The Compass A QUARTERLY NEWSLETTER BY SCREAMING EAGLE WEALTH MANAGEMENT // MARCH / APRIL 2021
LEGACY erik dullenkopf,CFP® | wealth manager certified financial planner™ professional | ca insurance license #0F97513
Cover Image: Features our dear friend’s daughter , Emmy and Emmy’s greatgrandmother
We made it to 2021!
However, as noted in the forecast above it is likely going to be a bumpy ride with plenty of surprises. Speaking for our clients and their financial well-being, we are prepared to navigate potential turbulence ahead together.
On Monday, January 13th 2020 we emailed out ‘A Reliable 2020 Forecast,’ we hope you read it! In fact, here it is unchanged as our 2021 forecast:
Most of our clients have the primary goal of living a long, comfortable retirement without the worry of running out of money. Fortunately, with careful planning and management of their finances most are likely to achieve this. In fact, many are on track to have quite a bit leftover. This leads to the question, “how much would you like to leave for your family?” And then often leaves one to contemplate the more difficult question, “What would you like your legacy to be?” What really is a legacy? The Merriam-Webster dictionary defines it as a gift by will especially of money or other personal property. I agree with this but feel that a legacy can be so much more and doesn’t have to be a tangible one. Some would say that their kids and grandkids themselves are their legacy. Or even the character, values and beliefs that one instilled in their family’s next generations. We don’t need to stop at just family members either, any form of legacy could also be left for friends, coworkers, a community….or the world! I guess in the end it is the memory of ones’ self that leaves a mark after we are gone.
• The economy/market will do something that surprises us • Investors who watch the market often will experience more stress than those that don’t • While we can’t predict the future, all will seem obvious in hindsight • You will be tempted to abandon your plan at some point based on expert forecasts and/or short-term market performance • Investors that focus on those things they can control will have a better investment experience than those that focus on what they can’t control nor predict • Investing with your gut, or feelings, will result in lower returns and higher stress than if you remain disciplined to your financial plan • Not looking, aka “strategic ignorance”, will result in less stress and greater personal enjoyment than watching the market. Disciplined investors were once again rewarded for staying invested through 2020, despite countless troubling headlines. I am proud of the calm and resilience our community of clients displayed through the year. It paid off.
In my conversations with clients over the years I found that there is a wide range of desires in this area. Some tell me that they want to spend every last dollar before they die, others tell me that they want to leave a specific and significant sum, and many feel it would be nice to have something leftover but don’t want to sacrifice their abilities in retirement in order to do so. Either way, it is not my job to impose but to encourage the thought and ultimately facilitate their wishes in the most efficient manner. I encourage you to ask yourself these questions and document them. We would love to hear how you feel and do what we can to help. Personally, I understand that a question like “What would you like your legacy to be?” is a very tough question to answer….and I am still working on answering that myself.
