Happy Holidays! Whether you’re trimming the tree, lighting the menorah, or still trying to recycle Thanksgiving leftovers into new recipes, we at Atlantic Capital Management wish you happiness and prosperity this holiday season!
In keeping with the spirit of giving common during this season, we’re going to use our final column of the year to talk practically about year-end giving as it relates to both charitable and estate-planning scenarios. Beyond the obvious good that comes from making gifts or donations to the many charitable organizations that serve the public interest, there are also some significant tax advantages to charitable giving that make it an important part of any wealth-management strategy. Our experience serving our clients over the past 27 years has given us a lot of insight into the best practices for year-end giving; we’ve distilled the most practical into the list below.
Give to qualified organizations: There are many qualified, reputable organizations serving thousands of worthwhile causes; there are also many unqualified, disreputable groups willing to take your money. Use the Exempt Organizations Select Check tool at the irs.gov website to verify the legitimacy and tax-exempt status of the group(s) you choose to give to.
Pay attention to the rules and guidelines: As you might expect, the IRS has a plethora of rules and guidelines that cover charitable giving. For example, monetary donations of any amount, to any type of organization, must be documented properly in order to qualify as tax deductions. So whether you bought popcorn from the Boy Scouts or put up the cash for a new wing at the local hospital, you’ll need to provide bank records like canceled checks or statements to corroborate your contributions. Keep good records of your donations, including dates, amounts, organization names, etc. If you donate material goods to an organization, get a receipt if you do it in person, or keep written records that include time, date, and value of goods if you utilize a drop-off box or unattended location. Finally, be mindful of the technicalities involved in the tax exemptions; for instance, you cannot deduct charitable giving if you use any of the “short forms,” like the 1040A or 1040EZ, when you file your taxes.
This past summer, the Internal Revenue Service and the Treasury Department announced that couples married in jurisdictions that legally recognize same-sex unions will, commencing with the 2013 tax year, be classified as “married” for Federal tax purposes. This policy change not only affects those couples residing in states where same-sex marriage is legal, but extends to couples who were married in a supporting jurisdiction but physically reside in a jurisdiction that does not support same-sex unions. Currently, 14 states support legal same-sex marriages: Massachusetts, California, Connecticut, Iowa, New Jersey, Delaware, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Maine, Maryland and Washington comprise the complete list. As we approach the end of the 2013 tax year, we thought it might be helpful to recap the changes, and talk a little bit about what to expect next year if you’re filing for the first time as a same-sex couple.
Taken at face value, the changes are pretty straightforward: as part of the new ruling, same-sex couples will be classified as “married” by the IRS, meaning that same-sex unions will be treated the same as “traditional” marriages from a Federal tax classification standpoint. This includes income taxes, gift taxes, and estate taxes, and also encompasses all areas of IRS tax law where marriage classification is a factor. Personal exemptions, dependency exemptions, filing status, standard deductions, IRA contributions, child and earned income tax credits, and deductions based on employee benefits are all driven by marriage classification when filing Federal taxes. Under the new ruling, legally-married same-sex couples are now able to file using either the “married filing jointly” or “married filing separately” status available formerly only to those partners in “traditional” unions.
As with seemingly everything related to the IRS, however, there are some wrinkles. First, the ruling applies only to legally-binding same-sex marriages, regardless of domicile. Domestic partnerships, civil unions, and other common-law relationships do not qualify. Secondly, and perhaps most importantly, the new ruling requires that partners in a same-sex union must change their Federal tax status from “single” to “married.” With this change in status comes the very real possibility that marginal tax rates may change unfavorably, and eligibility for certain exemptions and the classification of certain types of employee benefits might be compromised. Given that no one likes to be surprised at the last minute when the IRS is involved, we advocate getting ahead of the status change early, and understanding how it will affect your tax bracket and eligibility going forward. While fairly uncomplicated scenarios may not require the services of a tax preparation specialist, we strongly advise seeking advice from a qualified tax attorney or CPA if you suspect (or discover) that your change of status may have unanticipated downside. If you’ve got a significant estate, or are in a situation where changes to gift-tax status brought about by the new classification might come into play, it’s probably best that you consult a professional who can help you understand the nuances.
