Ten Tips on Trusts

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John Morton

Senior Wealth Manager

What is a trust?

A trust is a legal instrument to hold and control assets. Anyone with assets – not just the wealthy – should consider creating a trust to use during life, known as an “inter vivos” or revocable living trust. This trust would hold assets during someone’s life for his or her use, and then direct who inherits the assets too. Alternatively, someone could consider including a provision in their will to create a trust after death, known as a testamentary trust. There are other types of trusts as well, all with unique purposes, but all trusts are useful for determining how and when beneficiaries receive or have access to assets.

What is a trustee?

A trustee holds the legal title of and administers the affairs of a trust. If a living trust is created, the trustee and the grantor (trust creator) are the same person. The trust creator has simply placed their assets inside a trust for benefits such as privacy, outlining beneficiaries, and estate tax minimization, among other reasons. He or she can amend or revoke the trust while alive. If someone is incapacitated, has passed away, or set up an irrevocable trust, the trustee is a separate person or organization that holds a fiduciary responsibility to carry out the trust creator’s wishes and directing trust income or trust assets to the beneficiaries of the trust. When a trust is created, these trustees are identified.

Tip #1: Always have successor (back-up) trustees in your trust document. Additionally, know that organizations such as banks can serve as corporate trustees, but having a friend or family member as a successor trustee(s) will help reduce costs and retain more assets for the beneficiaries.

What are some benefits to having a trust?

As stated previously, a frequent attraction is having control over assets after death. For example, a trust could hold assets for a beneficiary until they are a certain age. As another example, a trust could place restrictions on distributions (like for a second marriage or a spendthrift child).

Tip #2: Another estate planning document, a “last will and testament” (usually referred to as “a will”), directs who receives assets but does not allow any control over those assets.

Trusts can also help protect an heir’s inheritance against creditors or divorce. Most states, like our neighbor Illinois, are common law states and in the event of a divorce, the assets are split equitably (not necessarily equally). Wisconsin is a community property state, where marital assets are considered to be jointed owned and thus split equally. In both cases, inherited assets are typically excluded if proper steps are followed.

Tip #3: Passing along assets to children in a properly structured trust makes it more likely that those assets are safeguarded in the event of a later divorce.

For larger estates, an estate plan with the right pieces can help pass more wealth onto the next generation. There is a 40% federal top tax rate on estates above the exemption amount (currently about $26M for a married couple but that is scheduled to cut in half starting January 1, 2026). Each state is different – Wisconsin does not have an estate tax but Illinois imposes a tax on an individuals’ estate above $4M.

Tip #4: You can’t avoid the tax man. But there are legals rules and structures that can allow for greater wealth transfer to future generations. We’ve helped clients structure their estate plan with an attorney to help reduce their expected estate taxes by six- and seven-digit figures.

Minors cannot receive assets as a beneficiary of a will, retirement account, or insurance policy, so setting up a trust to hold assets until a child can legally access the funds is the best route to avoid a probate court getting involved.

Tip #5: A trust should be used when minors are the estate’s beneficiaries.

Wait, what’s probate?

When someone dies, a court reviews that deceased person’s assets and estate planning documentation, like a will, to determine who inherits those assets. With attorneys and courts involved, this process will take time and can be very expensive. At a minimum, it’s likely to cost $5,000-10,000 but complexities could easily multiply that cost several times over.

Tip #6: While a comprehensive estate plan, including trust documents, can cost more than $3,000 there are many benefits for the family, including saving on legal fees during probate!

How can probate be avoided?

If done correctly, a revocable trust and proper estate plan can reduce or eliminate an estate’s interactions with probate court. A major downside to just having a will, even if a testamentary trust is written into the document, is that pesky court proceeding called probate still must occur. Eventually, the probate court would fund the trust with a deceased person’s assets, but that can be a lengthy and expensive process as mentioned earlier.

Tip #7: It usually makes sense to invest in setting up a living trust along with a will. Having a will (even with a testamentary trust) does not avoid probate.

