SWM Quarterly Newsletter Vol. 4 | Summer 2023

Welcome to Spectrum Wealth Management's Quarterly Newsletter, Perspective!





Mid-Year Update and Outlook

Letter from the Editor


Elder Financial Abuse: How to Recognize It and Warning Signs to Look for


Hello Friends, Welcome to the latest edition of Perspective , our digital newsletter designed with you in mind. The Spectrum team knows what issues and topics are most important to our clients, and we are proud to share insights that matter to you the most. As we approach the summer months and ending of the second quarter of this year, we are reminded that things in life are constantly changing as we transition through the different seasons of the year. For many, the summer is a time for travel, relaxation, rejuvenation, and spending time enjoying outdoor activities. It is also an ideal time to organize important documents you have accrued over the recent months and perform a mid-year review of your financial plans to ensure you are on track to meet your goals for the year. In this issue, we will be discussing Inherited IRAs: Mid-Year Update and Outlook, Why the Required Beginning Date is More Important Now than Ever Before, Elder Financial Abuse: How to Recognize It and Warning Signs to Look for, Charitable Giving Basics, and other financial topics including The Negative Wealth Effect, and Descending Triangle Charts Explained. As always, the Spectrum team supports your financial goals, and we are proud to guide you on the road to financial independence. We hope you enjoy this issue and find the articles practical and intriguing.


Inherited IRAs: Why the Required Beginning Date is More Important Now than Ever Before 10



Descending Triangle Chart Explained



Monte Carlo Analysis


Negative Wealth Effect


All the best,


Leslie Thompson CFA ® , CPA, CDFA™ Editor and Chief Investment Officer Co-Founder


Charitable Giving Basics



Estate Planning and 529 Plans

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Mid-Year Update and Outlook

Leslie Thompson CFA ® , CPA, CDFA™ Editor and Chief Investment Officer Co-Founder

The most popular prediction headed into 2023 was that markets would suffer through a rough first half but rally by year’s end. However, stocks and bonds have refused to comply with the consensus forecast. Throughout the first five months of the year, the S&P 500 Index returned 9.65% (including dividends), and the Bloomberg U.S. Aggregate Bond Index returned 2.46% on a total return basis. Positive returns are a welcome relief following last year’s market woes. Areas of the market that performed well last year (Energy and Staples) are this year’s laggards, and the outperformers of this year (Technology and Communications) were deeply out of favor last year after two years of solid gains. While the market-cap-weighted S&P 500 has performed well, the broader U.S. market, as measured by the Invesco S&P 500 Equal Weighted Index ETF (RSP), is down 4.33% through the end of May. The dichotomy between the handful of mega-cap growth companies (Apple, Microsoft, Google, Tesla, and Nivida) and the rest of the market helps to build the proverbial wall of worry. Interestingly,

Apple and Microsoft are valued at almost double the combined market capitalizations of the entire Energy and Materials sectors. 1 Apple is worth more than the Russell 2000 Index, and J.P. Morgan is worth more than all publicly traded regional banks. 2 Plenty of bad news this year could have derailed the first half’s rally in risk assets. Further tightening monetary policy, the Federal Reserve has raised interest rates at all three of its meetings this year and ten times overall since last March. As a result, the economy shows signs of cooling, but inflation is still too hot. Year-over-year earnings have declined for two consecutive quarters on smaller revenues and shrinking profit margins. Several U.S. banks have failed amid the ongoing crisis in the regional banking industry, raising fears of a looming credit crunch. Debt ceiling negotiations in D.C. were particularly divisive before resulting in a deal to avoid default. China’s reopening from COVID restrictions has been underwhelming. Sadly, the Russia-Ukraine war rages on with no clear end.

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Timely Financial News continued...

