Insightful Discussions
Mar 24, 2017

Managing Wealth For Longevity And Legacy

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In a vast improvement over 2016, this year’s stock market is thus far strong, leading many to advance carefully but hopefully. While the fate of some current federal regulations has yet to be decided – and in the midst of an improving equities market under a presidential administration already dubbed “pro-business” – four financial professionals discussed their predictions and the importance of long-term planning, even in times of uncertainty.

The stock market got off to a good start this year, but a new presidential administration can often make investors feel hesitant. What is your outlook for the market in 2017?


NICK BECTON: We are in the midst of the second longest-running bull market since 2009 and are cautiously optimistic.

We are experiencing an uncharacteristically strong bull market in the beginning of this year, compared to the slow start we experienced in the beginning of the last three years. The S&P 500 is up 5.74 percent and the NASDAQ is up 8.59 percent through the end of February. The new pro-business administration has fueled a positive trend for the equity market.

Note: Nick Becton provided responses with the advice and guidance provided by Senior Wealth Strategist Katherine Kraeblen and Senior Investment Advisor Lawrence Allen.


STEVE GASKINS: The economic recovery will continue and, based on leading economic data, the odds of a recession remain low. President Trump and Congress will likely enact pro-growth policies, including corporate and personal tax cuts, increased spending on infrastructure and defense and deregulation.

Although gains in the labor market will likely continue to be moderate in 2017, job growth remains robust enough to ensure two Federal Reserve rate hikes, and possibly three. We expect stocks to outperform bonds in 2017, but with the overall return environment for most asset classes modestly below historical levels.

Gains will likely come with increased volatility as the economic cycle ages. An uptick in inflation, along with steady and improving growth due to anticipated fiscal stimulus and potential federal rate hikes, may possibly pressure bond prices in 2017. Although we expect the 10-year Treasury yield to end the year between 2.5 and 2.75 percent, we see the potential for yields to climb as high as three percent in 2017. We currently favor bonds with a duration on the lower end of the scale.

Fundamentals and valuations overseas have been improving. However, we remain cautious on international investments due to global geopolitical risks.

Note: Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, a registered investment advisor and separate entity from LPL Financial.


SCOTT WINSLOW: As long-term investors who believe in owning equities, we are cautiously optimistic. A new administration generally does not overly extend or shorten the business cycle, but the Trump administration has promised a reduction of regulations, corporate tax reform and infrastructure spending. That combination is very pro-business and could bode well for stock investors.

We are also entering a likely period of rising interest rates, which, in combination with the current administration’s pro-business policies, creates the preference for stocks over bonds.


JOHN SLOAN: As an estate planning attorney, not a financial advisor, I have no deep insight into the market. In fact, in estate planning, our approach to the stock market often is counterintuitive. We spring to action in falling markets because effective gifts to avoid future estate tax are best made in a down market.

Don’t misunderstand me, I personally appreciate a strong market as much as the next person. Wearing my estate planning hat, however, I am not upset by an occasional down market, during which I can help clients make strategic gifts for the benefit of their families ahead of the next bull market.


How has investing changed now that we’ve moved from low to higher interest rates?


WINSLOW: Interest rates are still currently at historical lows, keeping equity investments attractive. The strategic move on rising rates is to reduce your percentage of investments that are more interest-rate sensitive, such as treasuries, investment-grade high-quality bonds and high dividend-paying stocks. Keep in mind that these investments still have a place in a properly balanced portfolio but will likely have some head winds if interest rates do continue to steadily rise.


SLOAN: Interestingly, low interest rates also can be beneficial to estate planning. We often assist clients with the transfer of assets to family members by sale instead of gift. A low interest rate environment allows more effective intrafamily sales because the cost of transfer is less. Rising interest rates increase the cost of such estate planning techniques.


GASKINS: Easiest to identify is the inverse relationship of interest rates to bond values. In general, as interest rates rise, bond values fall relative to the maturity and duration of the bond, among other things. Since bonds with longer durations generally decline in value more than those with shorter durations, keeping the average duration of your bond portfolio on the shorter end of the scale should help to mitigate loss of principal value caused by rising interest rates. On the other hand, rising rates provide the opportunity to achieve greater yield as you reinvest future funds.

The Fed raising rates is indicative of a growing economy, which can be good for stocks, but if they act too quickly, that can choke off the growth in the economy and lead to a recession and lower equity markets.