Along with a revocable living trust document, there are several other “areas” to button up in order to have assets pass to the desired heirs and avoid the costly probate process. Here a list to consider:

  • Beneficiaries on life insurance and retirement plans
  • Pay-on-death (POD) beneficiaries
  • Transfer-on-death (TOD) beneficiaries
  • Jointly owned property
  • Power-of-attorney documents

Regarding these beneficiaries, titling, and documents, here are two other tips:

Tip #8: The first four items transcend a trust or will document. That’s right: that hastily filled out beneficiary form for your first job’s retirement plan would dictate who receives those assets if the money was left there. If you’ve made changes to your will and trust beneficiaries, don’t forget to update everything else too.

Tip #9: If you’re incapacitated, a trust document isn’t helpful for assets not owned or governed by the trust. In the event of incapacity, a power-of-attorney document would outline who is responsible for making financial decisions for non-trust assets. Without that document, the next of kin and courts would determine who carries that responsibility.

Boardwalk Financial Strategies is highly involved in all aspects of our clients’ financial situations. A comprehensive estate plan and proper implementation gives our clients peace of mind and helps align their values, goals, and wealth. We help with our clients work with an estate planning attorney to create the right instruments and periodically review them.

Tip #10: Having an estate plan isn’t enough. It must be properly implemented. We help our clients “button up” their insurance policies, retirement accounts, bank accounts, investment accounts, real estate, privately owned businesses, and other assets so that their wishes are followed, the right beneficiaries receive assets, and their family saves money by reducing or avoiding probate.

At Boardwalk Financial Strategies, we are a team of advisors with strong estate planning backgrounds. This allows us to build comprehensive financial plans for our clients that serve them beyond their own lives. If you would like to learn more about our comprehensive wealth management services, please contact us today.

Get the Most Out of Your Employee Benefits

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John Morton

Senior Wealth Manager

For many, employee benefit elections for 2024 are just around the corner, and it’s important to know what you’re getting into before making any decisions. There will also be higher 2024 maximum contribution limits for workplace retirement plans. To take advantage of that, it may require you to change your contribution rate(s). We are here to help you navigate these decisions with confidence and peace of mind.

Many employers are focused on cost management in this economic environment. Since health benefit costs are expected to jump 5.4% this year, you may see a change towards a high deductible health care plan. This could mean higher out-of-pocket costs despite a lower monthly premium, so let us help you understand the difference compared to regular health insurance. As Brittany wrote about last month, enrolling in a high deductible plan could give you access to a Health Savings Account (HSA) – a fantastic long-term, tax-advantaged growth vehicle.

    • The HSA annual contribution limit in 2024 for self-only coverage is rising to $4,150 from $3,850 in 2023. The cap for family plans is jumping to $8,300 from $7,750. The catch-up contribution remains at $1,000 per spouse aged 50+.

There are typically other benefits offered by employers too, including voluntary life insurance benefits. This gives you the option to get additional life insurance without any health underwriting. However, it’s usually more costly than traditional term insurance. We don’t sell insurance but will help you navigate the options. We’ve helped some clients optimize their workplace and private policy mix, saving thousands of dollars in annual premiums. It is one example of many where we’re able to help optimize the additional benefits you’re offered.

Finally, 401(k) and 403(b) contribution maximums for 2024 will be announced next month and it’s widely expected that the maximum will increase to $23,000 from $22,500. Like HSA accounts, retirement plans allow catch-up contributions for those aged 50+. As we wrote about in January, the SECURE Act 2.0 required “high wage earners” – defined as those making $145,000 or more – to only make catch-up contributions with post-tax dollars.

    • Last month, the IRS announced a two-year delay to enable employers more time to add Roth 401(k) features to their plan. So, starting in 2026, high wage earners will need to contribute their $7,500 catch-up to their Roth 401(k).  Your employer plan should handle this for you automatically.

We will advise you to make pre-tax, after-tax, or Roth contributions based on what makes sense for your tax situation. If your compensation has changed, it may also make sense to adjust your contribution rate.

Employee benefit elections for 2024 can be a complex process that requires careful consideration of many different factors. We can help you understand what’s available and guide you towards the best decision for your family.

HSA? More Like HS-YAY!

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Brittany Falkner

Wealth Manager

Health Savings Accounts, otherwise known as HSAs or (HS “yay”s if you are a tax nerd like me) are one of the most underutilized account types that I have seen in practice. While these accounts are only available to individuals with high-deductible health plans, I often see clients completely missing the benefits that these accounts can provide. Below, we’ll go over why you should love these accounts and some best practices to make the most of these tax-advantaged accounts.

