Welcome to Spectrum Wealth Management's Quarterly Newsletter, Perspective!
VOLUME 1 | FALL 202 1
Contents
TAX PLANNING Taxes, What We Know for Now – Summary of the September 2021 House Ways and Means Committee Tax Proposal
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Letter from the Editor
Hello friends, Welcome to the first issue of our digital newsletter, Perspective ! As promised earlier this year, we are delivering our expertise and insights on a range of subject matter that relates to those who matter the most to us—our clients. We are very excited to present this inaugural issue. One of our core values is ensuring that we share valuable, forward-thinking knowledge spanning different areas of wealth management. In this issue, we will be discussing “Taxes, What We Know for Now – Summary of the September 2021 House Ways and Means,” “Our Investment Process – A Primer,” and other topics including Estate Planning, Social Security Benefits, Wealth and Family Dynamics, and Cryptocurrency. These articles will be informative and will highlight what we have been doing behind the scenes here at Spectrum as of late. We will also put a special focus on lifestyle topics and other narratives in the “Spectrum Spotlight” column. We hope you enjoy this issue and find the content intriguing and meaningful.
INVESTING Our Investment Process – A Primer
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SPECTRUM SPOTLIGHT: Q+A AND UPCOMING PHILANTHROPY Cryptocurrency and Meme Stocks Explained
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ESTATE PLANNING An Overview of Social Security Retirement Benefits and the Application Process GENERATIONAL WEALTH Wealth and Family: How Your Wealth Advisor Can Help with Family Dynamics
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All the best,
WOMEN AND WEALTH Advanced Estate Planning Concepts for Women
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Leslie Thompson CFA ® , CPA, CDFA™ Editor and Chief Investment Officer Co-Founder
Bob Phillips CPA, CFP ® , CFA ® President Co-Founder
GENERATIONAL WEALTH Challenges Wealthy Kids Face
22
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As you know, at Spectrum, we believe knowledge is power. To provide clarity and ensure that you are better informed about the House Ways and Means Committee’s most recent tax proposal, we have outlined the tax changes that may potentially impact our clients’ financial planning in the future. Corporations The top corporate tax rate would increase from 21% to 26.5% (raises $540billion) Individual Taxpayers Income tax bracket rate increases (raises $170billion) Increases the top rate from 37% to 39.6% in 2022 for individuals with a taxable income of $400,000 and $450,000 for married couples that file taxes jointly. The proposal brings back the “marriage penalty.” - Trusts & estates with incomes over $12,500 will be subjected to the 39.6% bracket. - Effective date: January 1, 2022 Long-Term Capital Gains rate increases (raises $123billion) Changes the 20% current top rate to 25% for capital gains and qualified dividends - The effective date for 2021: Long-Term Capital Gains recognized after September 13, 2021. Long-Term Capital Gains recognized on or before that date will be netted with losses recognized on or before that date and remain subject to the 20% top rate. - Additionally, the 20% top rate will continue to apply if the gain results from a transaction entered into on or before September 13 and is not materially modified. Expands the Net Investment Income Tax (raises $252billion) To capture more income to cover net income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer). By closing this gap, all income, be it from wages (currently subject to 3.8% HI tax), investments
(currently subject to 3.8% net investment income tax), or earnings from passthrough businesses, will be subject to the same amount of tax, for those with higher incomes. Roth IRA (raises $4billion) Roth conversions would be limited to those individual taxpayers with less than $400,000 of income and taxpayers that are married filing jointly with less than $450,000 of income. After-tax contributions made to a Traditional IRA or 401(k) would no longer be eligible for conversion to a Roth IRA. Many high-net-worth clients that are not eligible for a Roth contribution utilize this technique, commonly referred to as a “backdoor Roth IRA” to fund a Roth IRA. Additional restrictions would be included for individuals with retirement account balances exceeding $10,000,000 and income exceeding the Roth conversion limits outlined above. No additional contributions could be made to IRAs. Additionally, a distribution of 50% of the amount by which their retirement account balance exceeds $10,000,000 must be taken each year. - If retirement account balances exceed $20,000,000 and an individual has a Roth IRA or Roth Retirement Plan, the individual must also take a distribution from their Roth account balance to bring the account balance below $20,000,000. The effective date for the changes proposed above would be for tax years beginning after December 31, 2021. Estate Taxes Reverses the 2017 Tax Act increases made to gift, estate, and generation-skipping transfer (GST) tax exemptions effective as of January 1, 2022 (raises $50billion). For 2021, the exemptions remain at $11,700,000.
TAX PLANNING
Taxes, What We Know for Now – Summary of the September 2021 House Ways and Means Committee Tax Proposal
Bob Phillips CPA, CFP ® , CFA ® President Co-Founder
In early September, House Democrats laid out their draft of proposed tax changes for legislation to implement in the 2021 – 2022 federal budget. Some of the changes have been discussed heavily in the past as part of President Biden's foundation to fund the "American Families Plan." Yet, several prospective tax changes were recently added to the House Ways and Means Committee proposal that could reduce current wealth and estate planning options.