So, it must be maddening for market prognosticators to watch stocks and bonds climb the wall of worry fueling the fear of missing out (FOMO). The widening gap between financial assets’ performance and underlying risks underscores the notion that the economy is not the market and vice versa. Broadly, investors are on edge — eager to protect their unexpected gains. According to Strategas Research Partners, there has never been a market bottom before a recession began, further fueling investors’ anxiety. Investors anxiously await the recession that may or may not arrive this year. Most economists expect a recession in the next 12–18 months, although we heard this prediction over a year ago. Investors crave clarity regarding its timing and severity; however, until the resilient consumer and strong labor market falter, investors will likely have to wait longer for the anticipated recession. Knowing that recessions are a normal economic occurrence, How deep or mild will the recession be? is the day’s question. Outside of another external shock (the current banking crisis seemed to come out of nowhere), we side with a mild recession and soft landing by the Fed. As of this writing, the S&P 500 has finally meaningfully broken through the 4,200 level. So, what will it take for the index to continue the rally in risk assets? A definitive end to the Fed’s tightening cycle could help. The Fed is in a difficult position, and investors are uncertain about the future path of monetary policy. Inflation remains significantly above the Fed’s target, and the labor market has not been this strong in more than 50 years. This would suggest the Fed should keep raising rates. But, the regional banking crisis combined with Fed officials’ words and actions has investors convinced the tightening cycle is over. Historically, risk assets perform reasonably well during the monetary policy transition period between the last rate hike and the first rate cut.

That may reflect the current investment environment. But be wary of rate cuts because risk assets (stocks and corporate credit) typically fall when the Fed starts cutting. After all, the Fed is lowering rates for a reason — usually in response to a recession or capital market breakdown. Gaining insight into the direction of monetary policy will be vital to extend the market breakthrough. The good news is that the picture should become more apparent in mid–June at the next Fed meeting. Finally, the agreement to raise the debt ceiling was vital to continuing this year’s rally. Clarity on the timing and severity of recession and insight into the direction of future monetary policy will hopefully result in more stocks participating in this year’s rally — enabling the continuation of the secular bull market that began in 2009. As of this writing, the S&P 500 has advanced over 20 percent from the October 2022 market low, which by definition, is the end of the S&P 500 bear market.


Elder Financial Abuse: How to Recognize It and Warning Signs to Look for

Kelli Maxwell Communications and Marketing Manager

According to the National Council on Aging, 1 in 10 Americans aged 60-plus has experienced some type of elder abuse, and one of the most frequent forms of abuse is financial. This type of abuse is so common that the number of seniors in the United States who have experienced financial abuse is estimated to be as high as 37 percent. To look at things

objectively, if you have three living grandparents or two living elderly parents, there is a chance that at least one of them has been a victim of financial abuse and likely not even know it. To recognize the signs of elder financial abuse, you must first understand what it is. The Older Americans Act of 2006 defines elder financial abuse

06/09/2023 Past performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss, and the reinvestment of dividends and other income as applicable. Sources

1 Bloomberg, as of May 18, 2023 2 Bloomberg, as of May 18, 2023 3 Bloomberg, as of May 18, 2023

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Lifestyle + Wellness | Financial Literacy continued...

and exploitation as “The Fraudulent or otherwise illegal, unauthorized, or improper act or process of an individual, including a caregiver or fiduciary, that uses the resources of an older individual for monetary or personal benefit, profit, or gain, or that results in depriving an older individual of rightful access to, or use of, benefits, resources, belongings, or assets.” Simply put, elder financial abuse involves taking advantage of an older person for financial gain, regardless of motive. Financial exploitation can often be more challenging to detect than other forms of abuse. While this is not always the case, it is ubiquitous for financial abuse to be carried out by family members, friends, caregivers, or other trusted individuals that are in the victim’s life. One of the most common types of financial abuse that takes place from individuals close to the victim includes a caretaker using checks, debit, or credit cards to withdraw money or make purchases without the victim’s permission. However, more dangerous and repugnant forms of financial abuse are also commonplace. This includes threats of violence in exchange for money or assets, or worse, a family member, friend, or caregiver withholding care unless they receive an exchange of money or neglecting their caregiving responsibilities while still collecting full payment. Other perpetrators can also carry elder financial abuse, such as impersonators who claim to be associated with lotteries, law enforcement, the IRS or government offices, charities, or email phishing scams. Other common types of financial fraud targeted at elderly individuals include predatory lenders and identity theft. Why does elder financial abuse happen? Several factors make seniors especially vulnerable – while an age-related decline in cognitive abilities makes some elderly individuals an easy target for abuse, there are other reasons. Older individuals tend to have a higher net worth than younger generations, and the concentration of wealth in this age range makes them desirable targets for those with dishonorable intentions. Another factor that comes into play is the potential for