What is an HSA?

Health Savings Accounts let you set aside money on a pre-tax basis with all withdrawals being tax-free when used for qualified medical expenses .1 This means you can direct a portion of your wages toward this account and never pay tax on these dollars (assuming all withdrawals are for qualified medical expenses). When invested, the growth within the account is also tax-free! There are no other savings vehicles that have such glorious tax benefits, which makes HSAs known as triple tax-advantaged (money goes in tax free, grows tax free, and can come out tax free). To put the cherry on top, these accounts have no income limits, so high income earners are eligible to contribute (many other savings options have income limits, such as an IRA contribution).

You are eligible to contribute to a health savings account if you are enrolled in a high deductible health plan. For 2023, you have a high deductible health plan (HDHP) if your deductible is at least $1,500 single ($3,000 family) and your maximum out-of-pocket is no more than $7,500 single ($15,000 family). If that is true, you are eligible to contribute $3,850 if insured under single coverage ($7,750 family) to an HSA account. If you are over the age of 55, you may contribute an additional $1,000 per year. As a friendly reminder, unfortunately you are not eligible to contribute to an HSA once you are on Medicare.

Be sure to tell your tax preparer about any contribution you make and keep all medical receipts in your records. You may use this account to pay for qualified medical expenses for yourself, your spouse, and any dependent you claim on your tax return.

Best Practices & Hot Tips for HSAs  

The secret sauce to fully utilizing this tax haven of an account would be to contribute the maximum you can each year, invest the dollars, and to let the account grow until retirement or later. Most retirees are hit with the largest healthcare expenses later in life and that is when this account can really come in handy. By delaying the use of these funds, you are also maximizing the amount of tax-free investment growth! If you have been thinking of this account as a medical checking account you aren’t wrong, but I would encourage you to view this account as a retirement savings vehicle that has great tax advantages.  

Another hot tip to consider is that there is no time limit for reimbursing yourself for medical expenses. This means if you save your medical receipts throughout the years, you can reimburse yourself from your HSA account at any future point for past expenses, tax-free. To do so, you will need to keep meticulous records, ensure you were enrolled in a HDHP in the year the expense occurred, and ensure you did not claim a medical deduction for that expense on your tax return. If you are concerned about passing away with this pot of money, the good news is that HSA accounts allow for beneficiary designations. If you pass this account to your spouse after your death, your spouse will receive the same tax benefits, tax-free growth and withdrawals when used for medical.

To ensure you are maximizing this account, you will want to pay close attention to the HSA contribution limits each year. The contribution limits increase with inflation each year with the most recent increase being an astonishing 7% for 2024. For 2024, the contribution limits increase to $4,150 single ($8,300 family). Further, once you and your spouse are both over the age of 55, you are each eligible to contribute the additional $1,000 contribution. To keep the IRS happy, each spouse would need their own HSA account and the additional $1,000 would need to be deposited into their respective accounts. This provides a fantastic opportunity to super fund these accounts for those nearing retirement.

Lastly, you are eligible to contribute to an HSA account until April 15th of the following year for the current year, assuming you had a HDHP for the entirety of the previous year. This could come in handy if you forgot to max out the account, if you need additional tax savings on your return, or for additional tax planning purposes.

Final Thoughts

At Boardwalk Financial Strategies, we are a team of advisors with extensive tax backgrounds. This allows us to build comprehensive financial plans for our clients utilizing the above tax saving strategy and more. If you would like to learn more about our comprehensive wealth management services, please contact us today.

1 To see the full list of qualified medical expenses, please see the IRS Publication 502.

Three Tips for Your Home, Auto, and Umbrella Insurance

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John Morton

Senior Wealth Manager

When was the last time you reviewed your auto, home, and umbrella insurance policies? If you haven’t done so recently, it might be prudent to revisit your coverages. For example: when it comes to homeowner’s insurance, you’ll want to make sure that your replacement cost is updated to reflect today’s higher housing prices and construction costs (and all those pandemic updates you made on your home)! Let’s dive a bit more into what replacement coverage means for you and two other quick tips.