On the medical front, all three major data series—new cases, positive testing rates, and hospitalizations—have continued to trend down, while vaccinations continue to scale up. If these trends persist, we are through the worst of the pandemic and should see further improvement. Looking ahead, the fate of this year rides largely on the global roll-out of the various COVID-19 vaccines. We have many new members in our legislative and executive branches now in office that should prove balanced enough to keep any new laws moderated. This may likely include some new taxes and industry regulations, probably in 2022. The expected results of broad vaccinations are growing economies globally and continued stock market gains. Federal stimulus and low interest rated should also provide tailwinds for stocks. 2
COM MU N ITY I N VOLV EMENT Last June, I was able to support a cause that is near to my heart, Team Telomere. Team Telomere was named after Telomere Biology Distorders that are caused by a defect in one of the genes that protect the ends of chromosomes called telomeres. Team Telomere raises money for continued research for these debilidating diseases, one of which my wife Jordan has. Team Telomere participates in the Annual Million Dollar Bike Ride, hosted by the Penn Orphan Disease Center. Last June, my family along with some friends and clients participated in the Million Dollar Bike Ride, whether by donating money or in fact, going on a bike ride of comrodory. At long last, they were able to announce the 2020 Team Telomere Million Dollar Bike Ride Awardee, Dr. Judy Wong, from the University of British Columbia. Her research goes towards the characterization of telomere maintenance in tumor models of Dyskeratosis Congenita (Jordan’s disease). She was awarded over $67,000 towards her research. I wanted to thank all of those who participated in this amazing cause. We look forward to raising money again in 2021. Screaming Eagle Wealth Management is happy to sponsor the National Charity League’s Ventura County Juniors Chapter raise money supporting the children’s center for cancer and blood diseases at Ventura County Medical Center (VCMC). The money raised goes towards the new Ronald McDonald Family Room in Ventura. These rooms are designed to provide quiet respite, away from the busy clinical care units, where family members can relax, shower, get a snack, attend to personal or family business, or even get a few hours of sleep, while at the same time staying near their hospitalized children should they be needed. The facilities will feature a kitchen and dining area, a comfortable living room, a children’s play area, laundry facilities, a separate room for napping, and more! The Ronald McDonald Family Room at Ventura County Medical Center is a program of Ronald McDonald House Charities of Southern California. If you are interested in donating money towards either of these causes, please reach out to Jordan at email@example.com.
LEGACY PLANNING: CREATE A LASTING LEGACY Estate plans are about more than just who gets what. To ensure a lasting legacy, you need to get your documents in order and have a clear plan for how your wealth will transfer, avoiding taxes and inheritor pitfalls along the way. There will come a time when you realize that you have spent a lifetime building your wealth and you want to know how it can provide a lasting legacy to the next generation. You might be at that stage today or see it as a future event. Either way, you need to plan for it. This type of wealth planning is what we call Legacy Planning.
If the goal is to leave your wealth to your children, it may seem like a matter of simply bequeathing these assets to them. But if there is any concern about their ability to manage this wealth, or about them possibly losing these assets to creditors, Legacy Planning should be done. For some of our clients, a major (and valid) concern is leaving so much wealth to their children that they lose the motivation to build their own wealth or develop their own careers. Therefore, an underlying and critical question is determining how much of your wealth to leave to your children and if you should place any guardrails on how funds are used. In determining this, it is important to define the level of financial security you would like to provide to your children.
In certain jurisdictions, it may be more favorable to use a will (e.g. Living Will) over an RLT. Nevertheless because of the RLT’s ability to avoid both the cost and delay caused by probate an RLT (coupled with a Pour-Over Will), especially in states with high probate costs like California, is generally chosen as the main document to transfer wealth. This is particularly true if you would like other options to leave your wealth to your children or other heirs other than an outright distribution of your estate.
The following are the actions and issues that we encourage everyone to address to ensure proper Legacy Planning. 1. Getting Your Estate Planning Documents in Order 2. Bequeathing your wealth so as to leave a lasting legacy. 3. If applicable, planning to minimize the impact of federal estate and gift taxes. 4. Determining whether you also want to leave a charitable legacy.
LEAVING A LASTING LEGACY
It may seem natural to think that parents should just leave all their wealth to their children or loved ones, and in many situations this may be the best option, depending on the size of the estate and the financial wherewithal of the recipients. For others, especially those with sizable estates, the concern may be how much to leave, and if there should be any guardrails put in place for assets that are inherited.
GETTING YOUR ESTATE PLANNING DOCUMENTS IN ORDER
For estate planning, the key documents for most are as follows: •
you are unable to make those decisions due to being incapacitated. Health Care Directives. Generally consisting of two documents — a Living Will and Durable Power of Attorney for Health Care — these documents outline your wishes for your medical care. A Living Will, also known as “directive to physicians,” provides guidance about someone’s health care wishes if he or she becomes too sick to be able to communicate them. These can include directions regarding pain medication, artificial hydration and nutrition, and resuscitation. A Durable Power of Attorney, also known as “health care proxy,” appoints an individual to make health care decision if the principal (person who made the appointment) is unable to do so.