The proposed tax increases targets corporations, high-income business owners, estate taxes, individual income taxes for high earners, long-term capital gains, and Roth IRAs. These increases are being pushed in hopes of expanding civil aid available to Americans and work towards combat ing climate change. This includes, but is not limited to, generating more than $2 trillion to go toward expanding Medicare benefits, supporting investment in and deployment of clean energy, investing in tax fairness by increasing the size and efficiency of the Internal Revenue Service (IRS), and lowering prescription costs by allowing the HHS Secretary to negotiate for lower drug prices. 1
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Tax Planning continued...
The Joint Committee on Taxation has estimated that the 2022 gift, estate, and GST exemptions would be approximately $6,020,000. Those wishing to utilize the higher exemptions should do so before the end of the year. No changes to the income tax rules that allow unrealized capital gains to go untaxed at death (the “step-up in basis” at death remains). Valuation discounts would be disallowed, after the enactment date, for the transfer of interests in an entity that owns passive assets not used in an active trade or business (raises $20billion). Passive or “nonbusiness assets” described above would be treated and valued as if the asset was transferred directly to the transferee and will ignore the implied entity level transfer. For example, a transfer of 35% of a person’s Limited Liability Company (LLC) units of an LLC holding “nonbusiness assets” would be treated as a transfer of 35% of the assets of the LLC, and no valuation discounts would apply. Grantor Trust Rule Changes The ability to use Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), and other Grantor Trusts would change considerably under the new provisions (raises $7billion). Effective date: The changes below will apply to: - Trusts created on or after the “enactment date” and - For the portion of any trust before the “enactment date,” which is attributable to a contribution made on or after the “enactment date.” - The “enactment date” is generally considered the date signed into law by the President. Grantor Trusts that are created or receive contributions after the enactment date will be included in the estate of the grantor at the grantor’s passing. There will be an available reduction for the amount of taxable gift(s) made to the trust during the grantor’s life which effectively results in the appreciation being included.
Any distributions other than to the grantor or the grantor’s spouse from such Grantor Trusts will be treated as a taxable gift by the grantor, with the same reduction for the taxable gift previously made to such a trust as referenced above. Sales or transactions that occur after the enactment date between a Grantor and a Grantor Trust will be treated as a taxable event, and gains will be required to be recognized as such. Trusts created and funded before the enactment date would be exempt from the above provision. Other Miscellaneous Proposals A 5% surtax would be applied to individual taxpayers with a modified adjusted gross income o f more than $5,000,000. This would apply to all income for tax years beginning after December 31, 2021 (raises $127billion). Amends section 199A by setting the maximum allowable deduction at $500,000 in the case of a joint return, $400,000 for an individual return (raises $78billion). Limitation on Excess Business Losses for Non- corporate Taxpayers (raises $167billion) Extends the revenue raiser in the American Rescue Plan to permanently disallow business losses beyond the taxpayer’s business income. The provision currently applies until 2027. The change makes the provision permanent. Modifications to Wash Sale and Disguised Sales rules (raises $16billion) including cryptocurrency transactions to treat cryptocurrency the same as other financial instruments and prevent taxpayer abuse of the rules. So what does this mean for you? During waiting periods and times of uncertainty, staying focused and keeping things in perspective is important. The proposed tax changes still need to be deliberated and negotiated. They must get the majority vote in each house of Congress to pass legislation and may not even become law.
We understand there is a sense of urgency surrounding making necessary changes to maximize your wealth planning objectives. Rest assured that we are prepared for any legislation changes that may be coming in the future.
The team at Spectrum will continue to provide innovative and practical solutions to any complex issues that may arise and create ways to implement effective plans to ensure your financial goals are met.
Works Cited 1 https://waysandmeans.house.gov/media-center/press-releases/chairman-neal-announces-additional-days-markup-build-back-better-act
Spectrum in the News
At Spectrum, our expert advisors are recognized as thought leaders in the wealth management industry and are frequently invited to contribute their thoughts, opinions and knowledge to nationally recognized financial news sources. Featured Article: The Wall Street Journal | June 28, 2021 | Leslie Thompson Persistent Advance in Stocks and Commodities Shows Investor Confidence Broad gauges of market performance are surging together in a way few on Wall Street have ever seen, masking volatility under the surface Leslie shares her thoughts on recent market activity and the large technology companies she is favoring. https://www.wsj.com/articles/persistent-advance- in-stocks-and-commodities-shows-investor- confidence-11624819947
Bloomberg | June 17, 2021 | Bob Phillips Bank EFTs Rake In $1.7 Billion After Fed Revives Value Rotation https://www.bloomberg.com/news/ articles/2021-06-17/spdr-s-p-regional-banking- daily-inflows-932-1-million?sref=81ZfsQPj GOBankingRates | August 19, 2021 | Leslie Thompson Inflation Winners and Losers: Who Benefits When Inflation Rises? https://www.gobankingrates.com/money/ economy/inflation-winners-losers-who-benefits- when-inflation-rises/
Want to see more of our latest news articles and interviews? Visit our Spectrum in the News page.