a declining financial capacity. Depending on the level of cognitive decline with age, an older adult may have trouble making sound financial decisions. Elder financial abuse is an issue that should be taken seriously. Thankfully, some things can be done to recognize elder financial exploitation and protect our loved ones from this abuse. Financial abuse can be difficult for victims or family members to identify and report. Here are a few things you can watch for: Sudden changes in bank accounts or credit cards, such as names or authorized users added without your knowledge or consent Finding unpaid bills or past due notices, although you have sufficient financial resources to pay for your discretionary and non-discretionary expenses Previously uninvolved relatives showing up to claim rights to an elderly person’s property or assets Sudden transfer or attempted transfer of assets to someone outside of the family An unusual change in spending habits An elderly individual suddenly acting worried or stressed about financial matters Elder financial abuse is preventable. Here are a few ways you can protect yourself or an elderly loved one: Avoid joint bank accounts. While it may seem like a good idea to open a joint bank account for your family or caregiver to access funds to help you manage your finances, you should avoid a joint bank account at all costs. Joint bank accounts are an easy way for theft and financial abuse to occur. Remain socially active. Isolation contributes significantly to vulnerability, as being secluded from friends and family can make it difficult for others to identify and recognize signs of abuse. Seek outside perspectives. Consult your wealth advisor, attorney, or another trusted advisor before making significant investments or purchases. Require background checks. If hiring individuals to provide in-home care, it is vital to have the person properly screened, including a criminal background check.

Use technology to stay connected and informed. Consider enrolling your elderly loved one in mobile banking and setting alerts and notifications to be sent to them whenever a transaction is made or their balance falls below a certain amount. This can help them stay informed, feel in control of their finances, and quickly identify charges they did not authorize. If you suspect you or a loved one is a victim of elder financial abuse, you should report it to the appropriate agencies as soon as possible. The Consumer Financial Protection Bureau’s website offers additional resources about elder financial abuse, resources, and contact information based on the type of financial abuse that needs to be reported.

Sources 4 https://www.ncoa.org/article/get-the-facts-on-elder-abuse 5 https://www.ncsl.org/research/financial-services-and-commerce/combatting-elder-financial-exploitation.aspx 6 https://www.ncbi.nlm.nih.gov/books/NBK98784/

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One advantage of having a Roth IRA is that the owner has no RMDs. For this reason, a Roth IRA owner is always considered to have died before his RBD – regardless of how old the owner was at death. The rules become more complicated for 401(k)s and other employer-sponsored retirement savings plans. Under the exception of those still working, most plans allow participants who continue working beyond age 72 to delay their RBD until April 1 after they retire. This excludes SEP and SIMPLE IRAs, and this delay is also not available to those who own more than 5% of the company sponsoring the plan. The regulations clearly state that if someone owns more than 5% of the company is determined in the plan year ending in the calendar year that the employee turns 72 (or age 70 ½ for those born before July 1, 1949). The RBD and Annual RMDs During the Ten-Year Period For deaths before 2020, pre-SECURE Act rules allowed designated beneficiaries to bridge RMDs throughout their life expectancy. However, if the account owner died before their RBD, the IRA or plan could allow (and sometimes require) the entire account to be paid under the five-year rule. The rule required the account to be emptied by December 31 of the fifth year following the year of death. There were no annual RMDs within the five years – the beneficiary had total flexibility to take as much or as little from the account annually. The only requirement was to empty the account at the end of the five years. The five-year rule was not an option when the death occurred on or before the RBD. After the SECURE Act was enacted, most commentators believed it blurred the distinction between death before and after the RBD for post-death RMDs. The law seemed to say that most non-spouse beneficiaries were required to empty the inherited account within ten years after death, but like the five-year rule, no annual RMDs were required during the ten-year period. It is important to note that the life expectancy stretch is still available for particular designated beneficiaries known as “eligible designated beneficiaries (EDBs):” surviving spouses, children of the account holder under age 21, chronically ill or disabled individuals, or anyone not more than ten years younger than the account holder.