It is important to address several questions when framing the goal of leaving a legacy:
Revocable Living Trust (RLT). Also known as a Family Trust, in this type of trust the person who creates it maintains full control of assets titled to the trust while alive and then directs how assets are passed on when one and then both (if applicable) settlors/spouses pass away. Pour-Over Wills. Generally used in conjunction with Revocable Living Trusts, these function to direct assets to the RLT, which are not titled in the RLT’s name. Durable Power of Attorney. These documents designate who can make financial or legal decisions for you if
• • •
How much wealth is enough for the children? At what age should the money be transferred? Should we create incentive milestones (i.e., college graduation) or other goals before the money is transferred? For parents who have created their own wealth, the thought of leaving millions outright to their children may not align with their own values regarding work ethic and the belief 4
that children should build their own wealth. In this situation the parents may desire to leave a portion of the estate, rather than the entire estate, especially if they have a desire to leave a charitable legacy.
any amounts of net estate above that, there is 40% tax on the amount over the exemption. So, for each $1 million over the exemption transferred, about $400,000 in estate taxes will be owed.
The second concern is that the children could lose the wealth inherited, not only because of possible mismanagement, but for other reasons beyond the children’s control. If the estate is left outright to the children that means they have full control over those assets, which also means that if they are sued or have any other legal action against them, creditors will likely be able to go after those inherited assets to settle any claims. This can be avoided if the trust is left to a properly drafted and structured Irrevocable Trust, where the inherited asset will likely be beyond the reach of creditors. In addition to providing income or assets for the children to insure their financial security and providing asset protection, an irrevocable trust can also contain language to incentivize certain behavior, such as making funds available to start a business or to go to college or graduate school.
The problem is that the current exemption amount is only temporary. Under the TCJA, the exemption is set to expire at the end of 2025 when it will return to an inflation adjusted $5 million amount (the tax rate is scheduled to remain at 40%). Also, since we are currently in an election year, the exemption could be reduced before 2025 depending on the election results. As a result, one’s estate tax plan needs to be flexible and be adjusted as estate tax laws evolve and change.
DO YOU WANT TO LEAVE A CHARITABLE LEGACY?
Is there a charitable cause you believe in and would want to leave money to? Under current tax law, when assets are bequeathed to a charity, or charitable structure such as a Private Foundation or Donor Advised Fund (DAF), these assets are not subject to estate or gift taxes. Even though donated assets will not go to children or other loved ones, there will be no estate or gift taxes resulting from the donation. For many, given the choice of paying taxes or of providing funds to a charity, they would prefer leaving assets to charity. Even with this added tax benefit, there are many who believe strongly in providing a charitable legacy, and for those individuals this option is a win-win.
MINIMIZING TRANSFER TAXES – U.S. GIFT AND ESTATE TAX PLANNING
There is often a misperception that when one has their estate planning documents drafted, such as a Revocable Living Trust, that they have also undergone estate tax planning. This is not the case and it is likely that estate taxes need to also be planned for, especially if only the basic estate planning documents mentioned previously are drafted. Further planning will be needed to minimize estate taxes. If you have a large enough net estate and proper planning is not done to minimize transfer taxes (e.g., estate and gifts), these taxes can significantly reduce the estate that will be left as a legacy to your family. This issue is exacerbated if your estate is made up of largely illiquid assets, such as real estate or a closely held business, since it will be difficult to create the necessary liquidity to pay the estate taxes.
Once charitable goals are defined, there are a variety of charitable vehicles and strategies to choose from, each with their own advantages and disadvantages. The selection of which to use will depend on the client’s overall goals. As has been seen with many wealthy high-profile families, such as the Walton family of Walmart and the Gates family of Microsoft, leaving assets to charitable causes can have a lasting positive societal impact and, regardless of the size of one’s estate, any funds donated to charity can have a positive impact. As part of legacy planning, you have to determine if leaving a charitable legacy is important to you.
