Why Investment Accounts May be “Frozen” Upon Your Death
Death is an unavoidable fact of life—and of financial planning. Maintaining updated beneficiary designations and titles on your account is very important. This is why we set aside time during your annual review to ensure the beneficiaries you’ve assigned to your accounts reflect your wishes.
Beneficiaries are often surprised to learn the first thing we are required to do upon learning of the death of a client is to freeze the account. Why? As your advisor, our agreement on that account is with you, not with your beneficiaries.
Freezing your investment account means that whatever assets are in the account at the time of your death – stay in the account. All trading, distributions, active or static management of the account completely halts until your money transfers to your beneficiary. This process may take up to a week, six months, or a year to complete.
Beneficiaries may have a different investment temperament and depending on what is happening in the market; this may be a very anxious time for them. The beneficiary will not be able to control the risk or objective of the account until their portion is registered in their name. In cases where the beneficiary is not a spouse, and the heirs are looking at a long time frame to retitle the account, many people need a way to regain control of the account.
One tool that can help heirs in this situation is an Order of Informal Administration. This is issued by a court and names an executor who can direct the management of a deceased’s account until the estate is settled. Our experience has been that such an order is fairly inexpensive and not prohibitively difficult for an attorney to obtain.
In some rare cases, a beneficiary may also need to obtain a surety bond for the court to sign the Order of Informal Administration. For instance, in cases involving a business account, or where there is a large debt involved a bond might be required. Once the bond is obtained, and the Order signed there is no further accounting that is required to be made to the court. With clear beneficiaries and no creditors to an account, a bond is not needed.
The choice of estate administration is a legal decision, and we cannot provide legal advice to you. The Order of Informal Administration can be a simple way to keep your investment account actively managed until your estate can be distributed, and provides your beneficiaries confidence that your account is managed until they can take control of their share.
October Market Commentary
Written September 21, 2018
There’s an old joke that goes something like this: on Wall Street, the biggest lie is…”this time, it’s different.”
September 15, 2018 marked the 10th anniversary of the collapse of Lehman Brothers. The collapse led to the largest bankruptcy filing in U.S. history. As Lehman held over $600 billion in assets, this triggered a 4.5% drop in the Dow Jones Industrial Average - the largest since September 11, 2001. It was devastating to the U.S. financial system, and created a ripple effect that was felt globally. The events that led up to that fateful day are a fascinating tale of a perfect storm.
Although many factors contributed to the financial crisis, in large part it was the massive amounts of lending that people simply couldn’t afford to pay back. That risky lending was the snowfall on the mountain. Many economists think the avalanche was triggered on November 15, 2007. The Statement of Financial Accounting Standards 157: Fair Value Measurements¹ (SFAS-157), known as the ”mark-to-market” accounting rule, had been implemented in 2006. This required financial institutions to update their pricing on illiquid securities. Instead of carrying those securities on their balance sheets at cost, financial institutions were forced to change those securities’ values to what they would be worth if sold that day. Seems innocuous enough, but here’s the fallout from that rule. Write-downs of credit default swaps, mortgage-backed securities, and other financial derivatives caused some big banks to become insolvent, including the ill-fated Lehman Brothers.
What happened next was catastrophic. The stock market plummeted after the rule went into effect, but rebounded after a proposal to relax the rule’s guidelines. Coincidence? Maybe. Maybe not.
Now, don’t get me wrong. A recession was bound to happen at some point and these risky lending schemes were going to catch up with big banks eventually. But many economists believe that by letting Lehman Brothers go belly-up, a typical run-of-the-mill recession turned into the ”Great Recession.”
The days leading up to Lehman’s bankruptcy found regulators frantically trying to arrange a rescue for the bank which, at that time, was the 4th largest lending institution in the U.S. But their efforts, including a potential sale to Barclays and Bank of America, turned to smoke - forcing Lehman to file for Chapter 11. Regulators bailed out AIG the next day and Congress passed the Troubled Asset Relief Program (TARP) a few weeks after that. TARP injected $700 billion into the financial system.
One big question that remains debated to this day: Would the financial crisis have been so severe if regulators had bailed out Lehman Brothers? But that brings an underlying question: do you remember Bear Stearns?
Bear Stearns was a small bank by comparison. Regulators bailed out Bear Stearns by facilitating a distressed sale to J.P. Morgan Chase in March 2008. They also provided $29 billion to assist, ensuring that sale go through. This bailout gave Bear Stearns the necessary resources to avoid default, while setting an expectation to the banking community that banks will be rescued. The problem for Lehman was the assumption they would be saved and never considered the possibility of bankruptcy until the day before they were forced to file.
Why am I writing about this? To show that sometimes it doesn’t take anything more than a regulation change to trigger an unfortunate series of events. Here we are, ten years later, still debating what should have and could have been done. Can it happen again? Of course. After all, the biggest lie on Wall Street is….“this time, it’s different.”