The IRS interprets the SECURE Act differently. The IRS takes the position that the SECURE Act did not do away with an old RMD rule that is sometimes called the “at least as rapidly” rule. The rule does not require a beneficiary to continue receiving the same amount the IRA owner was receiving, but it requires that distributions continue after the owner’s death. Therefore, if an IRA owner was receiving annual RMDs, annual RMDs must continue after death, just not at the same amount. The result is that two rules apply at the same time when the IRA owner dies on or after the RBD with a beneficiary who is a non-eligible designated beneficiary: The “at least as rapidly” rule requires RMDs to continue in years 1 – 9 after death; The ten-year rule requires all funds in the inherited IRA to be withdrawn by the end of the tenth year after death. Other Reasons Why the RBD is Now Important The new rule requiring certain non-eligible designated beneficiaries to take annual RMDs during the ten-year period has been well-publicized. What has not received as much attention is that, under regulations, whether death occurred before or after the RBD is a controlling factor in several other RMD situations. For example, the death-before-or-after-the-RBD rule often tells us if the annual RMD requirement extends to successor IRA beneficiaries (e.g., the beneficiary of the first beneficiary). A successor beneficiary who inherits after 2019 is always subject to the ten-year rule. Suppose the original IRA owner died on or after his RBD; the first beneficiary was a non-eligible designated beneficiary. In that case, the successor must continue the annual RMDs during the remaining ten-year period. These annual RMDs would be calculated over the first beneficiary’s life expectancy. Annual RMDs would not apply if the original owner died before the RBD. Similarly, if the original owner died on or after his RBD and the first beneficiary was an EDB, the successor must take annual RMDs over the successor’s ten-year period. The regulations suggest that annual RMDs are also required over the ten-year period, even if the original owner died before the RBD. This requirement could be because annual RMDs had already started when the EDB was required to take them and, therefore, must continue.


Inherited IRAs: Why the Required Beginning Date is More Important Now than Ever Before

Brian Short CFP ® Senior Wealth Advisor

When the SECURE Act became effective in 2022, the question of whether a retirement account owner died before or after the required beginning date did not seem as vital as it was. That changed when the IRS published the new SECURE Act regulations on February 23, 2022. Understanding the required beginning date and how it is a central concept for determining required minimum distributions (RMDs) post- death is essential.

What is the Required Beginning Date? Simply put, the required beginning date (RBD) is the first date RMDs from IRAs and other retirement savings plans must begin. Before the SECURE Act, the RBD for traditional IRA owners was April 1 of the year, following the owner turning 70 ½. The SECURE Act extended the RBD for traditional IRA owners born on or after July 1, 1949, to April 1 of the year after the owner turns age 72. The SECURE Act 2.0 further changed the RBD date to age 73, up to a maximum age of 75 for those born in 1959 or after.

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Descending Triangle Chart Explained

Greg Thompson CMT ® Portfolio Manager

Historical trading activity and price changes of a security can be invaluable indicators of a security’s future price movements. Charts are regularly used when observing the market to predict future performance. Previously, we discussed the “inverse head and shoulders” chart pattern concerning the bearish-to- bullish trend reversal and a signal that a downward trend is nearing its end.

A descending triangle is a bearish continuation chart pattern created by drawing one trend line to connect a series of lower highs and a second horizontal trend line that connects a series of lows. This chart pattern tends to be popular among traders as it clearly shows that the demand for an asset is weakening. When the price breaks below the lower support, the indication is clear that the downside momentum is likely to continue with the potential to become even stronger.

Let us explore another common chart pattern type: the descending triangle.

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Spectrum in the News

Our multidisciplinary team is sought-after in the financial industry for their insight and expertise. We continue to be called upon by elite outlets for insights. Below are some of our recent media mentions. The Wall Street Journal | May 15, 2023 The Wall Street Journal: Energy Stocks Are in the Doldrums After Last Year’s Big Rally Co-founder and CIO Leslie D. Thompson discussed the energy sector with Hanna Maio at The Wall Street Journal, noting energy has outperformed significantly in the last couple of years and believes “There’s a little bit of reversion to the mean and taking some profits.” Kiplinger | March 22, 2023 Kiplinger: Fed Hikes Interest Rates Yet Again: What the Experts are Saying CIO and Co-Founder Leslie Thompson shared her insights with Dan Burrows of Kiplinger following yesterday’s FOMC meeting and the Fed’s 25 basis point rate hike. “While broad regional bank instability concerns have slowed, spillover disruption has yet to be known.”