Some states also have their own estate and/or inheritance tax as well. For example, while California does not currently have an estate or inheritance tax, Hawaii does (although the tax rate is much lower than the federal estate tax). That is why, depending on the legacy goals, it is important to undertake estate and gift tax planning so as to minimize the negative impact of these taxes, and/or help create the liquidity to pay them.
So, that is legacy planning, the element of wealth planning that determines what your wealth will do beyond your lifetime. Whether it is setting your children up for financial freedom, supporting a charitable cause, or both, there are many things that need to be addressed to ensure your wealth leaves a lasting impact.
As a result of the 2017 Tax Cuts and Jobs Act (TCJA), the estate and gift tax exemption amounts in 2017 were doubled. This substantial increase is beneficial because the higher the exemption amounts, the more likely an individual or married couple will not have to pay estate or gift taxes. Under current law, for 2020 the exemption per person is $11.58 million. For
Authored by: Daniel Fan, J.D., LL.M., CFP This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA. 5
6 Reasons Prepaid Funerals Are The Best Gift FEATURE FROM DIGNITY MEMORIAL
s a parent, you will give your children many lovely gifts. A lifetime of presents may include everything from a birthday puppy to a college education, a trip to Disney to relationship advice.
emotionally difficult parts of a passing, but you can help ensure that they don’t have to worry about money at the same time. In the days immediately following your death, your assets may be unavailable and life insurance can take six to eight weeks to pay. Without a prepaid plan in place, your children will be expected to cover all of your funeral expenses before funeral services. Pre-planning—and prepaying—means relief from that burden. Learn about monthly funeral payment options here.
But the next time you want to give your children something special, consider pre-planning your funeral. There are many benefits to planning in advance. We count down the top six reasons families tell us prepaid funeral plans are the best gift they ever received from their parents.
4. YOUR FAMILY MEMBERS WON’T NEED TO WORRY ABOUT GETTING IT WRONG.
6. YOU GET TO CHOOSE EXACTLY WHAT YOU WANT.
Would Dad have wanted the hand-carved, solid mahogany casket? Would Mom have wanted every last member of her church to attend the funeral service? When plans aren’t prepared beforehand, loved ones guess—and then worry that maybe they got it wrong. Save them from doubt and anxiety over getting it right by planning in advance.
Pre-planning your funeral allows you to carefully consider your options and make the choices that ensure that your life is remembered and celebrated the way that you want. Even if you tell your family about your end-of-life wishes, they may not remember or agree. The only way to know for sure that you will get a cremation with a celebration of life by the lake or a New Orleans-style jazz procession is by planning in advance.
3. YOUR FAMILY WON’T HAVE TO FACE QUICK DECISIONS.
5. YOUR CHILDREN WON’T HAVE TO FIND A WAY TO PAY FOR YOUR FUNERAL.
At the time of need, funeral arrangements are usually made in a couple of days. Even if you lay out your wishes in a will, your children can be left scrambling, since
You may not be able to shield your children from the 6
funerals often take place before a will is located or read. To protect your loved ones from facing hurried decisions during an already difficult time, plan your funeral in advance. Putting the details in writing not only ensures your wishes will be followed, but saves others from needing to make judgment calls on your behalf.
The days immediately following a death are emotionally difficult. Pre-planning your funeral, cremation or burial, documenting your wishes, and paying for arrangements give your loved ones the time, space and permission they need to grieve without having to make hundreds of funeral decisions. The time they might have spent making arrangements can be spent with family and friends, remembering a special life and beginning the healing process.