BECTON: The equity markets have accepted potentially higher interest rates in the future. Investors are becoming more comfortable with higher equity valuations. Higher rates will impact longer-duration fixed income. Fixed-income investors need to be very cautious with long-term holdings, especially inside mutual funds.

We at PNC are focusing on short maturities and holding high-quality individual bonds. We prefer municipal bonds because it’s all about after-tax returns, depending, of course, on the client’s individual tax situation.


What common mistakes do people make in financial planning?


GASKINS: One common mistake is failing to have a budget. Another is not understanding the cost of credit, particularly credit card debt. Many people fail to establish an emergency fund for those inevitable unexpected expenses. This can exacerbate any existing debt problem.

Failing to start saving early is a major problem. Time is an important factor in long-term financial success. The next step is moving from just saving to investing. With greater risk comes the potential for greater reward, so putting the appropriate part of your assets into investments with the potential for greater gain is essential to grow your portfolio and outpace inflation over the long-term.

Not taking advantage of work benefits, which offer the opportunity to invest pre-tax dollars and grow value on a tax-deferred basis, is a big mistake, particularly if your employer matches part or all of your contribution. And failure to have an estate plan can lead to big problems and/or unnecessary expense for your family.


BECTON: Common mistakes we see include: not having an emergency fund; not investing for retirement with every paycheck; not taking advantage of the power of compound interest; not doing appropriate estate planning; and inadequate insurance, whether that be life, disability or long-term care.

Our advice is - don’t bury your head in the sand. Taking control of your finances takes some time but it is manageable if you prioritize and tackle each item over time. It is well worth it for the peace of mind you will feel once you have your financial life in order.


SLOAN: Again, financial planning is not my bailiwick. Estate planning, however, is closely related. The most common mistake I see is chasing results, not developing and following a plan. The planner, regardless of specialty, first should listen to clients, then help them develop a plan designed to meet their stated goals, work with them to follow the plan and adjust plans from time to time as appropriate.

In my experience, the long-term results for the client typically are much more effective when they are part of a well-conceived plan.


WINSLOW: There are three big ones: not saving enough, procrastinating on a plan and being too conservative. There is no question we live in a consumer culture. People just do not save enough money and spend beyond their means. For many, planning and accepting hard truths is just not exciting, so they delay planning until a major event forces them to address financial issues.

Lastly, being too conservative is a huge mistake. Risk should not be taken lightly, but someone who retires today at age 65 could very well live to be more than 100 years old. The cost of retirement coupled with health care cost and inflation creates a need for greater returns.


How have rising health care costs and longevity affected investment priorities?


BECTON: The cost of health care is rising at a much faster pace than the cost of other typical expenses. Living longer exacerbates this, as more people are likely to be dealing with costs associated with chronic illness in later years. It is important to factor future medical expenses into your long-term plan and see what can be done through budgeting, savings and investing to achieve your goals.

Concerns about rising costs should be factored into long-term cash flow planning so an appropriate asset allocation can be determined. We believe your investment strategy is best developed based on a thorough understanding of your full financial situation and emotional relationship with money.


WINSLOW: Planning for longevity and health care costs is one of the primary focal points of our practice. Healthy retirees could have retirements that span over many decades, incurring uninsured, unplanned health care costs that could easily be over several hundred thousand dollars.

We address these issues through customized planning with an optimal balance of investments designed to make their money last while incorporating risk management strategies to mitigate the health care costs. It is very important to streamline the planning with both their CPA and attorney. It is best to also incorporate their loved ones, so the family is all on the same page as they age.


GASKINS: The sharp increase in premiums - and rising costs of health care itself - are significant concerns for young and old. Those costs must be considered in one’s ability to save and invest in younger years and in preserving one’s principal in their years after retirement.

The potential cost of long-term care is particularly worrisome. Whether to assume that risk or insure part or all of it is an important question and depends on several factors - age, sex, current health, family history, assets available to self-insure, etc. There are also potential ways to insure against that risk: pure long-term care insurance; long-term care riders on annuities or life insurance; or hybrid life insurance/ long-term care insurance coverage.


What advice would you give about transferring assets to future generations?


SLOAN: Planning for the transfer of assets to future generations is exactly what I do. My first action is to listen. I want to hear about a client’s family and learn goals, concerns and other relevant information. We also provide new clients with an estate planning information form to help gather family and financial information that is also important to the process. Armed with this information, I can provide advice tailored to their specific circumstances and goals. The recommended strategies and tactics are built from the client’s input, not a “one-size- fits-all” approach.