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the lens of supply and demand and what we at Spectrum call “indicators” of future activity. Technical analysis applies at individual security, sector and asset class levels. Tenets of Technical Analysis Market action discounts everything. All known information related to the security is reflected in the price, including fundamental factors. As soon as new information comes to light, it is immediately reflected in the stock’s price Prices move in observable trends with a tendency to stay in trend. The repetitive nature of price movements is attributed to market psychology. The trend is considered to be intact until the trend line is broken, and the adage “the trend is your friend” means you should trade in the same direction as the trend. Technical analysis analyzes the mathematical relationship between data points to evaluate what has happened to the price of a security or index in the past with the expectation that history tends to repeat itself. Many of the patterns in technical analysis have been used for more than 100 years. They are still relevant because they illustrate patterns in price movements that often repeat themselves. An example of this is the Fibonacci sequence and the golden ratio to target price objectives. The art and science of technical analysis is the interpretation of data as a directional clue to future price activity. Fundamental analysis refers to the financial aspects of a company. Through the analysis of its financial statements, financial ratios, and other factors like economic and industry influences, an estimate of the fair market value of its stock can be achieved. Technical analysis does not care about the “value” of a company. Technical analysis is only interested in the price movements in the market. At Spectrum, we use fundamental and technical factors to analyze portfolio holdings. We believe the interplay between the two methods is essential to active stock selection by providing clues of what to buy (fundamental) and when to buy, hold or sell (technical).
What is Factor Investing? While rooted in academia, factors are broad, persistent drivers of returns and typically include characteristics associated with size, value, momentum, quality, and low volatility, among other potential drivers. By capturing or avoiding certain factors, returns can be improved, risk reduced, and diversification enhanced. While we acknowledge that the use of factors is elusive as they go in and out of favor (consider the underperformance of the value factor post-2010 to date), there is still merit in evaluating stocks through a factor lens. At Spectrum, we begin our monthly portfolio screening process by evaluating over 200 factors. We believe focusing on quality and momentum factors in security selection is essential. We find these factors have had an enduring impact on long-term appreciation, which has provided a source of outperformance against relevant benchmarks for our All Cap, Dividend Growth, and Growth and Income strategies. Why Use Quality as a Factor? While there is no commonly agreed-upon definition for the quality factor, at Spectrum, we focus on the following attributes: earnings growth, earnings growth stability, high profitability, high return on assets (ROA), low debt ratio and low accounting accruals. It seems that one would always want to own the stock of a company deemed to be “high-quality”; however, the market does not reward high-quality companies all of the time. For instance, low-quality stocks tend to outperform after recessionary periods or periods after a market sell-off. However, over the long term, high- quality stocks have outperformed low-quality stocks. Why Use Momentum as a Factor? Factor investing has attracted substantial research over the last few years, and momentum, a technical factor, is often cited as the strongest factor. Factors spark interest not only because they have been associated with the outperformance of market-cap-weighted benchmarks but also because they are not supposed to exist. The efficient market hypothesis predicts that you should not outperform a random basket of securities after adjusting for risk because security prices reflect all publicly available information. As such, factors have often been called “anomalies” in academic papers.
INVESTING
Our Investment Process – A Primer
Leslie Thompson CFA ® , CPA, CDFA™ Editor and Chief Investment Officer Co-Founder
Without a doubt, the most powerful strategy for building wealth is saving, then investing these savings for long-term growth. When investing, we believe a portfolio should include a combination of managed index funds—or, in our case, exchange-traded funds (ETFs) and individual stocks. Of course, bonds may have a role within a portfolio as a volatility reducer and, hopefully someday, an income provider. Still, the subject of this article will focus on growth assets, specifically the selection of individual stocks. We believe owning individual
companies through publicly traded stocks provides a connection to what you own, reducing emotional bias by allowing you to remain on course over difficult investment conditions. To this end, we have devoted this article as a primer to how we invest in individual stocks. What is Technical and Fundamental Analysis? Technical analysis studies past market activity to gauge what the market might do in the future. At its most basic, it is the study of behavioral finance through
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Investing continued...
A partial view of Microsoft stock
Eugene Fama, the University of Chicago professor who created the efficient markets hypothesis, famously considers momentum the “premier anomaly.” At Spectrum, we use many sources to quantify momentum. Still, we rely heavily on point and figure charting (see a partial view of Microsoft stock as an example) for security and market direction cues. We believe that Point and Figure charts filter insignificant market noise and focus only on price, providing a disciplined yet straightforward method of identifying current or emerging trends.
Conclusion There are infinite methods of stock selection. We base our selection methodology on fundamental measures such as those associated with high-quality companies. We combine these with technical attributes through the momentum factor as a litmus test to our analysis. We believe the technicals represent a collective view of all market participants, be that for an individual stock, sector, or market, and a critical element of deciding what we own and when we own it.
SPECTRUM SPOTLIGHT: Q+A AND UPCOMING PHILANTHROPY
Cryptocurrency and Meme Stocks Explained
Kelli Maxwell Communications and Marketing Manager
Greg Thompson CMT ® Senior Investment Analyst
Nate White Portfolio Strategist
Everyone seems to be talking about cryptocurrency and meme stocks. Maybe you have seen posts on social media, have had conversations about it among friends, or have heard about it on the news—but do you know what all the hype is about? Before you jump on the bandwagon, you will want to understand how trending stocks work and the new technology behind cryptocurrency.