USA Today | February 14, 2023 USA Today: What’s an FSA, HSA, 529? How they work and how to use them to cut taxes, build wealth. Co-founder and CIO Leslie Thompson discussed the pros and cons of flexible spending accounts (FSAs) with USA Today’s Medora Lee, noting the expansion of eligible items for purchase while cautioning against overestimating your spending by year-end.


Monte Carlo Analysis

Leslie Thompson CFA ® , CPA, CDFA™ Editor and Chief Investment Officer Co-Founder

When you sit down with a financial professional to update your retirement plan, you may encounter a Monte Carlo simulation, a financial forecasting method that has become more prevalent in recent years and a tool that Spectrum has used for almost 20 years. Monte Carlo financial simulations project and illustrate the probability that you will reach your financial goals, and might help you make a more informed investment decision.

Estimating investment returns All financial forecasts must account for variables like inflation rates and investment returns. The catch is that these variables have to be estimated, and the estimate used is vital to a forecast’s results. For example, a forecast that assumes stocks will earn an average of 4% each year for the next 20 years will differ significantly from a forecast that assumes an average annual return of 8% over the same period.

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Investing | Financial Literacy continued...

Estimating investment returns is complicated. For example, the volatility of stock returns can make short-term projections almost meaningless. Multiple factors influence investment returns, including events such as natural disasters and terrorist attacks, which are unpredictable. So, it is essential to understand how different forecasting methods handle uncertainty. Basic forecasting methods Straight-line forecasting methods assume a constant value for the projection period. For example, a straight-line forecast might show that a portfolio worth $116,000 today would have a future value of approximately $250,000 if the portfolio grows by an annual compounded return of 8% for the next ten years. This projection is helpful but has a flaw: In the real world, returns are not typically that consistent from year to year. Forecasting methods that utilize “scenarios” provide a range of possible outcomes. Continuing with the 10-year example above, a “best-case scenario” might assume that your portfolio will grow by an average 10% annual return and reach $300,000. The “most-likely scenario” might assume an 8% return (for a $250,000 value), and the “worst-case scenario” might use 4%, resulting in roughly $171,000. Scenarios give you a better idea of the range of possible outcomes. However, they are not precise in estimating the likelihood of any specific result. Forecasts that use Monte Carlo analysis are based on computer-generated simulations. You may be familiar with simulations in other areas; for example, local weather forecasts are typically based on a computer analysis of national and regional weather data. Similarly, Monte Carlo financial simulations rely on computer models to replicate the behavior of economic variables, financial markets, and different investment asset classes. Why is a Monte Carlo simulation useful? In contrast to more basic forecasting methods, a Monte Carlo simulation is designed to account for volatility, especially the volatility of investment returns. It enables you to see a spectrum of thousands of possible outcomes, considering the many variables involved and the range of potential values for each of those variables.

By attempting to replicate the uncertainty of the real world, a Monte Carlo simulation can provide a detailed illustration of how likely a given investment strategy might meet your needs. For example, when it comes to retirement planning, a Monte Carlo simulation can help you answer specific questions, such as: Given a particular set of assumptions, what is the probability that you will run out of funds before age 90? If that probability is unacceptably high, how much additional money would you need to invest each year to decrease the probability to 10%? The Mechanics of a Monte Carlo Simulation A Monte Carlo simulation typically involves hundreds or thousands of individual forecasts or “iterations” based on data that you provide (e.g., your portfolio, timeframes, and financial needs and goals). Each iteration draws a result based on the historical performance of each investment class included in the simulation. Each asset class — small-cap stocks, corporate bonds, etc. — has an average (or mean) return for a given period. Standard deviation measures the statistical variation of the returns of that asset class around its average for that period. A higher standard deviation implies greater volatility. For instance, the returns for stocks have a higher standard deviation than those for U.S. Treasury bonds.