The next step is to establish or update a sound set of basic documents that address control, use and distribution of assets, either during incapacity or after death. Other key decisions are made during this step, including whether to use a revocable trust as the main distributive document instead of a will to keep beneficiaries and asset information out of the public record after death. Privacy opportunities are very well received by clients in today’s world.

I advise clients to consider their goals, implement basic estate planning documents consistent with those goals and address matters that are key to a successful estate plan. This comprehensive approach is critical to meeting the client’s goals.


BECTON: We think the most important factor in this decision is ensuring you do not irrevocably part with too much too soon. Make sure you can maintain the lifestyle you want after assets are transferred to the next generation or charity.

Then, think about what you want your wealth to achieve for your family and for your community. What values do you want to pass on? Are you concerned about the impact of inherited wealth on a child?

Many people give consideration to Warren Buffett’s suggestion - leave children “enough money so that they would feel they could do anything, but not so much that they could do nothing.”

Once you have considered values and goals for your family, your advisers can design a plan to achieve those goals while minimizing taxes.


WINSLOW: Every client will have different values regarding the distribution of their assets. Our firm takes clients through the process to help decide how to achieve their goals, such as: when to distribute assets; what assets to distribute and to whom; whether to use a trust; who should inherit and be in control of a business; what kind of corporate governance should be in place for non-active family shareholders; and the most tax-efficient structure.

This should be accomplished by assembling a team of experienced competent advisors in the areas of tax, law and wealth management. Our firm has over a century in advanced planning experience, addressing complex intergenerational planning.


GASKINS: The most basic way to transfer assets to the next generation is to have a Last Will and Testament, which states your wishes about how and to whom your assets are to be distributed. If you do not have a will, your assets will be distributed according to your state’s laws. You can make charitable bequests from your assets and set up trusts to manage assets for minors or others who may require asset management, or for estate tax-planning purposes.

Beneficiary designations on life insurance, annuity contracts, company retirement plans, IRA’s, etc. should be properly completed and coordinated with your will.


What measures exist to ensure clients’ assets are used responsibly by their children and/or grandchildren?


WINSLOW: There is no measure that will outperform teaching values and planning at a very young age. Mentoring your children in prudent personal finance is invaluable. It is important to help children get started early in investing and to create an environment of saving versus just spending.

We welcome clients to bring in their children of all ages to educate them on the various issues in investing and wealth management. Once a transfer of assets has occurred, however, trusts can be great planning tools to protect beneficiaries from creditors or have the funds stewarded as you see fit.


GASKINS: The establishment of living or testamentary trusts allow you to have a trustee who will manage assets for the benefit of the trust beneficiaries, which could be because of tax planning, or for beneficiaries who need creditor protection or have substance abuse or mental health issues, or just need protection from their poor financial management skills.

We also suggest parents talk with their children about not only the benefit of their inheritance but also the responsibility to be good stewards of it. The discussions don’t have to necessarily include asset values but should focus on family ideals and concepts on how to maintain the family legacy.


BECTON: A permanent solution is to utilize trusts in planning for gifts and inheritances. Trusts are remarkably flexible vehicles that can provide protection for the child from his or her own inexperience. Through a trust, a child can have access to funds for specific purposes, such as education, starting a business or purchasing a home. And the child could gain gradual access to assets as he or she attains certain ages.

A more hands-on approach involves the use of lifetime gifts. A parent could give an adult child a gift of cash with some guidance about how they’d like it used. This is an opportunity to observe how the child handles money and an opportunity to coach if the funds aren’t used as intended.


SLOAN: Many of our clients are interested not only in addressing typical estate planning matters, but also molding future generations into productive people. Often, a client’s most important legacy is to encourage progeny to impact their families and communities positively, not to act like “trust fund babies” who sit by their mailboxes waiting for checks.

There are many tools to help clients encourage their families to be productive. We have developed what we believe is an excellent set of forms to encourage positive productivity from cradle to grave. In the early years, the trustee is encouraged to use funds to support the best education possible for the trust beneficiaries. When beneficiaries reach working age, their income from work can be supplemented by trust distribution up to an amount equivalent to salary. Essentially, the trust is designed to encourage productivity by recognizing that productivity means different things at different stages of life.