PREPAID FUNERAL PLANS ARE A LOVING THING TO DO It’s always difficult when a loved one dies, but it’s even more challenging when surviving children don’t know what Mom’s or Dad’s final wishes were. It can be heartwrenching for children to have to face hard decisions for a parent. That’s why planning, documenting, funding and sharing final arrangements is so important. Though you can’t protect your children from grief, you can help
2. YOU LOCK IN TODAY’S PRICES AND SAVE MONEY. One of the more practical benefits of planning your funeral in advance is financial. As the cost of living rises, so do the costs of funerals and burials. When you plan and pay in advance, you essentially lock in a price guarantee. For example, if you plan today and choose a casket that costs $2,000, you will never have to pay more than that for that casket, even if it doubles in price. Paying for things at current prices protects you—and your children—against inflation. Learn about how much cremations and funerals cost.
ease their sadness about your death by ensuring they don’t have to second-guess or make hasty decisions about your preferences.
1. YOUR LOVED ONES CAN FOCUS ON REMEMBERING AND HEALING. Perhaps often forgotten, but the top reason families tell us that prepaid funerals are the best gift they ever received is the emotional value of prepaying for a funeral. 7
CONSIDERATIONS FOR LEAVING A MORE TAX EFFICIENT LEGACY Written By Erik Dullenkopf, CFP® As discussed in my introduction to this newsletter, a family’s desire to leave a financial legacy can land anywhere on a very broad spectrum. Except for those whose primary goal is to spend every last penny before they die, most will likely have assets left over for the next generation. Therefore, one may wonder, what will be the tax implications for their heirs when they do inherit some of your wealth? Many heirs will be grateful to have received anything but may find themselves with sizable tax bills as a result.
these accounts. The recent implementation of the SECURE Act in 2020 now requires (most all) nonspouse beneficiaries of these IRA’s to fully distribute the account within 10 years of receiving them. For some this may not be a problem, but it is taxable nonetheless. For others this could result in significant taxes due if they are already high-income earners or if the Traditional IRA was very substantial. So, what if they could get tax free assets instead? Some parents may want to choose to take action now while they are alive to reduce the resulting taxes their heirs may have to pay on their inheritance. Here are three types of assets that are more tax friendly to a beneficiary:
When looking at the families we serve we see some commonalities. Although many have achieved a significant net worth, most will not be subject to an Estate Tax and do not need to take action to avoid it. For 2021, the federal estate tax exemption is $11.7 million per person or $23.4 million for a married couple. On the other hand, most clients do have a significant majority of their net worth in pre-tax retirement accounts like Traditional IRA’s and 401k’s. These are very valuable to accumulate for and fund retirement needs but the distributions are fully taxable at Ordinary Income tax rates. Both for the current owners and for the inheritor of dollars inside
1. ROTH IRA’S OR ROTH 401K’S. A Roth IRA/401k is a type of retirement account that does not provide an immediate tax benefit at the time of contribution. However, the growth and ultimate withdrawal from the account are tax free. Unfortunately, it is not easy to get dollars inside of a Roth account, because of IRS rules and restrictions. First, one may have to sacrifice the benefit of making 8
pre-tax/tax deductible contributions while they are working in order to put money into the Roth account. The IRS does not allow for both Traditional and Roth contribution, but only one or the other up to the maximum annual contribution. This can be a costly trade-off for someone who is a high-income earner. Second, a Roth IRA has income limits that can disallow contributions. If married filing jointly, contribution eligibility starts to phase out at $198,000 in 2021. Third, the contribution amounts into a Roth IRA is limited to $6,000 per year, or $7,000 if over age 50, in 2021. A spouse can also make their own contribution so long as the other requirements are met, for a combined maximum of $14,000 (over age 50 in 2021). At this rate it may take a while to accumulate a large amount here. Fourth, one must have earned income in order to contribute, and will be restricted to the lower of the amount of earned income or annual contribution maximum.
