8 Wealth Issues: Estate Considerations

Going beyond “just the documents”

Did you know that dealing with California probate court can take at least eight months, and sometimes drag on for as long as several years? Additionally, the cost of probate can range from 3 to 7% of the total estate value. With proper estate document preparation through a reputable attorney, it is fairly simple to avoid the probate process for your heirs, but there are other estate considerations that are sometimes overlooked in the estate planning process.

In this month’s 8 Wealth Issues column, I wanted to spend some time discussing estate and legacy considerations. We will be covering some of these at our next client workshop as well.

Essential Documents. Most attorneys will prepare the essential estate documents in negotiated packaged pricing. These typically include a will & trust and springing durable powers of attorney for finance & healthcare. The power of attorney for finance is important for someone to have access to your accounts in the event of your incapacity (think about the ability of a spouse to access your retirement accounts).

Choosing an Executor/Successor Trustee. Selecting someone to administer your affairs after your passing is an important part of the process, but so is communicating this fact to that person. Simply naming someone in your will is not enough. We encourage clients to sit down with the person to be sure they understand your wishes, the resources they should turn to with regard to your assets, and how you would like your estate administered. Be sure you revisit this choice, for as life progresses, you may wish to re-name your designee for any number of reasons.

Taxes: Estate Tax & Income Tax Considerations. We all have an asset exemption for estate tax purposes. This exemption has changed considerably over the years based on the laws set forth by the Federal government. Some states also have estate taxes (currently California does not).

There are also income tax considerations for certain inherited assets. The most common surround tax-qualified retirement accounts and annuities. Your heirs may have options on the treatment of these distributions, and we encourage you to communicate that to them before it’s too late. For instance, Stretch/Beneficiary IRAs can be a great preservation strategy for an inherited retirement account. Oftentimes beneficiaries do not know about these options.

Conduct a Beneficiary Check. Certain types of assets pass outside of probate (and/or outside of your trust). We encourage clients to revisit who is named on retirement accounts, life insurance policies, and transfer on death designations. Often life events dictate a need to update your beneficiary (e.g., divorce).

Specific Bequests, and the Threats to Them. I have had clients tell me that they want to be sure that there is something specific left for someone specific—be it a family heirloom or an exact dollar amount. These bequests can be made as part of the trust, but sometimes the challenge can be in making sure that there is enough money left at the end of your life. As we plan for longer and longer retirements, people’s nest eggs need to last longer. Additionally the cost of a health event that would necessitate a care situation can be devastating to any planned legacies. Long term care insurance can sometimes help with covering these costs and ensuring legacy goals.

Your Legacy: Estate Transition & Administration. What isn’t often talked about in the estate planning process is the value of communicating your plan with loved ones. I have spent time with many clients who had to piece through parent’s estates, and often discovered how certain assets “worked” from an inherited standpoint. Some people do not realize that their trust will need to file a tax return in the year that it distributes assets. This estate transition work and the actual administration of assets is a value-added service our practice provides. I can tell you that those who have had a family-oriented meeting before the inevitable tend to have a smoother path.

This information has been derived from sources believed to be accurate This article is for informational purposes only. It is intended to be accurate and authoritative in regard to the subject matter covered. It is presented with the understanding that we are not engaged in rendering legal or tax advice through this article. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. IRS Circular 230 Disclosure: Any discussion pertaining to taxes in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.

Perspectives from Above the Noise – Week of March 24, 2014

Last week’s volatile trading serves a clear reminder to just how much sway U.S. monetary policy still holds over the world’s financial markets. As expected, the Fed announced an additional $10 billion reduction in its monthly quantitative easing (QE) asset-purchase program. Citing labor market improvement, the Fed also altered its forward guidance policy by replacing its 6.5% unemployment threshold for triggering the end of its zero-interest-rate policy with a more qualitative and holistic assessment of the labor market. By projecting rates to rise to 1% at the end of 2015 (from 0.75%) and 2.25% by the end of 2016 (from 1.75%), some interpreted the new forecast as a sign that the Federal Open Market Committee will begin tightening sooner and/or more aggressively than previously expected. Despite the Fed drama stealing most of the spotlight, there was also some noteworthy economic data that seemed to indicate that the soft patch in U.S. economic activity was primarily weather-related and is now starting to abate.