3: +16%, and so on. For a 10-year projection, a Monte Carlo simulation will produce a series of 10 randomly generated returns — one for each year in the forecast. A separate series of random returns are developed for each iteration in the simulation, and multiple combined iterations are considered a simulation. A graph of a Monte Carlo simulation might appear as a series of statistical “bands” around a calculated average. Let’s say a Monte Carlo simulation performs 1,000 iterations using your current retirement assumptions and investment strategy. Of those 1,000 iterations, 600 indicate that your assumptions will result in a successful outcome; 400 iterations indicate you will fall short of your goal. The simulation suggests a 60% chance of meeting your goal. Pros and cons of Monte Carlo A Monte Carlo simulation illustrates your future finances based on the assumptions you provide. Though a projection might show a very high probability that you may reach your financial goals, it cannot guarantee that outcome. However, a Monte Carlo simulation can illustrate how changes to your plan could affect your odds of achieving your goals. With periodic progress reviews and plan updates from the Spectrum team, Monte Carlo forecasts could help you make better-informed investment decisions. IMPORTANT: The projections or other information generated by Monte Carlo analysis tools regarding the likelihood of various investment outcomes are hypothetical, do not reflect actual investment results, and do not guarantee future results. Results may vary with each use and over time. Because of the many variables involved, an investor should not rely on forecasts without realizing their limitations.

There are various types of Monte Carlo methods, but each generates a forecast that reflects varying patterns of returns. Software modeling stock returns, for example, might produce a series of annual returns such as the following: Year 1: -7%; Year 2: -9%; Year

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has made your profession obsolete. Any thought experiments can illustrate scenarios that can up-end your current financial outlook. If any of these happens, you might feel dejected, despondent, or discouraged, but a combination would be disastrous to many people’s psyches. The two examples above are examples of the wealth effect. The first instance is a positive wealth effect. You come across an unexpected windfall, and a vast number of options open up for what to do with the money. If enough people experience this positive effect, then this can contribute to a virtuous cycle of increasing wealth leading to more wealth. The second instance is an example of a negative wealth effect. A negative wealth effects happen when asset values contract due to circumstances outside your control. During periods of market volatility, investors typically experience a negative wealth effect. A negative wealth effect occurred during the Great Financial Crisis, where falling home prices led to a downward price spiral in other assets. People see their assets’ value falling and extrapolate further falling prices into the future. Falling prices consequently affect their wealth. Declining wealth can lead to a feedback loop that sees further economic decline if more people suddenly stop spending. This process happened during the Great Depression, and the psychological effect still occurs today. These mental exercises demonstrate the most crucial aspect of money, wealth, and investing; psychology. Psychological effects around the dynamics of money are complex and highly interdependent. People view a loss of wealth as more painful than a similarly sized gain is enjoyed. When markets are booming, people feel empowered to spend more. When markets are gloomy, the tendency to spend freely is curtailed. The interaction of psychology and money is an interesting place where we can see the limitations of our Stone Age behaviors manifest in the modern world. Behavioral economists have attempted to catalog all our illogical tendencies in the biases and heuristics literature of writers like Kahneman, Tversky, Thaler, and Sunstein. These authors observe that once-adaptive behaviors that guarantee survival in life-and-death

situations usually are maladaptive when it comes to money matters. When our brains see losses in our portfolio, we want to avoid that pain. Avoiding pain and moving toward certainty during times of volatility is usually costly, not only to your portfolio but also to your mental state. Once you start to change your plans during tough times, you are more likely to change other long-term goals, which could be counterproductive to your overall wealth. Awareness that these biases are innate to all people can help us better understand ourselves. Having an outside perspective on your financial picture can also be another way to grasp the implications of market volatility. When viewing your financial picture, it is important to understand that the long-term impact of decisions we make under duress may not be optimal. If you are having trouble sleeping at night due to financial stress, it might be worthwhile to reevaluate your financial picture. If you need to make a change, it is best to have experts who can walk you through the details and benefits before execution.


Negative Wealth Effect

Nate White Portfolio Analyst and Senior Project Manager

“The first principle is that you must not fool yourself, and you are the easiest person to fool.” — Richard Feynman Imagine you have just inherited a large sum of money. The sum isn’t essential, but what you can do with the money is. You might take trips. You could buy anything you ever desired. Maybe you want to devote your time and money entirely to philanthropic endeavors. If you are entrepreneurial, you might build a business that multiplies the windfall tenfold. All these possibilities are

new and exciting opportunities that didn’t exist before you came into your fortune. You feel empowered to spend, invest, and splurge without reservation. Now imagine that your accountant has not filed your taxes correctly for a few decades, and you suddenly owe the government vast sums. Or a relative has taken out loans against your jointly owned property that will be foreclosed. Maybe there has been corporate malfeasance at your employer, and you suddenly are out of work. Imagine that technological innovation

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The top 2023 ordinary income tax rate is 37% plus state taxes. Careful planning stretches your dollars to benefit you now and, eventually, the people and charities you love. Note: The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. Under the current law, the amount will revert to its pre-2018 levels of about one-half of $12,092,000.