Finally, several of the states listed above legalized same-sex unions a number of years ago; as a result of the statute of limitations incorporated as part of the new ruling, partners in same-sex marriages can choose to file amended returns for tax years 2010, 2011, and 2012 if they so choose (and if the obvious benefit of doing so exists!).
As summer comes to a close it can only mean one thing: hundreds of thousands of college students from all over the nation and the world will be returning to the Commonwealth to pursue some form of higher education. And while most of those students are looking forward to learning new things, meeting new people, and crisp Fall afternoons tailgating (we’ll skip over the part about winter parking bans for now), many parents are pondering how, exactly, they’re going to pay for their kids’ four-year excursion to the land of higher learning. As a popular radio commercial so aptly puts it, “This is the time of year when the logo on the sweatshirt starts appearing at the top of the bill!”
At Atlantic Capital Management, we help many families effectively plan and pay for college. In our experience, there is no “magic bullet” for college financing; like most other forms of investing, it requires planning, due diligence, and willingness to stay focused on the goal: paying for your kids’ education without going broke (or bankrupting them) in the process. Below are some tips, gathered from our direct experience, for effectively planning for and managing the college funding process.
It’s never too early to start: As with most investment scenarios, it’s wise to let the power of time and compounding work in your favor when it comes to college planning. The average yearly cost for a private four-year institution is now over $32,000. The sooner you can get started on saving for college while your children are still young, the more time you’ll have to make that money work for you. Invest what you can afford to, and make adjustments as life circumstances change.
Do your research: Your kids aren’t the only ones who should be hitting the books. New college financing options hit the market every year, and you should take the time to keep up with the changes and implement them, as necessary, in your portfolio. “Tried and true” instruments like 529 plans have been enhanced by things like the Coverdell “college IRA,” which allows for tax-free withdrawals for tuition, books, fees, and housing. Do your research, or consult your financial professional.
Understand the financial aid options: Most families assume that they won’t qualify for financial aid. In reality, even the top-tier institutions give a large percentage of students some kind of aid. So if you’re facing a near-term tuition scenario, file that FAFSA as early as possible! Carefully evaluate your options for grants, scholarships, and loans. Many families can put together an effective “hybrid” college finance plan even when faced with a short time frame. Work closely with the financial aid offices at prospective schools.
If you’d like to learn more about our approach to helping families pay for college, please call us at (508) 893-0872 to schedule a free consultation.
These days, Americans are living longer, healthier and more productive lives. Thanks primarily to advances in medicine, healthcare, and overall quality of life, average life expectancy has risen steadily and dramatically over the past 50 years. Forty percent of retirement-age men will live to be at least 85, and fifty-three percent of women that age will live to be at least 88. Overall, the average life expectancy in the United States is now 78.6 years, up from 69.7 years in 1960. Retirees and seniors living longer, healthier lives would appear to be a good thing for everyone involved, right? Not so fast, my friends. Without planning properly for it, living long into your “golden years” could quickly go from something you’ve dreamed about to a complete nightmare…particularly if your money dies before you do!
As we’ve discussed in previous articles, planning for your family’s financial security is a multi-faceted endeavor. From investments to insurance, the probability that you (and your spouse and children) are going to live longer adds a few new wrinkles to that planning process. Below are some suggestions for maximizing your financial security for a longer life expectancy.
Re-think “retirement”: It should seem fairly obvious that the longer you live in retirement, the more money you’ll need to…live in retirement! If you’re approaching traditional retirement age, you may want (or need!) to consider ways of forestalling living off of your retirement savings. For example, can you re-career or work in a more limited capacity for several years beyond traditional retirement age to supplement your income? Can you adjust your investment strategy or portfolio to maximize those additional years spent in the workforce? If you’re a younger investor, can you adjust the scope of your investment strategy, or your career arc, or both, to take into account working longer into your “retirement” years?