Here are some expert insights from our Chartered Market Technician ® , Greg Thompson, and our Portfolio Strategist, Nate White. Q. What is a meme stock? A (Nate): Meme stocks are securities that gain viral attention through social media platforms. These securities see an increase in volume due to hype on social media, not because of how well the company performs. Often, meme stocks become overvalued with sharp price increases over short periods.
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Spectrum Spotlight continued...
Q: What is the difference between cryptocurrency, coins and tokens? A (Nate): Coins are any cryptocurrency with their own, standalone blockchain, whereas tokens are any cryptocurrency built on top of an existing blockchain. The purpose of a coin is purely financial, enabling users to perform secure money transfers. For example, Bitcoin is used only as a virtual currency and store of value. Think of transferring Bitcoin as being similar to transferring money to someone via wire transfer. Although it’s not quite the same thing, the end result is the same. Tokens, on the other hand, strictly represent an asset or utility within a platform. They are used specifically within the application for which they were created. Ethereum is a good example. It’s tokens are called Ether. Ethereum is the blockchain network where Ether is held and exchanged. You can use Ether (tokens) as currency in a financial transaction, as an investment or as a store of value. There are also non- fungible tokens (NFTs), a special kind of cryptocurrency in which each token is unique. Assets like Bitcoin have a set value, whereas NFTs have different values based on what they represent. NFTs are ideal for authenticating ownership of digital assets such as artwork, recordings, pets and other virtual collectibles. Q: What are the advantages and disadvantages of investing in cryptocurrency? A (Greg): As discussed previously, all investments carry risk, but cryptocurrency tends to have greater price volatility and risk of significant losses compared to publicly traded securities. There are also no federal regulations, and cryptocurrency doesn’t have a fundamental value the same way money or other types of securities do. Cybersecurity issues are associated with cryptocurrency and virtual wallets being hacked, and FDIC insurance does not cover cryptocurrency. However, there are a few upsides to investing in cryptocurrency. There is a potential for high returns, and some think cryptocurrency can be used as a diversification tool for portfolios. Thanks to blockchain technology, transactions are secure and confidential. There are no set market hours as with traditional trading—you can buy or sell cryptocurrency 24 hours a day, seven days a week.
Q: Are there risks in meme stock trading? A (Greg): Any type of investing involves risk, but meme stocks trade erratically. The reason meme stocks become so viral is because of opinions from influencers and individual buyers on social media and online forums such as Reddit. People start to buy meme stocks as they see other people buying them— also known as FOMO or the fear of missing out. The number of shares that are short compared to the number of people holding shares and willing to sell impacts the volatility. Most of the time, institutions and big spenders that purchase large amounts of these securities are the ones making a profit, not a person purchasing a few shares. A (Nate): We also suggest being very wary of getting investment advice from social media and forums like Reddit. You never know who is on the other side of the screen, their expertise, or where they are getting their information. Q: What is cryptocurrency? A (Greg): Cryptocurrency is a form of digital currency based on a blockchain. The easiest way to explain blockchain technology is to think of it as a database. It differs from a typical database in the way it stores information. Blockchains store data in blocks that are chained together. Blockchain is used in a decentralized way so that no single person or group has control over it; instead, all users cooperatively retain control. Cryptocurrency transactions are permanently recorded and available to the public. There are different types of cryptocurrency. Bitcoin and Ethereum are probably the most well- known names out there, but several other types of cryptocurrency exist. Different types of coins and tokens are used for different purposes. Each type of cryptocurrency has its own digital platform. Q: Where does cryptocurrency come from? A (Nate): There are “Miners,” who are people that gain cryptocurrencies by solving cryptographic equations using high-power computers. The process involves validating data blocks and adding transactions to a blockchain.
Q: Are meme stocks and cryptocurrency good investments? How do I know if these types of investments are suitable for my portfolio? A (Greg): Every investor has their own unique situation and risk tolerance. All investments carry some level of risk. Cryptocurrency is probably not the best investment if you have a low risk tolerance or if losing everything you invested in cryptocurrency would put you in a bad financial position. It’s important to know that cryptocurrency, meme stocks and other types of trending stocks can be very volatile, with the potential for severe price fluctuations. It’s best to discuss these types of trades with your financial advisor.
A (Nate): It’s also helpful to think of cryptocurrency and blockchain technology like the internet boom of the 90s. People knew it was coming but were unsure where it originated, where it was maintained, or how it would be useful in everyday life. Cryptocurrency may or may not be useful for your financial goals. Do you have additional questions about meme stocks or cryptocurrency? Contact us to speak with an advisor today. If you have questions on other wealth management topics, please submit them to kmaxwell@spectrum-mgmt.com .