I am tempted to end this commentary here. However, I want to impress that we don’t see the avalanche as much as we see more snow falling on the mountainside. A trigger might bring that snow crashing down one of these days. But we don’t see that happening in 2018. 2019 might be another story and we’ll evaluate it when we get there.**
Maximizing Charitable Tax Deductions Under the Tax Cuts and Jobs Act of 2017
Under the new tax law, claiming charitable deductions became more difficult for most people. The standard deduction increased to $12,000 for single filers and $24,000 for couples. You can only itemize deductions if the total of all deductions exceeds the standard deduction. But there are a few things you can do to optimize your write-off.
Bundle your giving. Instead of giving every year, bundle your giving into every other or third year. How does that help? Say you are married, give $10,000 annually and have $14,000 in other deductions. The total is equal to the standard deduction, so your contributions provide no tax benefit. But if you bunched two years together and gave $20,000, your itemized deductions total $34,000. This extra $10,000 deduction could save you as much as $3,700 in taxes.
Donor Advised Funds (DAFs). Think of a DAF as a bank account with a foundation: deposit money, get a charitable tax deduction, then direct the foundation to distribute your funds to the charities of your choice.
DAFs work well with bundling because you can put a multi-year deposit into the DAF and direct the DAF to pay it out over the time period you desire.
It works well with year-end giving because instead of quick year-end decisions, you can make your charitable contribution to the DAF and decide later where you want the money to go. It also works well when you give to multiple charities because you only need to track one charitable receipt (the DAF deposit), not several.
Charitable IRA Rollover. If you are over age 70.5 and have an IRA, you can use this strategy to give pre-tax dollars without itemizing. Instead of taking your usual distribution from your IRA, you can direct the custodian to make a distribution directly to a charity (it may not go into a DAF). The distribution counts towards your minimum required distribution and is not taxable to you.
Accelerating Estate Gifts Today. Have you included charity in your will or trust? Terrific, but doing so gives you no income tax benefit. What if you could receive an income tax deduction today for the amount charity would otherwise have received after you die? Strategies such as Life Estates, Charitable Remainder Trusts, Pooled Income Funds and more can do that. Without getting into the weeds, these strategies allow you to use your assets and take income for the rest of your life with a commitment that charity receives them at death. Say you plan on leaving $100,000 to your church upon death. Using one of these strategies, you continue to benefit from your $100,000 during life but also get a tax deduction based upon your life expectancy. It could save you thousands of dollars in income taxes! It is like having your cake and eating it too!
Let us know how we can help you optimize your philanthropy.
In early September I had the good fortune to attend a training conference specifically designed to offer insight into the new technology to help us better serve you. My favorite session was titled “Nobody Puts Compliance in the Corner.” As the chief compliance officer for MKFP, I appreciated the opportunity to check out new tools that will help me manage our compliance and supervision programs.
My biggest takeaway from those four days was learning ways we can deepen our client relationships, connect with the next generation, and leverage ourselves to gain referrals.
I traveled to San Antonio so I could attend the 2018 National Association of Insurance and Financial Advisors (NAIFA) Annual Conference. As a board member of NAIFA, I am excited that NAIFA is partnering with the Society of Financial Service Professionals (FSP) and GAMA International. FSP is collaborating with NAIFA to help meet the demand for programming for advisors in advanced practices. GAMA International hosted a workshop on how advisors – who aspire to become managers and CEOs – can best position themselves to reach that level of management. These opportunities are examples of how we can better serve you.
On September 14th I attended a Lawrence Chamber luncheon where I met the new KU Director of Athletics, Jeff Long. I am excited for Long to join us in Lawrence. He brings more than two decades of experience in athletic administration and is an established national leader within intercollegiate athletics.
National Financial Planning Month
“Most people don’t plan to fail; they fail to plan.” – John L. Beckley
We love that October is National Financial Planning Month! It’s never too late to start planning for your financial future. No matter if you’re nearing retirement, or you’re only 21 and starting out – come see us. It’s never too late, or early to start planning.
Disclaimers and Notes
* Wayne L. McDaniel is not affiliated or registered with Cetera Advisor Networks LLC. Any information provided by Wayne L. McDaniel is in no way related to Cetera Advisor Networks LLC or its registered representatives.
Registered Representatives offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC Advisory services also offered through McDaniel Knutson Financial Partners. Cetera is under separate ownership from any other named entity.
** The views are those of Victoria Bogner and should not be construed as investment advice. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Economic and performance information is historical and not indicative of future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
Listing in this publications/and or awards is not a guarantee of future Investment success. This recognition should not be construed as an endorsement of the advisor.
The Dow Jones Industrial Average is a widely followed market indicator based on a price-weighted average of 30 blue-chip stocks that trade on the New York Stock Exchange which are selected by editors of The Wall Street Journal.
The S&P 500 Index is a capitalization-weighted index made up of 500 widely held large-cap U.S. stocks in the Industrials, Transportation, Utilities and Financials sectors.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.