that don’t already have Traditional IRA assets. Because if they do, the taxes at conversion will apply on a pro-rata basis looking at all pre-tax and post-tax balances inside the IRA and thus be much less tax efficient. • Complete a Roth Conversion (different than “contribution”) by transferring money from a Traditional IRA to a Roth IRA and pay taxes out of pocket on the amount converted. This is ideally completed in a calendar year with less taxable income. For example, after retirement and before starting Social Security or taxable withdrawals from a Traditional IRA. Usually this will be best fit for a retiree living off cash savings for the calendar year in which the conversion is completed. 2. LIFE INSURANCE. For the sake of legacy planning, we are referring to Permanent life insurance policies, one that will last the insured’s entire life and doesn’t expire after a term of years or after employment ends. Sometimes a Survivorship Policy that pays out after the second spouse dies will have a lower premium than if only one spouse is the insured
For those that are limited by the rules above, they may want to consider these alternatives to funding a Roth account: • Continue pre-tax contributions to a 401k and make Roth IRA contributions in a separate account. • Depending on the specific 401k plan design at an employer, one may be able to continue with pre-tax contributions, but also add to the “aftertax non-Roth” portion of their 401k. Then at a later time request from the plan administrator to distribute the after-tax non-Roth contributions into an outside Roth IRA. The great part about this strategy is that one can continue their current year tax reduction and at the same time get a potentially sizable deposit into a Roth IRA without being subject to income limits. • “Back-door” Roth. If one’s income is greater than the income limit and is not allowed to contribute directly into a Roth IRA they may want to carefully execute this strategy. Make a non-taxdeductible Traditional IRA contribution, then complete a Roth conversion at a later date and only pay income taxes at that time on the growth in the account. This strategy is most beneficial for those
and may be more ideal. The benefit here is that the “death benefit” is income tax free to the beneficiary. Additionally, one could choose to buy whatever size benefit they want and are not limited by the IRS, as with Roth accounts above. When appropriate, the insurance will provide leverage, meaning the death benefit will ultimately be greater than the total premiums paid. Of course, there are downsides here ( continued on next page ) 9
as well. There are premium payments that need to be made for the policy otherwise one could lapse the policy and receive little to no money in return. Here it is important to have a plan for exactly how the premiums will be funded during ones’ retirement. Life insurance also requires medical underwriting thereby eliminating this from being an option for some. 3. NON-QUALIFIED ASSETS. These are assets that are not inside a retirement account. Commonly this would be one’s residence, banks accounts, or other investments. These assets are often owned by a family’s revocable trust. The big benefit here is that these assets will generally receive a “step-up in cost basis” at the time they are passed on, meaning that the taxable gain at that time is essentially $0. This can be especially powerful when someone owns a house or a stock for a long time that has appreciated significantly during their lifetime. If they sold the asset before passing it would result in a large capital gain tax, but if the investment is passed on through death then the new date of death cost basis will be equal to the value and no capital gain will exist at that time. For those later in life who are in a position to start planning beyond retirement the above strategies may necessitate action now to maximize the tax efficiency of their legacy. I suggest starting this assessment by reviewing what their current financial plan projects their financial legacy to be, both in quantity and which specific types of assets. One will also have to determine if it is worth it to them as it will likely require some sacrifice on the part of the retiree. A careful estimate of one’s tax brackets during their lifetime versus the tax brackets of their heirs, will be an important part of the analysis. Done correctly the end result could be a significant reduction in taxes paid for several generations. Any financial planning, legacy planning included, needs to be an ongoing process as circumstances, tax laws and desires evolve over time.
There wouldn’t be ‘The Compass Newsletter’ without a few Douglas updates. Doug will be 3 at the beginning of April, which Jordan & I cannot believe time is going by so fast. He enjoys his balance bike, scootering, singing with his Mom, his Little People toys and above all, a good snuggle session.
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Erik P. Dullenkopf, CFP® (CA Insurance license #0F97513) is a Registered Representative and Investment Adviser Representative with/and offers securities and advisory services through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through CES Insurance Agency or Screaming Eagle Wealth Management.