PHILANTHROPY Upcoming Holiday Season / Shepherd’s Center of Hamilton County
through volunteer opportunities, and necessities for home-bound, isolated, and/or financially fragile seniors through their Community Caring program. To learn more about The Shepherd’s Center of Hamilton County, visit www.shepherdscenterofhamiltoncounty.org . We will purchase and assemble several care packages that include everyday household essentials, such as cleaning supplies, personal hygiene items and laundry supplies, for The Good Shepherd’s Center of Hamilton County Community Caring program. We feel very grateful to have the ability to help those in need, especially so close to home. To see our team in action and learn more about our philanthropy involvement, check out our social media pages and blog!
Each year, Spectrum Wealth Management donates to and participates in non-profit organizations to help communities in the greater Indianapolis area. We believe donating time and funds to fellow Hoosiers who are in need helps the team at Spectrum thrive. With the holiday season just around the corner, we have discussed ways our team can get involved to help vulnerable members of our community. Although the winter holidays are joyful occasions for most, they can be a challenging year for others. We know that financial security is an issue that many senior citizens face, especially those without families. That is why we have chosen to partner with The Shepherd’s Center of Hamilton County, an organization that assists older adults to continue living independently in their homes. They provide enrichment opportunities for senior citizens, companionship
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years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily. Your age at the time you start receiving benefits also affects your benefit amount. Although you can begin to claim benefits early at age 62, the longer you wait to retire (up to age 70), the higher your retirement benefit. You can find out more about future Social Security benefits by signing up for a mySocialSecurity account at the Social Security website , ssa.gov , so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor and disability benefits. If you are not registered for an online account and are not yet receiving benefits, you will receive a statement in the mail every year, starting at age 60. You can also use the Retirement Estimator calculator on the Social Security website, as well as other benefit calculators that can help you estimate disability and survivor benefits. Retiring at Full Retirement Age Your full retirement age depends on the year in which you were born.
begin receiving benefits. Your retirement benefit will be reduced by 5/9ths of 1 percent for every month between your retirement date and your full retirement age, up to 36 months, then by 5/12ths of 1 percent thereafter. For example, if your full retirement age is 67, you’ll receive about 30 percent less if you retire at age 62 than if you wait until age 67 to retire. This reduction is permanent—you will not be eligible for a benefit increase once you reach full retirement age. However, even though your monthly benefit will be less, you might receive the same or more total lifetime benefits as you would have had you waited until full retirement age to start collecting benefits. That is because even though you will receive less per month, you might receive benefits over a more extended period of time. Delaying Retirement Will Increase Your Benefit For each month that you delay receiving Social Security retirement benefits past your full retirement age, your benefit will increase by a certain percentage. This percentage varies depending on your year of birth. For example, if you were born in 1943 or later, your benefit will increase 8 percent for each year that you delay receiving benefits, up until age 70. In addition, working past your full retirement age has another benefit: it allows you to add years of earnings to your Social Security record. As a result, you may receive a higher benefit when you do retire, especially if your earnings are higher than in previous years. Working May Affect Your Retirement Benefit You can work and still receive Social Security retirement benefits, but the income you earn before you reach full retirement age may affect the amount of benefit you receive. Here’s how: If you are under full retirement age: $1 in benefits will be deducted for every $2 in earnings you have above the annual limit. In the year you reach full retirement age: $1 in benefits will be deducted for every $3 you earn over the annual limit (a different limit applies here) until the month you reach full retirement age.
ESTATE PLANNING
An Overview of Social Security Retirement Benefits and the Application Process
Year You Were Born
Full Retirement Age
1943 – 1954
66
1955 1956 1957 1958 1959
66 and 2 months 66 and 4 months 66 and 6 months 66 and 8 months 66 and 10 months
Tia Lee CFP ® , CTFA Director of Wealth Planning Applying for Social Security retirement benefits can be a confusing process, and many are unaware of all of the benefits available to retirees. Social Security was initially intended to provide older Americans with continuing income after retirement. Today, though the scope of Social Security has been widened to include survivor, disability and other benefits, retirement benefits are still the cornerstone of the program.
1960 and later
67
How Do You Qualify for Retirement Benefits? You earn Social Security credits when you work and pay Social Security taxes (FICA on some pay stubs). You can earn up to four credits each year. You generally need 40 credits (10 years of work) to be eligible for retirement benefits. How Much Will Your Retirement Benefit Be? Your retirement benefit is based on your average earnings over your working career. Higher lifetime earnings result in higher benefits, so if you have some
If you were born on January 1 of any year, refer to the previous year to determine your full retirement age. If you retire at full retirement age, you’ll receive an unreduced retirement benefit. Retiring Early Will Reduce Your Benefit You can begin receiving Social Security benefits before your full retirement age, as early as age 62. However, if you retire early, your Social Security benefit will be less than if you wait until your full retirement age to
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Estate Planning continued...