Plan for the long, long haul: With the help of a certified financial planner, map out a plan for a retirement period that lasts well into your 80s, and perhaps even into your 90s. Strive to understand the implications of long life expectancy on the principal balance of your nest egg; your goal should be to formulate a plan which allows you to live off a reasonable income stream for as long as you can before spending down the principal balance of your investments. Remember that time, in this instance, works just as easily against the value of your portfolio as it does in favor. Although we don’t mean it negatively in this sense…plan for the “worst-case scenario!”
Consider “longevity insurance”: Like a private pension - longevity insurance is another option for retirees seeking to turn their savings into a steady income stream throughout retirement. Unlike other strategies, annuities can offer a guaranteed income stream that will last as long as you and your spouse live if set up properly. With an immediate fixed annuity, you “buy it, set it and forget it.” As long as the insurance company remains solvent, annuity owners generally get a check for the same amount every month – they can even set up payments to last as long as they live, so that the longer they live, the more valuable the annuity becomes. They can also be set up to continue to pay to the surviving spouse in the event of death. Consider diversifying your investment strategy to include fixed-income annuities as part of your “worst-case scenario” planning.
Once you understand where you are financially (see my last two articles on Net Worth and Cash Flow), you should consider protecting your family. Purchasing life insurance is a solid financial decision. However, because every family’s circumstances are different, choosing the best policy requires some planning and research. There are some basic questions you can answer that will help get the process started: Why purchase it? How much do you need? Which type best fits your needs? Which companies offer the best policies? Let’s take a look at each of these questions below.
The most common use of life insurance is to ensure family stability after the insured has died. Life insurance policies can also be used to pay for funeral expenses, estate taxes, charity or the transfer of a business. There are many uses for life insurance; think about how you want your life insurance policy to work for your specific situation to determine how much and what type to use.
When purchasing life insurance to protect the family, carefully consider the projected annual living expenses of the survivors. If you have children at home, factor in the amount of lost income needed to sustain the household. For example, survivors usually need immediate help paying off the big bills such as the mortgage, expected college costs and other family expenses. Adding up these costs will give you the amount of insurance the family needs. These calculations should be done for each spouse to ensure that both have a death benefit sufficient to protect the survivor and family. Quick financial recovery from the stress of the death of a spouse leaves the survivor debt free and able to make an easier transition into the new life circumstances. Of course, a large number of variables will come into play here. Look holistically at your circumstances to best determine how much coverage you should purchase.
Life insurance policies are available as permanent or term. Permanent life policies typically pay a fixed amount upon death, and normally contain an investment vehicle that allows the cash value to grow, tax-deferred, over the life of the policy. You pay a fixed premium for the policy for as long as you own it. Term life policies don’t include an investment vehicle; they simply offer varying levels of coverage based on age, health, and desired monthly premium. With term life, you’re paying purely for protection.
Simply put, permanent life insurance is expensive and term life insurance is cheap. There are many other investments to choose from, so it’s not necessary to buy life insurance that does both. The goal is to provide indemnification (protection) in the event of a death. For family protection term policies provide the most protection for the least cost.
There is no shortage of companies selling life insurance. Fortunately, there are agencies which rate those companies on things like financial strength and willingness to pay claims. Stick with companies which get top ratings from Standard & Poor’s and A.M. Best.
Answering these basic questions should give you enough of a head start to have an informed conversation with an agent or financial professional about your exact needs, and the types of life insurance products available to match them.
You’re probably familiar with the term “rightsizing” from its common use in corporate America, where it usually describes a situation in which an organization makes changes to the corporate structure, such as reductions in workforce or reorganization of management, with the goal of restructuring the business so it performs optimally. (This process used to be called “downsizing,” a term which has taken on an almost universally negative connotation, and has thus been replaced by the far-friendlier term we’re using here.) What you may not be familiar with is the concept of rightsizing your investment portfolio so that it provides both a vehicle for achieving your financial goals AND giving you security and peace of mind. Rightsizing a portfolio is especially important for DIY investors; if you’re managing your investment strategy without the help of a professional advisor, it really does pay off in the long run to understand how issues like liquidity, asset allocation, and diversification can impact your money, and your security, in both the short run and over time. Below, we discuss several of these topics, and offer practical advice for effectively rightsizing your investment portfolio.