We also help clients develop methods for teaching children how to manage money with the assistance of the parent. For example, a small amount of funds can be set aside in an account owned by the parent and child or a trust account with the parent and child as co-trustees. In this context, the parent and child work together to address investment and use of funds, so the child has input and the benefit of the parent’s experience.


Is addressing the needs of millennials - now and in the future - becoming more of a focus for your industry?


WINSLOW: Millennials continue to be a growing part of our business. We currently have a huge focus on retiring baby boomers. Baby boomers’ wealth management needs are very current and urgent. Our rapid growth with millennial clients is largely due to incorporating them in the planning process with their families.

As with any emerging cohort, our practice will evolve with the clients to deliver their wants and needs. I expect that change to be constant.


SLOAN: The practice of my estate planning colleagues and I at Ward and Smith is comprised 100 percent of estate planning and estate administration (assisting families with estates after the death of a family member). Although, as noted previously, estate planning covers many topics, so we need to be in a position to help all potential clients - young, older and everyone in between.

Different stages of life - marriage, children, sickness, grandchildren, etc. - dictate different considerations for an estate plan. We are geared and ready to assist millennials and want to continue to focus on their needs. Our fee schedule approach to new estate planning document preparation, for example, has been very well received by younger couples operating on a budget. They know exactly what the work will cost the day they agree to proceed with the planning.

Additionally, we are seeing more younger entrepreneurs that are financially successful and in need of planning beyond the typical early-year goals. Millennials are an important segment of our work.


GASKINS: Addressing the needs of millennials is important to our industry because they are or will be the recipients of trillions of dollars of inheritances. It is important to understand their needs because they are different from the needs of their parents’ generation. They tend to utilize technology much more than their parents, so technology that meets their higher expectations is critical.

Generally, millennials are not as likely to seek face-to-face meetings as previous generations. They tend to prefer email or telephone communication, which means they are not as bound by geographic constraints.

Millennials are also generally more entrepreneurial than the previous generation, so they may seek help from advisors who understand that mindset and the challenges and opportunities of entrepreneurship. Millennials also tend to be more hands-on, so they may seek more input into their wealth planning and ask a lot more questions than their parents do or did.


How do you advise clients regarding income tax-deferred investments, like IRAs and other retirement plans, versus other investments?


GASKINS: Tax-deferred accounts offer the opportunity for your assets to grow faster and larger than in a taxable investment because taxes are not assessed until the assets are withdrawn, instead of annually as income is received and gains realized.

And contributions to company-sponsored retirement plans can be made pre-tax so you reduce your current taxable income by the amount of your contributions. It is generally assumed you will withdraw these assets after retirement, when you will presumably be in a lower-income tax bracket. Assets withdrawn are taxed as ordinary income.

Contributions to a Roth IRA or Roth 401k are not deductible or pretax but grow tax-free and will never be taxed even when taken out, assuming requirements are met. This is favorable to taxable investments because all earnings and appreciation avoid income taxation. Taxable investments do not generally offer tax deferral or avoidance. However, capital gains are not taxable until they are realized and are taxed at more favorable capital gains tax rates, instead of ordinary income tax rates.


SLOAN: Many of our clients have large IRAs or retirement plans. We leave the investing of IRA assets to financial advisors, but we can add value by addressing tax-efficient methods of leaving IRAs to beneficiaries.

As with planning for other assets, clients often prefer to use trusts to protect the IRA benefits for their beneficiaries. The rules for using a trust as beneficiary, however, are confusing and counterintuitive. A wrong decision with beneficiary designation can accelerate the income and cause significant income tax soon after receipt of the IRA. A well-planned beneficiary designation approach can stretch the income tax consequences over the life of the beneficiary. We also often address the benefits of leaving IRAs or a portion of them to desired charities. Income and estate tax can be avoided completely with this strategy.

The beneficiary designation of an IRA or retirement plan can be as important as how the IRA assets are invested. Clients need to be strategic with both aspects of their retirement plans.


WINSLOW: Our firm implements asset location planning to add depth to the client experience. This process puts more active trading strategies and the least tax advantageous asset classes in the client’s tax deferred accounts. This positioning allows their personal accounts to hold other assets less likely to incur heavy tax costs. We like to deliver customized solutions with the desire to limit taxation for our clients. Our practice specializes in this approach, making it one of our core deliverables.


What would the fiduciary rule mean for your clients and/or for you as an advisor?