Once you reach full retirement age, you can work and earn as much income as you want without reducing your Social Security retirement benefit. Keep in mind that if some of your benefits are withheld before your full retirement age, you will generally receive a higher monthly benefit at full retirement age because, after retirement age, the SSA recalculates your benefit every year and gives you credit for those withheld earnings. Retirement Benefits for Qualified Family Members Even if your spouse has never worked outside your home or in a job covered by Social Security, they may be eligible for spousal benefits based on your Social Security earnings record. Other members of your family may also be eligible. Retirement benefits are generally paid to family members who rely on your income for financial support. If you are receiving retirement benefits, the members of your family who may be eligible for family benefits include: Your spouse of age 62 or older, if married at least one year Your former spouse of age 62 or older, if you were married at least 10 years Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled Your unmarried child under age 18 Your unmarried child under age 19, if a full-time student (through grade 12) or over age 18 and disabled if the disability began before age 22 Your eligible family members will receive a monthly benefit of as much as 50 percent of your benefit. However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member’s benefit will be reduced proportionately. Your benefit won’t be affected.
How Do You Apply for Social Security Retirement Benefits?
The SSA recommends that you apply three months before you want your benefits to start. To apply, fill out an application on the SSA website, call the SSA at (800) 772-1213, or make an appointment at your local SSA office. When preparing to apply for Social Security retirement benefits, it’s important to speak with a trusted advisor. Your wealth advisor can assist you in applying for your Social Security retirement benefits and create the best strategy to ensure you get all of the benefits available. If you have questions or concerns about applying for Social Security retirement benefits or planning your ideal work-optional lifestyle, contact us at 317-663-5600 or smg@spectrum-mgmt.com .
GENERATIONAL WEALTH
Wealth and Family: How Your Wealth Advisor Can Help with Family Dynamics
Kelli Maxwell Communications and Marketing Manager
When it comes to family wealth advisors, they exist in several professions such as accounting, banking, financial planning and law. Their professional skills are focused on the services and advice they provide for families, not the family unit itself. However, your financial advisor needs to have the skills necessary to deal with complex financial issues that arise in high-net-worth and ultra- high-net-worth families.
While they are not likely trained as a family mediator or counselor, your wealth advisor should possess the ability to bring family members together to address important issues and differences, resolve disputes and help with family governance. Being so close to the family, a trusted advisor observes several types of personal family issues. While a wealth advisor’s primary duties revolve around business and financial issues, their profound evaluation of the family’s needs often uncovers problems that the family members may not have considered.
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Lifestyle continued...
Although each family is unique, they share prevalent problems that family wealth advisors can recognize and assist. Some common family issues include conflict between family members that prevent them from taking action, families that have differences between members yet deny any disagreement, and past hurt feelings preventing family members from making reasonable compromises. Families typically have differences between generations, especially regarding life experience, different perspectives, intergenerational culture, and values. At times, the older, wealth-creating generations have become successful in their career or family business and are used to doing things in a specific way. On the other hand, the family’s younger generation may not be motivated to create their own wealth. Or, if they are, they may want to try new, innovative and potentially “risky” ventures, and the older generation may not agree. It is up to the wealth advisor to negotiate between the two sides: helping the older generation understand their children and preparing them adequately for the future, and helping the younger generation develop the mindset needed to create and manage wealth accordingly throughout their lives. Many older generation members are unaware of what other families are doing, do not want to face unavoidable life changes, and are uncomfortable understanding new possibilities. Those who are part of the family’s younger generation may be accustomed to an affluent environment and don’t feel the need or desire to acquire their own revenue to grow wealth throughout their lives for the next generation. Our advisors at Spectrum are experienced in dealing with complicated family issues and obstacles that interfere with financial decision-making and planning processes. They commonly encounter situations that require a delicate touch, knowledge and creative problem-solving skills. Below are some common areas we assist family clients with. Clarify values and shared visions. Every family has a set of unique values that determine how they conduct as a family and a business. A great way to encourage everyone involved starts with putting the spotlight on what matters most.
Values and visions for the future need to be clearly defined, confirmed and properly implemented. Our experienced advisors can help start the process with a positive focus on what family members agree on before diving deeper into conflicts. Gather pertinent information to understand the “Big Picture” in the family business. At Spectrum, we want to ensure we have all of the information needed to help simplify your financial life and help you deal with complexities as they come. Our advisors seek to get client perspectives via interviews and documents to learn about the business itself, how different family members view the family and family business, and learn more about each individual’s agenda. Encourage transparency. Family conflicts regularly emerge due to a lack of communication among family members. Often, family members do not have correct or adequate information. Our team of advisors can help appropriately and cohesively bridge the gap in communication so that all involved have the core facts and accurate information. Bring everyone together. Our advisors are talented in encouraging open communication between family members and bringing everyone together to discuss future goals. While every single family member may not have a say in the decision-making process, they can still help family members discuss intentions and help navigate through areas of differences. Help clients live life by design and move towards their financial goals with confidence. Clients often think there is only one way to get the desired outcome regarding financial goals. Our advisors can tactfully address family members from all generations and challenge families to reconsider decisions that will help them achieve their goals by taking action in areas that may be new, uncomfortable or unexpected. Creating a plan of action for the best future possible starts with establishing objectives that align with your long-term values and moving toward taking proposed steps to reach your goals.