The guiding principle for rightsizing your portfolio should sound familiar if you’ve read any of our other blog posts about the “4 Rs” of DIY investing: careful, judicious, and realistic planning is the cornerstone of putting together a rightsized portfolio. There are many unfortunate stories of DIY investors chasing unrealistic performance benchmarks, putting their money at risk by “getting in over their heads” and over-leveraging their liquidity, or not effectively planning for the fact that different asset classes generally perform differently (i.e., stocks and bonds usually don’t move in the same direction!). We hope that you don’t become one of these unfortunate stories, and we offer the following tips for effectively rightsizing your investment strategy. These are drawn directly from our experience managing our clients’ portfolios, and generally summarize our professional approach to making sure that our clients get the returns AND security they want and need.
Leverage your liquidity wisely
This piece of advice might seem self-evident: invest only what you can afford to invest, given your current life circumstances. Alas, we regularly see and hear of scenarios in which DIY investors over-commit themselves, usually in an attempt at “out-performance,” and run into serious financial issues when their investments underperform (sometimes dramatically) or market conditions fluctuate unexpectedly. Risk tolerance is a focal point of rightsizing a portfolio. Apply a realistic, even conservative, risk tolerance metric to your current liquidity scenario and review and revise it often. As we’ve mentioned before, your investment strategy should be formulated according to your long-term goals, but must be realistically linked to your current station in life. A truly rightsized portfolio begins with knowing that you can afford to fund it without compromising your family’s short-term financial security.
Asset allocation is critical
Generally put, the concept of asset allocation is simply a strategy for deciding which investment products represent the best options for reaching your financial goals and adhering to your risk tolerance threshold. Common asset classes include stocks, bonds, cash, and U.S. Treasury securities. More specific products, like lifecycle funds, bond funds and good old stock mutual funds also exist within these broader categories. Specialized asset classes like private equity funds, real estate, and commodities like gold and other precious metals are also available, but less likely to be a large part of the average DIY investor’s portfolio. Realistic asset allocation is a critical factor in the success of any investment strategy. As the old saying goes, putting all of your eggs in one basket rarely works well; if you lose the basket, you lose all of your eggs! Historically, bonds, cash, and stocks have been the bedrock foundation for most asset allocation strategies, as the relative fluctuations of these asset classes tend to balance each other out quite effectively in both short- and long-term scenarios. Specialized assets can be added to or removed from a portfolio as goals, and markets, change. At ACM, we practice asset allocation stridently, offering our clients diversification across the five major market categories. We can’t overemphasize the importance of understanding asset allocation, and realistically selecting asset categories that match your goals, means, and appetite for risk.
Diversify, diversify, diversify
Most reasonably-educated DIY investors recognize intuitively that portfolio diversification is a “no-brainer.” What many investors don’t realize is that effective diversification takes place at multiple levels. A solid portfolio is diverse at both the macro and micro levels. For example, it’s just as important to diversify within an asset category (i.e., funding both individual equities AND equity funds) as it is to diversify across asset categories (i.e., funding stocks AND bonds). Furthermore, it’s possible to diversify even further within asset classes by focusing on specific markets, industries, and verticals. If your risk threshold permits, you may want to add some specialized assets to the mix. (If this makes sense to you, you’ve probably already realized that this process involves a lot of research. Diversification at both the macro and micro levels helps greatly to buffer your portfolio against the inevitable market fluctuations that come with long-term investing. If you don’t have the time or wherewithal to “deep dive” into diversification, some firms offer products known as lifecycle funds, which target specific investment goals like retirement or college planning and “automatically” adjust diversification strategies over the term of the fund. Lifecycle funds can be effective diversification tools for some DIY investors, but we’ll point out again that adopting a lifecycle fund makes sense only if it’s not an “eggs in one basket” strategy.
Whether you’re just starting out or have been managing your own money for years, it’s never a bad idea, nor is it ever too late, to apply the principle of rightsizing to your DIY investment strategy. If you’d like to learn more about our strategies for rightsizing our clients’ portfolios, we encourage you to contact us to schedule a free consultation today.