For the week, the S&P 500 was up +1.38%, the Dow gained +1.48%, and the MSCI EAFE (developed international) rose +0.13%.

Here are the 3 stories this week that rose above the noise:

Gas Boom Rejuvenates Manufacturing

An article from The Wall Street Journal highlights the resurrection of U.S. manufacturing that is occurring due to the shale gas drilling boom. In a dramatic about-face, petrochemical companies have returned to the U.S. and are making multibillion-dollar investments to profit from the abundant cheap natural gas pouring out of shale-rock formations across the country.

From 2010 to 2012, energy-intensive manufacturing sectors added more than 196,000 U.S. jobs and increased real sales by $124 billion in the nation's metro areas, according to the report. Steel plants across Indiana's Rust Belt and from Birmingham, Ala., to Knoxville, Tenn., to West Mifflin, Penn., have more orders for metal. And machinery-sector growth exploded between 2010 and 2012, with Houston leading the way, followed by Chicago, Detroit, Los Angeles and Milwaukee, the report said. "That means jobs," said Lansing, Mich., Mayor Virg Bernero. "There are still people who need jobs, and advanced manufacturing is the ticket."

Fear of Rising Rates Killing Bull Overblown?

A recent article from the USA Today has a nice summary of the historical evidence on how stocks perform during periods of rising interest rates, a concern which again came to the forefront of investors’ minds following last week’s U.S. Federal Reserve meeting. As detailed in the article, stocks have performed fairly well on average when interest rates are rising but still low. As this condition is typically associated with an improving economy, cyclical sectors have tended to perform best on average.

As noted in the article, once interest rates hit a high nominal level stocks have tended to struggle. We have also found that when the pace of the rise in interest rates is very sharp it has also tended to provide a headwind for stocks. Nonetheless, the article provides a good historical perspective that suggests stocks can perform well during a period of moderately increasing interest rates.

Pace of Home Price Gains Slow According to the S&P/Case-Shiller Home Price Indices

Today’s release of the S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that the 10-city and 20-city composites rose 13.5% and 13.2%, respectively year-over-year through January. The broader 20-city composite posted its third consecutive monthly decline of 0.1%, with 12 cities seeing their annual rates worsen.

As of January 2014, average home prices across the United States are now back to their mid-2004 levels. Separately, purchases of new homes in the U.S. fell in February to the lowest level in five months. Unusually frigid temperatures along with rising mortgage rates, higher property values and a lack of supply have dampened prospective buyer demand.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of March 17, 2014

U.S. markets were choppy last week with the S&P 500 and Dow each sliding over two percent. Global and geopolitical concerns trumped modest improvement in U.S. economic data. Evidence of advances in the labor market was provided by weekly jobless claims that declined by 9,000 to 315,000, a three-month low. Economists had expected an increase in jobless claims and with this week’s data showing a third consecutive decline in continuing claims there is mounting evidence that the labor market is rebounding from weather-influenced weakness over the past three months. Retail sales in the U.S. also increased in February by 0.3%, the first increase in three months and above consensus expectations. There was a broad-based rebound in demand with nine out of 13 categories showing monthly gains and restaurant sales, an important indicator for discretionary spending, rising by 0.3%. Despite last week’s slide, U.S. stocks have generally been quite resilient, after a very strong February rebound, even as many of the world’s other leading markets have come under growing pressure.

For the week, the S&P 500 dropped -1.97%, the Dow lost -2.35%, and the MSCI EAFE (developed international) fell -3.06%.

