Broker Check

November 2018

Show Your Beneficiaries Some R.E.S.P.E.C.T...What We Can Learn From Aretha Franklin

In August, it was announced Aretha Franklin, The Queen of Soul, passed away at the age of 76 from pancreatic cancer. I was never a big fan of Motown music, so I can’t remember all—or even most—of the songs of that era. In a pinch I can sing some of the more famous hits at costume/theme dinner parties, but as a child of the 1980s, I missed the days of Gladys Knight & The Pips, Smokey Robinson, Diana Ross, etc.

What intrigued me about learning of Aretha Franklin’s death is she died without a will. One of the most famous and successful artists of all time hadn’t done any kind of estate plan. She wasn’t/isn’t the only famous person to die without a will or estate planning documents. Bob Marley died in 1981 (at age 36) and under Jamaican law, his estate was divided up equally among his wife and nine kids. In other words, his widow only got 10% of his estate. His heirs are still fighting it out. Jimi Hendrix died in 1970 and his heirs just resolved their differences in 2015. Sonny Bono and Kurt Cobain make the list, too. Initially Michael Jackson was thought not to have had a will. It turns out he did have a will but it took a few months to find it.

Not having a will made me think of the 2017 passing of Prince. His estate still isn’t settled because literally dozens of would-be heirs have come forward claiming a piece of Prince’s estate. So far, all of their claims have been rejected by the court system in Minnesota, but not without delay and expense. While the Prince estate is likely to be wrapped up in the coming year, and all six of his beneficiaries will come out just fine, the fact remains that not having a will has made it more difficult for his heirs than need be. Plus, Prince may have had other priorities he wanted to address after he passed away.

Another point of interest to me is Franklin had all kinds of advisors. Her attorney of 28 years, Don Wilson, said they had discussed estate planning dozens of times, but Aretha just “never got around to it.” In the absence of the will, the State of Michigan will dispense of her estimated $80 million estate essentially equally among her four children--after the estate goes through the probate process. Estimates are that it shouldn’t take more than a year or two to unwind everything, assuming everything goes smoothly.

Generally speaking, probate is the court-supervised disposition of someone’s estate. It’s not typically a huge ordeal, but it is a public procedure, meaning family financial affairs are made public. Most people don’t want that. Then there is the delay of tallying up assets, paying off liabilities, re-registering property, etc. If Franklin wanted her estate to go to her four kids, then the story ends well. But what if she wanted to give money to a charity? Maybe she wanted to start a music school for young Detroit musicians? Maybe one of her kids needed more financial help than the others? Maybe she wanted her song royalties (btw…R.E.S.P.E.C.T. rights are owned by other artists) to go to one group and her houses to go to someone else? The point here is we’ll never know what she actually wanted because she didn’t take the time to write it down. She could have saved her family hours and hours of stress, in-fighting, and legal fees if she had just taken the time to draw up a few legal documents.

For most people you know, the estate planning process will be pretty straightforward. Perhaps you can’t relate to each of your kids getting $20 million, but there is something we can all glean from Aretha Franklin, Prince, and others: talk to an attorney about your estate plan. While you may not have any song royalties to address, it will be useful for your heirs to know what your final wishes are. The big thing for most of us with young kids is who gets custody of them. My sister lives in Atlanta. My wife’s sisters live in Tulsa. You can see how this could get complicated.

Heirs could be in different life stages. One kid may want to sell mom’s house. One kid may want to live in mom’s house. One kid may not be able to make a decision on his own behalf. Maybe one kid cared for mom the last ten years and another lived in Fiji and hadn’t spoken to mom in years. When you consider divorces, re-marrying, step-kids, half uncles, and second cousins, you can see how estate settlement can get confusing. The best thing you can do is write it all down, so there is no question as to what mom and dad wanted. The kids may not agree with it, but you’d rather have your kids mad at you rather than them being mad at each other.

Also, remember beneficiary designations of insurance policies and retirement plans always trump what is written in a will. At your annual review, we review your beneficiaries. If there has been a change to what you want, please let us know. Also, included in any will and estate planning documents should be your medical and financial powers of attorney. Your heirs, executors, guardians, and trustees are going to need these forms eventually. You might as well do them now.

Aretha Franklin’s lawyer says he discussed writing a will for years, but they never “got around to it.” In the title of this article, you’ll see a “round TUIT.” Now you have yours (get it? It’s a…“round…tuit”). Please discuss with your attorney how you want your estate to be resolved. Your family will thank you for it.

- Peter Knutson, CFP®, CLTC

Market Commentary: Normal Volatility or the Beginning of the End?

Written October 17, 2018

How many of you are micro-managers? (You know who you are.) Don’t worry; I can sympathize as I fight my own helicopter tendencies. When things aren’t perfect my instinct is to swoop in and take over. I want to fix it thinking, if I throw enough willpower at a problem, it’ll turn around. Except, as all my micro-managing readers can appreciate, there are times when that can be the worst possible thing to do. For example, I remember thinking as a little kid that the plastic bags we got from the grocery store were too wrinkly. So naturally I tried to iron them. Guess what I learned? You can’t iron plastic bags!