Replacement cost coverage:

If your home needs to be partially or fully repaired or rebuilt due to a covered event, the insurance company will pay up to the replacement cost within the policy. It doesn’t matter if the shingles are 10 years old or the porch is brand new, insurance companies will replace your home or home components without considering depreciation. So, it matters what your home would currently cost to rebuild – recently we’ve seen many policies have inadequate coverage because housing costs have risen. We recommend you revisit this with your insurance broker or agent.

When you do, we recommend that you pay attention to how the policy defines replacement. Standard replacement cost replaces your home with fixtures, materials, and function as close as possible to what it’s like now. Functional replacement cost will build you a new home, but it may not be the same value – you’ll save on premiums, but the insurer will only replace your damaged property with something that functions the same way. Guaranteed replacement cost is a step up from the standard: just in case your home actually ends up costing more to rebuild than the policy states, your insurance company will foot the bill. There’s more to these differences, of course, so we suggest you discuss the coverage details with your agent.

Personal property coverage:

Everything from the clothes in your closet to the artwork on the wall and the new couch you just bought falls under the category of personal property within your homeowner’s insurance policy. You’ll want to make sure you have a conservative coverage amount relative to what you think everything is worth (prices aren’t exactly the same as they were even a few years ago). Your insurance company usually caps how much they’ll pay for certain items, like jewelry or valuable artwork, so you may need to list those as personal articles.

If you ever needed to file a claim, here’s one way to know what you owned: each year we suggest that you walk through your home, videoing. Pan over rooms, open drawers, and add commentary as necessary. This will make your side of the claims process way easier than trying to remember things after a very stressful loss. It’s also much faster than categorizing everything you own now on a written list.

Uninsured (and underinsured) motorist coverage:

If you’re in a car accident, this endorsement (extra add-on) will kick in to pay for your bodily injury expenses or vehicle damages if the other driver didn’t have insurance (or had inadequate insurance). Wisconsin requires uninsured motorist coverage (at least $25,000 per person and $50,000 per accident) but some states do not. We not only recommend it on your auto policy but would also recommend adding it to your umbrella (personal liability) policy.

This endorsement will step in for expenses beyond the underlying auto policy limits. Your medical insurance could be adequate for some scenarios, but the umbrella policy endorsement would provide other benefits that health insurance won’t, such as lost wages or payments for pain & suffering. The cost for this endorsement is usually an extra $100-200 per $1M of umbrella coverage and we recommend at least getting a quote to see whether that’s worth the peace of mind.

We hope you found these tips helpful. We don’t sell insurance, but we’re happy to work with our clients’ brokers and agents to find what’s right for their situation. At Boardwalk, property and casualty insurance is reviewed for our clients every two years – even if nothing obvious has changed. Whether it’s saving on insurance premiums, helping update coverages, or just confirming that everything looks good, our clients have peace of mind knowing they are well protected.

The Debt Ceiling is a Drag – Here is What You Need to Know

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John Morton

Senior Wealth Manager

So, what’s up with the debt ceiling? All this partisan politicking is dragging us down! Let’s highlight the 5 most important pieces you need to know and our advice on what to do with your portfolio.

#1

The US actually hit the debt ceiling in January! Since then, the US Treasury has used various cash and debt management techniques to continue paying obligations while staying under the debt limit.

  • After lighter-than-expected tax receipts were accounted for, the latest projection by the US Treasury shows that resources to maintain all obligations could run out as early as June 1st.
  • After that point, payments may be delayed or stopped for benefits to veterans, senior citizens (Social Security and Medicare), taxpayer refunds, etc. and it’s possible that debt can’t be repaid on time or in full (known as default).

#2

Without a resolution in advance, it’s highly likely that debtholders will be prioritized. Any available funds would first go towards repayment of maturing debt obligations for several reasons:

  • There’s no political hierarchy involved with this choice by the Treasury. (For instance, choosing to issue payments for veterans’ benefits instead of Medicare obligations.)
  • Everyone in government would be motivated to quickly resolve the problem because everyone has constituents that will be affected.
  • Avoiding default is a top priority for maintaining financial stability.

#3

Default would have a lasting, negative impact on the economy.

