.
  • Tax so-called “carried interest” at ordinary income tax rates, a proposal specifically aimed at certain ultra-high-income Wall Street types such as hedge fund managers.

 

Economists who have analyzed these proposals project that they would reduce federal revenue by $6.2 trillion over ten years, and add $7.2 trillion to the federal deficit. Those numbers could, of course, be reduced by cuts to federal spending. But history tells us that, whether enacted by Republican or Democratic majorities in Congress, tax cuts have never been fully offset by spending cuts. The president-elect has argued, of course, that his proposals will spur sufficient economic growth to more than make up for anticipated revenue losses.

At the individual level, the Trump tax plan would save moderately high-income people – those in the bracket between $143,100 and $292,100 – an average of $4,300 a year. For the top tenth of one percent, those earning more than $3.8 million, the tax savings would average $1.07 million in 2017.

The Republican leadership in the House of Representatives has proposed its own tax-reform package, which shares many but not all of the Trump proposal’s features. Its impact, economists have projected, would be to reduce federal revenue by $3 trillion over ten years, adding $3.1 trillion to the federal debt. The House proposal would save those moderate-income ($143,100-to-$292,100) taxpayers far less than the Trump plan, just $340 a year on average. But the top 0.1 percent would come out even better, saving an average of $1.2 million each.

While both Republican and Democratic leaders in Congress have said they expect to be able to enact some version of tax reform in 2017, the devil is always in the details. Expect Democrats to put up stiff resistance to any plan that benefits the top 1 percent more than those in the middle. And, unless both the White House and Congress can find common ground on the specifics, the status quo may remain in place for the foreseeable future.

So, watch for anything being proposed as genuinely “bipartisan,” which may have a reasonable chance of becoming law. On the other hand, proposals that may appeal to the middle might also attract opposition from the most extreme wings of either party.

One other factor that’s worth keeping an eye on in the future, depending on what Congress does, is how it would affect inflation rates. And if inflation starts to creep up, the Federal Reserve would almost certainly raise interest rates. The Fed has already projected that it will bump up rates in three increments next year. So, anything that will speed up the economy is likely to affect interest rates, which in turn will affect bonds and some other financial markets.

In the meantime, when it comes to adjusting your individual tax and investment strategies, we’ll always advise remaining flexible and open to a wide range of possibilities. Remember, as we said last month, the most certain thing when it comes to government is uncertainty

 

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment, and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.