Here are the 3 stories this week that rose above the noise:

Industrial Production Bounces Back in February

U.S. industrial production rebounded in February and grew at its fastest pace in six months, signaling the U.S. economy is beginning to break out of its recent weather-induced slump. Consensus expectations were for a 0.2 percent rise, but February’s industrial production grew by a sizeable margin over expectations to reach 0.6 percent month-over-month growth, the first monthly gain since November.

Nearly half of the increase came from growth in automotive production, which grew by 4.6 percent in February following a sharp decline of 5.1 percent in January. February’s rebound in industrial production, coupled with moderate improvements in manufacturing and labor data, is providing optimism that economic growth will re-accelerate in the coming months.

Consumer Prices Little Changed as U.S. Inflation Contained

Despite increases in a select number of commodities so far in 2014, the overall cost of living in the U.S. was little changed in February. The consumer price index (CPI) increased only 0.1 percent last month, matching the advance in January. Excluding volatile food and energy, the so-called core measure also climbed only 0.1 percent from January and was up 1.6 percent over the past 12 months, the same as the previous month.

Lower inflation readings complicate policy for Federal Reserve officials as they meet this week. Central bankers raised concerns about too-low inflation several times in their last gathering. As a result, Fed officials have said they will probably hold the bank’s target interest rate near zero for “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent.

Japan as the Crisis Next Time

In a blog posting for Reuters, Anatole Kaletsky summarizes the bear case for Japan and how it could have a significant impact on the global economy and financial markets. The author was a one-time supporter of Japanese Prime Minister Shinzo Abe’s aggressive economic program commonly called Abenomics. However, two key pieces of Abe’s original plan have been largely abandoned (structural reforms) or reversed (fiscal stimulus). Of particular concern is a looming jump in the consumption tax from 5 percent to 8 percent set to take effect on April 1. The Japanese equity market also seems to have lost momentum and we will be watching for signs of a technical breakdown in the coming weeks which would lend evidence that the bearish fundamental case detailed in the article is playing out.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of March 10, 2014

Tensions from the Ukrainian-Russian standoff over the Crimean region were temporarily pushed aside by a busy week of economic data releases. The ISM Manufacturing Index kicked things off, showing a 1.9 point improvement to 53.2 in February (readings above 50 signal expansion). This was a bigger expansion than was expected by economists, but recovered only part of the weather-related decline in January. The JPMorgan Global Manufacturing PMI also rose to its highest reading since April 2011. The broad strength evident in this week’s global manufacturing provides some evidence that the global economic expansion remains intact despite the market volatility of early 2014. Meanwhile, the ISM Prices Index remained above 60 for the second straight month and at the upper-end of its range over the past two years, perhaps indicating some burgeoning inflationary pressures which are not yet widely appreciated. Much of the labor data was also modestly positive.

For the week, the S&P 500 gained +1.00%, the Dow increased +0.80%, and the MSCI EAFE (developed international) lost -0.33%.

Here are the 3 stories this week that rose above the noise:

Perfect Storm for Inflation Could Rock the Market

In a recent CNBC.com article, Alex Rosenberg examines rising inflationary threats caused by an improving labor market and rising commodity costs. Corporate profit margins are at an unsustainable level because of tempered labor and input costs, so it is likely they will contract in the near future. But, if inflationary pressures heat up too quickly, the Federal Reserve may be forced to take a hawkish stance. The S&P 500 hit another all-time high last week, but stretched earnings multiples coupled with increasing inflationary pressures could be the catalyst for a correction in U.S. equities this year


Hilsenrath : Fed Likely to Continue Taper

A blog post from The Wall Street Journal’s Jonathan Hilsenrath, who is widely followed for his coverage of Fed policy, makes the case that the Federal Reserve is unlikely to change its tapering strategy at its March 18-19 meeting. Per Hilsenrath, Fed officials have indicated the bar is high to alter their current strategy of reducing monthly asset purchases by $10 billion at each policy meeting.