  • At a time when high inflation and interest rates are already dampening consumer and business sentiment, a default would further undermine confidence. Economic growth would take a hit.
  • Within a matter of weeks after default (mid- or late-June), experts estimate that a tenth of economic activity would stop, 6 million jobs could be lost, and the stock market would fall by one-third.
  • US debt would have a credit rating downgrade, which last occurred in 2011 with a corresponding debt ceiling crisis. There could be “a permanent increase in the cost of funding U.S. federal debt,” says David Kelly, chief global strategist at J.P. Morgan Asset Management.
  • The global financial system depends on the stability of the dollar as the world’s dominant reserve and trade currency. Things would quickly become destabilized if confidence in the dollar drops. Over the last decade in particular, “de-dollarization” has been a common reprise. Despite this, global trade and currency reserves are still dominated by the US dollar. Up and coming alternatives, like the Chinese yuan, don’t have a deep and liquid market. Additionally, other countries often have just as many political issues and uncertainties as the US. A US default would still play into the de-dollarization theme: it would elevate concerns for the world’s reliance on the US dollar and jeopardize America’s place as a global leader.

#4

It’s almost certain that debtholders will still be paid on a delayed basis. In other words, it would be a default in terms of timing but not eventual repayment.

  • In addition to full repayment, it’s very likely that there is additional compensation for debt that isn’t repaid on the maturity date.
  • This already takes place when securities mature on, for example, the last of the month and it happens that the maturity date is a weekend day. The standing practice is to repay the debt on the nearest business day afterward with extra interest for the additional days held.

#5

The debt ceiling showdown has become a routine occurrence, so there is clearly a serious issue with our government’s spending and revenue mismatch that must be resolved. Annual deficits have persisted over the last two decades regardless of which party controls Congress or the presidency.

  • Eventually, there could be changes to fix the underlying problem: higher taxes or spending cuts.
  • With a divided government, those arduous changes are less likely than swiftly kicking the can down the road. Many predict that the debt ceiling will be suspended until the next fiscal year (starting Oct. 1) or next election year.

For investors, it is important to understand that stock and bond prices reflect the current probability of various scenarios heading into June 1st and, importantly, will continue to be volatile as new information is quickly factored into prices.  Rather than attempting to time the market or predict an outcome, we advise staying invested in your carefully constructed, globally diversified investment portfolio that has been structured for your personal financial goals and risk tolerance.

We would be happy to offer more insights and analysis about the debt ceiling if you are interested in learning more. We’re also here to review your portfolio mix any time your personal circumstances may warrant a change.

Headline Concerns vs Market Returns

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John Morton

Senior Wealth Manager
Both stocks and bonds started off 2023 with a continuation of the strong rally that began late last year. Most would not have expected this result after recalling the headlines from this quarter, but it’s not uncommon for markets to climb a wall of worry. Since markets are forward looking, the positive longer-term outlook for assets means that investment prices tend to follow a cycle of reacting to negative news, recovering, and then climbing higher. Despite a pandemic, wars, historic inflation, and recession fears over the last three years, US stocks are still up over 18% per year during that time (as measured by the broad Russell 3000 index). At Boardwalk, we believe that better investing experiences happen by aligning individual goals and risk tolerances to a globally diversified portfolio, and then focusing on long-term financial wellbeing rather than short-term market volatility.

Banking Panic of 2023

Interest rates continued to move higher in early 2023 and the Federal Reserve (Fed) indicated that it was not planning to stop raising rates until price and wage inflation showed meaningful progress toward their targets. Inflation is trending downward, but side-effects of the Fed’s rapid rate increases were put on stark display when Silicon Valley Bank dramatically collapsed on Friday, March 10. This bank and a few others had severe liquidity and risk management issues but, unfortunately, the broader financial sector has also been negatively impacted. In short: the cost of attracting and keeping customer deposits has risen, hurting profitability, and the value of the debt instruments on these companies’ books have fallen.

The stress in the banking sector was promptly addressed by the U.S. Treasury, FDIC, and the Fed. They announced that uninsured depositors of failed banks would be made whole and by providing liquidity to banks via a special lending program. Importantly, these steps have quelled fears of contagion in the financial sector. For diversified investors, 2023’s banking crisis had a minimal impact on portfolios. Silicon Valley Bank represented just 0.04% of the Russell 3000 index at the end of February and the index was still up 7.18% for the quarter. As Nobel Prize laureate economist Harry Markowitz is attributed with saying: “Diversification is the only free lunch” in investing.