GASKINS: In perhaps oversimplified terms, the purpose of the fiduciary rule is to hold all advisors and firms to a standard of putting the interests of their client first when providing advice to brokerage retirement accounts. While this has some applicability to fee-based advisory businesses, it has more impact on commission products because it typically involves differential compensation, including commissions and trails, which may be higher or lower depending on the investments that are recommended. The Department of Labor (DOL) considers differential compensation to be a conflict of interest and has created this rule to limit such conflicts.


WINSLOW: Many clients would experience very little change. Our practice is currently around 90 percent advisory-based. Though it remains to be seen what will be implemented, we are more than ready to comply.

As for advisors, the fiduciary rule could create more cost to comply with regulatory burdens. When I started in business 21 years ago, some very simple transactions would only require a few pages of paperwork. Today that same transaction may be over 50 pages. The disclosures of the new rule may add to that.


BECTON: Because PNC Wealth Management® is already working in a fiduciary capacity, the proposed DOL changes to the definition of “investment advice fiduciary” applicable to retirement investors would have very little impact on how we manage money or provide advice, since we already adhere to the higher standard.

The DOL changes would legally obligate financial professionals to put their client’s best interest first rather than simply finding “suitable” investments. This change could radically change or eliminate many commission-based fee structures currently employed by the industry.


What would a repeal of the existing estate tax mean for current and future clients?


SLOAN: The estate tax is a concern for many of our wealthier clients and sometimes a primary reason they walk through our door. If the estate tax were repealed with no replacement, then an area where we help many clients would no longer be necessary.

The counterintuitive estate planner would view this as an opportunity. If clients could plan their assets without limitations, then we would advise them to place as much as possible in trust now to protect them from any possible future rules to come.

The estate tax has been implemented and repealed three times during the last century. What goes away now could come back later. Those who plan well in the meantime likely will have put themselves and their families in a positive place. Even if the tax completely disappeared, estate planning will remain important for clients.


BECTON: That question is much more complicated than most people realize. Would the repeal be just of the estate tax or would there also be a repeal of the generation-skipping transfer and gift taxes? Would the repeal be permanent or would it “sunset?” What happens if a future Congress reinstates the federal estate tax? And what would happen with the tax basis of inherited assets?

Under current law, the income tax basis of inherited assets is stepped up (or down) to the date of death value. If the estate tax is repealed, it is likely that step up in basis will no longer apply, making more inherited assets subject to capital gains taxes.

There is currently an exclusion from federal estate tax of $5.49 million, or $10.98 million for married couples. Estate tax repeal isn’t an issue for most people, but for those to whom it applies, it is quite complicated.


WINSLOW: The repeal would only affect a small percentage of the population. We are currently advising our high net-worth individuals to proceed with planning but stay flexible.

The political landscape of our country changes every two years in the legislative branch. It would be an enormous mistake to plan for no estate tax and then have the political direction change. This could limit your opportunities and increase your costs.
If a client has a large closely held business, real estate or farm, lack of planning could prove disastrous.


What are your predictions for the industry under the new presidential administration?


SLOAN: In the estate planning world, the estate tax is a great driver of business. People often are motivated to maximize the value of their assets for their family, instead of the government.

The uncertainty of the estate tax has led some to delay certain aspects of planning. My initial prediction is uncertainty and, thus, some planning inaction during the initial stage of the new administration.

As the direction of the estate tax is clarified, uncertainty will dissipate and those waiting for clarity will proceed. Regardless, many of the other matters we address with clients will remain critical without any anticipated impact of the administration.


GASKINS: The new administration has expressed its desire and intention to have proposed new regulations, as well as existing ones, reviewed to ensure they protect investors without putting undue burden on the investment firms and advisors.

That leaves the industry in an uncertain regulatory environment.

Regardless of how the regulations are finalized, our industry needs to be prepared for more regulation intended to bring more clarity to how some firms and advisors charge their clients and help ensure the clients’ best interests are always put first, as they should be.


WINSLOW: President Trump has promised many pro-business policies, including deregulation. This is likely good for investors and advisors alike. I think you will see an eventual implementation of the fiduciary rule that will be streamlined from the current ruling.


BECTON: Investors prefer less regulation, and overturning or significantly changing The Dodd-Frank Wall Street Reform and Consumer Protection Act could provide relief to the financial markets, which may in turn stimulate the economy.

We believe corporate earnings and consumer spending will ultimately be the main driving forces that continue to push the markets higher.

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