Recent economic data, including Friday’s jobs report, does not appear sufficiently weak to alter Fed policy. In fact, Hilsenrath mentioned a burgeoning increase in wage pressures that some analysts believe signals increased consumer inflation is likely to take hold in the coming months. The key takeaway is that the Fed is likely to continue its tapering strategy at next week’s policy meeting.

Will America Heed the Wake-up Call of Ukraine?

As the Ukrainian crisis plays out, this Washington Post article from former Secretary of State, Condoleezza Rice, provides perspective on what is at stake and why the crisis may not be over soon. She argues “the immediate concern must be to show Russia that further moves will not be tolerated, and that Ukraine’s territorial integrity is sacrosanct.”

She further argues that appropriate sanctions include diplomatic isolation, asset freezes, and travel bans against oligarchs. The longer-term task is to answer Putin’s implied statement about Europe’s post-Cold War future. Putin is trying to turn the clock back as far as intimidation through military power, economic leverage, and Western inaction will allow. Positively, the article points out that the West has political levers to pull should it decide to heed the wake-up call.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of March 3, 2014

The start to 2014 has been the tale of two very different months. After late January’s sell-off, stocks bottomed in early February when emerging markets stabilized. Now, U.S. and European stocks are back to their December levels. That’s because the equity market’s “down” January was followed by a solidly “up” February with the S&P 500 breaking out to another new all-time high at the end of last week, despite some late-week profit-taking in many of the highest-flying stocks. Perhaps some traders were simply taking profits in their highest-risk names as geopolitical tensions rose in Ukraine.

Stocks got a mid-week lift from Senate testimony by new Fed Chairwoman Janet Yellen. Much like in her earlier testimony before the House of Representatives, Yellen provided a sense of accommodative continuity that markets seemed to really like again, especially given the uncertainty surrounding much of the recent economic data.

For the week, the S&P 500 added 1.26%, the Dow gained 1.36%, and the MSCI EAFE (developed international) was up 0.67%.

Here are the 3 stories this week that rose above the noise:

Forget Sanctions, What Could Really Hurt Putin Is Investor Backlash

Global equity markets have rebounded from Monday’s selloff as Russia has backed off escalating military involvement in the Ukraine. A Bloomberg article points out that as the world has become more inter-connected, the threat of investor capital flight has become a powerful geopolitical weapon.

Investors punished Russia yesterday by causing an 11% drop in Moscow’s Micex stock index. Investor selling also caused the Russian currency, the ruble, to sink to a record low against the U.S. dollar which, in turn, caused Russia’s central bank to hike interest rates from 5.5% to 7% in an effort to defend the ruble. A declining stock market and higher interest rates cause further risks to the Russian economy. Russia can’t afford to let this go on, as even before the Ukraine crisis, it was hemorrhaging investment capital.

Corporate Insider Bearishness at Pre-2008 Crash Levels

Mark Hulbert, writing for MarketWatch, examines the current state of corporate insider sentiment based on analysis of the latest available trading data. Based on the analysis described in the article, corporate insiders are now more bearish than at any point since 2011.

However, while the overall tone of the article is bearish, in our view it is not too surprising that insiders are selling shares given the market gains experienced over the past year. We view the bearish insider sentiment discussed in the article as a potential indication that profit growth may be more challenging to attain in the near-term than analysts expect, but it is only one cautious data point to consider.

Manufacturing Growth Speeds Up in U.S., Slows Globally

U.S. manufacturing expanded at a faster rate than expected in February to help offset some of the recent weakness caused by abnormally cold weather conditions and grew at an accelerated pace for the first time in three months.

Additionally, the closely watched ISM New Orders Index, a strong leading indicator of economic activity, also expanded at a faster pace in February. U.S. manufacturing activity diverged from Europe and Asia last month, where growth eased in both regions from falling international demand. China’s manufacturing data was disappointing and experienced its weakest growth in eight months.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.