A charitable lead trust pays income to your chosen charity for several years after your death. Once that period ends, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction.

If you have charitable intentions consider these three strategies.

Make an outright bequest in your will or trust. The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will or trust that names the charitable beneficiary and states the gift amount. The outright bequest is especially appropriate when you do not have tax-deferred retirement accounts or want the funds to go to the charity without strings attached. Make a charity the beneficiary of an IRA, retirement plan, or annuity. You can name your favorite charity as a beneficiary of an IRA, employer-sponsored retirement plan, or tax- deferred annuity. Naming a charity as a beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account. Use a charitable trust. Another way to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust.

Note: There are costs and expenses associated with creating these legal instruments.

If charitable giving is not currently a part of your financial plan, consider discussing this with your wealth advisor. We can develop a charitable giving plan that not only creates tax benefits but also assist in discovering giving opportunities that align with your values and passions to forge a sense of personal satisfaction, knowing your gifts impact those who need them the most.


Charitable Giving Basics

Tia Lee CFP ® , CTFA Director of Wealth Planning

Charitable giving can play an essential role in many estate plans while giving you the personal satisfaction of supporting your favorite charities. There is a long list of tax- efficient gifting strategies, defining how much you want to give, when to give it, and to whom is the place to start. Gifts during your lifetime primarily focus on income tax reduction, while gifts at death primarily focus on estate tax reduction.

A few words about estate taxes and income taxes The federal government taxes wealth transfers made to individuals over specific amounts during your life or death. In 2023 any person can transfer $12,092,000 estate tax-free, double that for a couple. The tax-free amount is called your lifetime estate tax exclusion amount. Transfers above your exclusion are subject to roughly a 40% estate tax. Note that some states still have inheritance taxes to consider as well. Gifts to charities give your estate a charitable deduction similar to a charitable deduction on your income tax return.

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In addition, you are allowed an “applicable exclusion amount” that effectively exempts around $12,920,000 in 2023 for total lifetime gifts and bequests made at death. Note: State tax treatment may differ from federal tax treatment, so look to the laws of your state to find out how your state will treat a 529 plan gift. Contributions to a 529 plan are treated as gifts to the beneficiary A contribution to a 529 plan is treated under the federal gift tax rules as a completed gift from the donor to the designated beneficiary of the account. Such contributions are considered present interest gifts (as opposed to future or conditional gifts) and qualify for the annual federal gift tax exclusion. In 2023, this means you can contribute up to $17,000 to the 529 account of any beneficiary without incurring federal gift tax. So, if you contribute $25,000 to your grandchild’s 529 plan in a given year, for example, you would ordinarily apply this contribution against your $17,000 annual gift tax exclusion. This means that although you would theoretically need to report the entire $25,000 gift on a federal gift tax return, you would show that only $8,000 is taxable. Bear in mind, though, that you must use up your federal applicable exclusion amount (about $12,920,000 in 2023) before you’d actually have to pay gift tax. Special rule if you contribute a lump sum Section 529 plans offer a special gifting feature. Specifically, you can make a lump-sum contribution to a 529 plan of up to five times the annual gift tax exclusion ($85,000 in 2023), elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. A married couple can gift up to $170,000. For example, if you contribute $85,000 to your grandchild’s 529 account in one year and make the election, your contribution will be treated as if you would make a $17,000 gift for each year of a five-year period. That way, your $85,000 gift would be nontaxable (assuming you do not make any additional gifts to your grandchild in any of those five years).