Do you know what else you can’t do? Have an investment account that always makes money. Unless you invest only in money market or straight up T-Bills, your accounts will move with the undulating waves of your holdings.

We’re experiencing one of those waves right now. There was a crest at the end of September, and over the last three weeks we’ve experienced a sharp pullback. This has caused major indices to lose an average of 7% since the first of October.

Economists use plenty of reasons to explain the volatility. The 10-year treasury rate spiked above 3%, new home sales are decreasing, trade tensions with China have no end in sight, etc. And while all of these things are happening so far, I think for both fundamental and technical reasons that this is looking like a normal pullback in the midst of a rising market.

There are plenty of reasons to be positive on the fundamental front about the state of the U.S. economy. Tax reform is a significant tailwind and will become even greater next year. Corporate earnings are upbeat and sentiment is high, while consumer confidence is strong, and unemployment is low.

Looking at the technical reasons of the market, stocks are oversold. Pessimism has shot too far to the downside and we’re due for a bounce, but that doesn’t mean the volatility is over. What typically happens after a bounce is that we see a retest of the low, or a break below it, before stocks can make meaningful progress. The good news is that there may be buying opportunities ahead. More good news is that we’re heading into strong seasonality. November and December are typically positive months for the year, and can be even more so in a mid-term election year in which the first three quarters were positive.

If you’re nervous, my first piece of advice is not to make emotional decisions about your portfolio or allocations. Talk with your advisor to see if your risk tolerance is in the right spot for you. Secondly, don’t look at your portfolio every day. This is known to be one of the leading causes of F.O.S. (”freaking out syndrome.”) No one likes to see his or her account in the red several days in a row. So unless you have a good reason to check your account values, step away from the computer for a few weeks. Go for a walk. Enjoy the fall weather. We’ll let you know if we see causes for concern.

- Victoria Bogner, CFP®, CFA, AIF®

Are You Giving Too Much to the Tax Man?

Taxes at any age can be complicated. Please allow me to preface this entire article with the fact that I’m not a tax professional, and you should consult one for anything tax-related. With that colossal disclaimer behind me, I’d like to talk about one of the finer points of investing. Buckets. As in which bucket should you use when you invest?

A bucket could be your employer’s retirement plan, the Roth option in your retirement plan, a Roth IRA, traditional IRA, taxable brokerage; deferred annuity…the list is long. With so many choices, how can you know where to invest your hard-earned dollars? The answer is a big ”it depends.”

It’s generally a good idea to have a variety of buckets that have different tax structures. Let’s use “Barney” as an example and how he might structure his retirement savings over the years. Bear in mind that your situation may be different.

20-30 year old Barney got married. He had a couple of kids and his wife stays home with them. He’s probably in a lower tax bracket now than he will be later in life. For that reason, it’s a good idea for him and his spouse to max out a Roth IRA and, if his employer offers it, contribute toward the Roth option in his employer plan. Roth IRA contributions aren’t deductible but the earnings are tax free! (Bonus tip: it’s a great idea to get life insurance at this stage, too)

40-mid 50s Barney is earning more money than he did in his 30s. The kids are out of the house and his spouse decides to go to work full time. They should both contribute toward their pre-tax buckets: traditional IRAs and employer retirement plans like 401(k)s and 403(b)s. Contributions are tax deductible, but they’ll pay taxes on all of it when they pull that money out.

Late 50s-mid 60s: If Barney and his spouse are maxing out their pre-tax buckets; they could start a taxable brokerage account for extra retirement savings. Contributions aren’t tax deductible but if they hold on to their investments for at least a year before selling them, they’ll pay a lower tax rate on the gains. They’ll also get to deduct up to $3,000/year of realized losses.

Finally retirement! Barney and his spouse want to stop working and travel the world. They’ll have $35,000 of Social Security income but will need an additional $50,000 from their retirement savings each year. How should they take the $50,000?

What if Barney took the entire $50,000 from their pre-tax bucket? Then the majority of their combined Social Security income would be taxable with a total tax bill of $5,802. That’s 11.6% of the $50,000 he took from his 401(k) or IRA in this case.

Here’s where Barney’s savings strategy will pay off. $21,700 can come out of his pre-tax bucket tax-free. (Yep, tax-free.) The other $28,300 can come from their Roth IRAs. In this way, they just got $85,000 of total income completely tax-free, and the $21,700 they take from his 401(k) or IRA was completely tax-free money going in and coming out!

As I said, your picture is different from Barney’s. But this illustrates the power and importance of income planning! Talk with both your financial planner and a tax professional about your particular situation. We are just a phone call away.

- Victoria Bogner, CFP®, CFA, AIF®

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.