WOMEN AND WEALTH
Advanced Estate Planning Concepts for Women
Leslie Thompson CFA ® , CPA, CDFA™ Editor and Chief Investment Officer Co-Founder
Statistically speaking, women live longer than men. If you are married, you will likely have the last word about the final disposition of all of the assets you have accumulated during your marriage. You will want to consider whether these concepts and strategies apply to your specific circumstances. Please note that many of the limits addressed below are subject to change should the items addressed in our earlier article, Taxes, What We Know Now— Summary of the September 2021 House Ways and Means Committee Tax Proposal pass.
Transfer Taxes When you transfer your property during your lifetime or at your death, your transfers may be subject to federal gift tax, federal estate tax, and federal generation- skipping transfer (GST) tax. (The top estate and gift tax rate is 40%, and the GST tax rate is 40%). Your transfers may also be subject to state taxes. Federal Gift Tax Gifts you make during your lifetime may be subject to the federal gift tax. Not all gifts are subject to tax, however. You can make annual tax-free gifts of up to $15,000 per recipient. Married couples can effectively
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Women and Wealth continued...
make annual tax-free gifts of up to $30,000 per recipient. You can also make tax-free gifts for qualifying expenses paid directly to educational or medical services providers. A basic exclusion amount protects a total of up to $11,700,000 (in 2021) from gift tax and estate tax. Federal Estate Tax The property you own at death is subject to federal estate tax. You can make deductible transfers to charity, and there is a basic exclusion amount that protects up to $11,700,000 (in 2021) from tax. Because the current estate exemption is so large, very few people are subject to federal estate tax. Portability The estate of someone who dies in 2011 or later can elect to transfer any unused applicable exclusion amount to their surviving spouse (a concept referred to as portability). The surviving spouse can use this deceased spousal unused exclusion amount (DSUEA), along with the surviving spouse’s basic exclusion amount, for federal gift and estate tax purposes. For example, suppose someone died in 2011, and the estate elected to transfer $5,000,000 of the unused exclusion to the surviving spouse. In that case, the surviving spouse effectively has an applicable exclusion amount of about $16,700,000 ($11,700,000 basic exclusion amount plus $5,000,000 DSUEA) to shelter transfers from federal gift or estate tax in 2021. Federal Generation-Skipping Transfer (GST) Tax The federal GST tax generally applies if you transfer property to a person two or more generations younger than you (for example, a grandchild). The GST tax may apply in addition to any gift or estate tax. Similar to the gift tax provisions above, annual exclusions and exclusions for qualifying educational and medical expenses are available for GST tax. You can protect up to $11,700,000 (in 2021) with the GST tax exemption. Indexing for Inflation The annual gift tax exclusion, the gift tax, estate tax basic exclusion amount, and the GST tax exemption are all indexed for inflation and may increase in future years.
Income Tax Basis Generally, suppose you give property during your life. In that case, your basis (generally, what you paid for the property, with certain up or down adjustments) in the property for federal income tax purposes is carried over to the person who receives the gift. So, if you give your $1 million home that you purchased for $50,000 to your brother, your $50,000 basis carries over to your brother—if he sells the house immediately, income tax will be due on the resulting gain. In contrast, if you leave property to your heirs at death, they get a “stepped-up” (or “stepped-down”) basis in the property equal to the property’s fair market value at the time of your death. So, if the home that you purchased for $50,000 is worth $1 million when you die, your heirs get the property with a basis of $1 million. If they then sell the home for $1 million, they pay no federal income tax. Lifetime Giving Making gifts during one’s life is a common estate planning strategy that can also minimize transfer taxes. One way to do this is to take advantage of the annual gift tax exclusion, which lets you give up to $15,000 (in 2021) to as many individuals as you want tax-free. As noted above, you can take advantage of several other gift tax exclusions and deductions. In addition, when you gift property that is expected to appreciate, you remove the future appreciation from your taxable estate. In some cases, it may even make sense to make taxable gifts to remove the gift tax from your taxable estate as well. Trusts There are several types of trusts that are often used in estate planning. Here is a quick look at a few of them. Revocable Trust You retain the right to change or revoke a revocable trust. A revocable trust provides for the management of your property in case of your incapacity and avoids probate at your death. Credit Shelter (Bypass, Family or “B” Trust) Trust A credit shelter trust (CST) is a trust created after the
death of the first spouse in a married couple. Assets placed in the trust are generally held apart from the surviving spouse’s estate so that they may pass tax-free to the remaining beneficiaries at the death of the surviving spouse. The assets held in the CST can benefit the surviving spouse during their lifetime. Grantor Retained Annuity Trust (GRAT) You retain a right to a fixed stream of annuity payments for a predetermined number of years, after which the remainder passes to your beneficiaries, such as your children. Your gift of a remainder interest is discounted for gift tax purposes. Charitable Remainder Unitrust (CRUT) You retain a stream of payments for a number of years (or for life), after which the remainder passes to charity. You receive a current charitable deduction for the gift of the remainder interest. Charitable Lead Annuity Trust (CLAT) A fixed stream of annuity payments benefits a charity for a term of years, after which the remainder passes to your noncharitable beneficiaries, such as your children. Your gift of a remainder interest is discounted for gift tax purposes. Life Insurance Life insurance plays a part in many estate plans. Life insurance may create the estate in a small estate and be the primary financial resource for your surviving family members. Life insurance can also be used to provide liquidity for your estate, for example, by providing the cash to pay final expenses, outstanding debts, and taxes so that other assets do not have to be liquidated to pay these expenses. Life insurance proceeds can generally be received income tax–free. Life insurance that you own on your own life will generally be included in your gross estate for federal estate tax purposes. However, using an irrevocable life insurance trust (ILIT) to keep the life insurance proceeds out of your gross estate is possible. With an ILIT, you create an irrevocable trust that buys and owns the life insurance policy. You make cash gifts to the trust, which the trust uses to pay the policy
premiums. (The trust beneficiaries are offered a limited period to withdraw the cash gifts.) If appropriately structured, the trust receives the life insurance proceeds when you die, tax-free, and distributes the funds according to the terms of the trust. It is essential to know that women tend to outlive men by five years or more because that means there is a greater chance that you will need your assets to last for a longer period of time. Keep this in mind when you are mapping out your estate plan and consider things such as making lifetime gifts. Any property you give away is no longer available to you.