If you contribute more than $85,000 ($170,000 for joint gifts) to a particular beneficiary’s 529 plan in one year, the averaging election applies only to the first $85,000 ($170,000 for joint gifts); the remainder is treated as a gift in the year the contribution is made. What about gifts from a grandparent? Grandparents need to keep the federal generation- skipping transfer tax (GSTT) in mind when contributing to a grandchild’s 529 account. The GSTT is a tax on transfers made during your life and at your death to someone who is more than one generation below you, such as a grandchild. The GSTT is imposed in addition to (not instead of) federal gift and estate tax. Like the basic gift tax exclusion amount, though, there is a GSTT exemption (also about $12,920,000 in 2023). No GSTT will be due until you have used up your GSTT exemption, and no gift tax will be due until you have used up your applicable exclusion amount. If you contribute no more than $17,000 to your grandchild’s 529 account during the tax year (and have made no other gifts to your grandchild that year), there will be no federal tax consequences — your gift qualifies for the annual federal gift tax exclusion, and it is also excluded for purposes of the GSTT. If you contribute more than $17,000 in 2023, you can elect to treat your contribution as if made evenly over a five-year period (as discussed previously). Only the portion that causes a federal gift tax will also result in a GSTT. Note: Contributions to a 529 account may affect your eligibility for Medicaid. Contact an experienced elder law attorney for more information. What if the owner of a 529 account dies? If the owner of a 529 account dies, the value of the 529 account will not usually be included in his or her estate. Instead, the value of the account will be included in the estate of the designated beneficiary of the 529 account. There is an exception, though, if you made the five-year election (as described previously) and died before the five-year period ended. In this case, the portion of the contribution allocated to the years after your death


Estate Planning and 529 Plans

Leslie Thompson CFA ® , CPA, CDFA™ Editor and Chief Investment Officer Co-Founder

When you contribute to a 529 plan, you will not only help your child, grandchild, or other loved one pay for school, but you will also remove money from your taxable estate. This will help you minimize your tax liability and preserve more of your estate for your loved ones after you die. So, if you’re thinking about contributing money to a 529 plan, it pays to understand the gift and estate tax rules.

Overview of gift and estate tax rules If you give away money or property during your life, you may be subject to federal gift tax (these transfers may also be subject to tax at the state level). Federal gift tax generally applies if you give someone more than the annual gift tax exclusion amount, currently $17,000, during the tax year. (There are several exceptions, though, including gifts you make to your spouse.) That means you can give up to $17,000 each year to as many individuals as you like, federal gift tax-free.

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Estate Planning | Education Cost Planning continued...

would be included in your federal gross estate. For example, assume you made a $50,000 contribution to a 529 savings plan in Year 1 and elected to treat the gift as if made evenly over five years. You die in Year 2. Your Year 1 and Year 2 contributions of $10,000 each ($50,000 divided by 5 years) are not part of your federal gross estate. The remaining $30,000 would be included in your gross estate. Some states have an estate tax like the federal estate tax; other states calculate estate taxes differently. Review the rules in your state so you know how your 529 account will be taxed at your death. When the account owner dies, the terms of the 529 plan will control who becomes the new account owner. Some states permit the account owner to name a contingent account owner, who would assume all rights if the original account owner dies. In other states, account ownership may pass to the designated beneficiary. Alternatively, the account may be considered part of the account owner’s probate estate and may pass according to a will (or through the state’s intestacy laws if there is no will). What if the beneficiary of a 529 account dies? If the designated beneficiary of your 529 account dies, look to the rules of your plan for control issues. Generally, the account owner retains control of the account. The account owner may be able to name a new beneficiary or else make a withdrawal from the account. The earnings portion of the withdrawal would be taxable, but you will not be charged a penalty for terminating an account upon the death of the beneficiary. Keep in mind that if the beneficiary dies with a 529 balance, the balance may be included in the beneficiary’s taxable estate. 529 Plan Changes Effective in 2024 Ordinarily, money withdrawn from a 529 plan must be used for qualified educational expenses, and if not, you will pay state and federal income taxes (at the beneficiary’s tax rate) on the money, as well as a 10% penalty. The penalty can be waived in some qualifying circumstances; however, you will still need to pay the tax bill.

Starting in 2024, a rollover allowance will begin with several limits. First, the amount rolled over cannot be more than the Roth contribution limit, which is $6,500 for 2023. Another condition is that the 529 plan must have been open for at least 15 years. After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit. It is unknown at this time if changing the account beneficiary requires a new 15-year waiting period. Until the IRS issues rules, it is also unclear whether withdrawals of earnings from 529 plans transferred to a Roth account will be subject to the rule that requires earnings to remain in the Roth account for at least five years. Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/ or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.

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Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services can be found in its Form ADV Part 2, which is available upon request. The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action.

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