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Frequently, it is due to pressure and expectations placed on children by the parents or household. Successful parents have high expectations for themselves, and similarly, high expectations for their children. Children can easily misinterpret this, and frequently children will put too much pressure on themselves, thinking it will appease their parents. Several other risk factors present challenges to older children’s and teens’ emotional and social development. Some parents focus too much on the results and not enough on the process regarding academics. Placing the pressure of academic perfection on an older child or teen can result in burnout or losing interest in learning altogether. Affluent children typically come from families where one or both parents are constantly working and on the go, causing them to live in higher isolation than children from families with lesser means. This can lead to less interaction with peers, not having strong friendships through formative years, or cause a lack of self-confidence in social settings. Financial Security Challenges Another common misconception is that affluent children live prosperous lives and never face any “real” problems. The truth is that affluent children are at a significant disadvantage regarding emotional intelligence, life skills, discipline and knowledge to attain long-term financial stability. That’s why wealthy parents must focus on preparing children for financial success later in life. If you don’t recognize the risks of affluence and address them early on, your children may have a higher chance of failing as adults. The illusion of security or perception of financial success and abundance at home can be deceptive for a child and lead them to think that they are set for life. Children in wealthy families often live in a lifestyle bubble. They frequently have no idea how money is earned, budgeted and spent, and often, if not always, get what they want when it comes to material possessions. The problem with the lifestyle bubble is that inevitably the child will one day become independent and have their own bills, loans and mortgages to pay—and there is always a risk that they could lose their wealth if they are not adequately educated on how to grow and sustain it throughout their lifetime.
What good is a substantial inheritance if the child isn’t equipped with the knowledge and emotional intelligence to manage the transfer of wealth? Helping Kids Apply Emotional Intelligence to Money The good news is, many of the positive traits carried by the parents who created wealth, such as being goal- oriented, achievement-driven and analytical, pass down to kids. The obstacle for wealthy parents is recognizing the risks and challenges mentioned above and finding ways to incorporate a healthy and productive relationship with money into their child’s life as an ongoing process. Just like adults, children have “emotional profiles,” more commonly known as personality types. A person’s emotional profile is one of the most significant catalysts of an individual’s relationship with money and financial success. Emotions and belief systems influence how we manage our money throughout our lives. It’s important to know that our emotional profile type is formed early in life and does not change. For example, if a child likes to solve puzzles, he or she will likely take a problem-solving approach to finances later in life. Their emotional profile may be the “Investigator” or “Problem Solver.” If a child is very social and likes to complete tasks and share with others, they will likely grow up to be a “Giver” that connects with others in emotional ways. This behavior will flow over into their relationship with money. Parents should find the best financial literacy approach and find resources based on their child’s personality type. There are several different types of simple strategies that wealthy parents can use with their children to help them develop the necessary skills to face financial adversity and effectively manage money. It may be as simple as establishing weekly chores to “earn” spending money or delaying gratification for younger children, even if money is no object. Instead of buying them every toy or material item they ask for, when they ask for it, hold off on making the purchase. This can teach them the important lesson of delayed gratification, and having the ability to delay gratification is essential to developing self-control. Or, when a child becomes old enough to go shopping with
GENERATIONAL WEALTH
Challenges Wealthy Kids Face
Kelli Maxwell Communications and Marketing Manager
Several misconceptions surround those from a wealthy upbringing. Did you know that children raised in affluent households have a higher chance of having financial issues or suffering mentally and emotionally later in life than those who are less privileged? 1 While it’s easy to think that large amounts of money can solve all of life’s problems, that’s not the reality of the situation for everyone.
Mental Health and Developmental Challenges Studies show that disorders such as substance abuse, anxiety and depression are 20 to 30 percent more common in children from wealthy families than children from families with average to below- average incomes. 2 Wealthy parents need to know that their children could be at risk for potential mental health ailments. So why are children from wealthy households more prone to substance abuse, chronic depression and low self-esteem?
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