Fixed Income Change

Prior to 2022’s historic rise in rates, interest rates were very low for over a decade. It was uncertain when rates would increase, but odds were that rates were more likely to move up than further down. When interest rates rise, the value of bonds falls. For this reason, from its inception, Boardwalk had allocated 40% of fixed income investments to short-term bonds because they lose less value when rates rise. The remaining 60% of clients’ fixed income allocation was dedicated to intermediate term bonds, which earned higher yields in exchange for more risk of value fluctuation.

In 2022, intermediate term bonds were down 13% (Barclays Capital US Aggregate Bond Index) while short term bonds only lost 2.8% (FTSE World Gov. Bond Index 1-3 Years, hedged). Again, this happened because when rates rose, the underlying bonds within these indices lost value. The US 10-year Treasury Note was yielding about 1.5% to end 2021 and crossed above 4% in late 2022. Similarly, the US 2-year Treasury Note paid less than 1% in 2021 and hit a high of 5.03% on March 3, 2023. With the short-term bonds having accomplished their role in dampening the impact of a rise in rates, current intermediate-term yields at much more attractive levels, and considering the now lower likelihood of further rate increases, Boardwalk has made a strategic change to clients’ fixed income allocations. We have shifted half of clients’ short-term bonds into intermediate term bonds to lock in higher interest rates for a longer period of time.

Finally, to end on a bright note: while rising rates do hurt bond prices in the short-term, over a longer period, higher rates are actually beneficial for investors and result in higher long-term returns in a diversified portfolio. The graphic below compares the growth in wealth between a static low interest rate environment (1% interest rates in blue) versus the trajectory of a higher interest rate. The hypothetical investor is far better off in the long run with higher interest rates even with the jarring negative value adjustment that occurs.

Silicon Valley Bank Explained

If you were not familiar with Silicon Valley Bank (SVB), it’s likely that you have heard about it now – and not in a good way. Unfortunately, SVB on Friday became the biggest bank to fail since the global financial crisis in 2008. Since then, the Federal Reserve, U.S. Treasury, FDIC, and even larger banks stepped in to ensure liquidity, calm depositors, and stabilize markets. While it may be an appropriate time to revisit whether you have enough FDIC coverage for your money held at a bank (more on that later), the consensus view is that the overall banking system is well capitalized and has ample liquidity.

So how did SVB fail? SVB held long-term bonds that had lost significant value as the Fed hiked rates. In order to meet withdrawals from its accounts, SVB had to sell these bonds at a loss. As the bank came under stress, more depositors withdrew funds. This required SVB to sell additional holdings at a loss – and the cycle fed on itself until regulators stepped in to close the bank down. The bank had a heavy concentration of start-up and technology-related firms among its depositors and customers. So not only did the bank suffer from tightening liquidity and rising rates, but its customer and depositor base did as well. This was a major contributor to why other banks have not experienced the dramatic bank run, and failure, that SVB did. Exposure to concentrated areas of the market have proved to be detrimental to other banks: Silvergate Capital and Signature Bank of New York recently shut down after their heavy participation in the crypto space caught up with them.

Contagion is when a disturbance, like SVB failing, spreads within the financial system. Even during last week’s panic – and certainly after the reassuring announcements on Sunday – this risk is considered to be low. Why? SVB, Silvergate, and SBNY had concentrated exposure and limited entanglement with other financial institutions. This was unlike the large banks in the lead-up to the global financial crisis. In 2008, there was significant financial exposure between giant banks via complex securities, so one bank’s losses quickly turned into a threat for the whole industry.

The Federal Deposit Insurance Corporation (FDIC) ensures that depositors at banks will receive any insured funds. On Friday, depositors at SVB did not know whether they would recoup any of their money above the FDIC limits. Regulators have since stepped in to shore up confidence in the banking sector: all customers of the failed SVB have access to their money today and other banks that might experience heightened withdrawals will have easier access to liquidity (borrowing from the Federal Reserve).

A Brief Review of FDIC Coverage

While the FDIC, U.S. Treasury Department, and Federal Reserve have quickly stepped in to support depositors beyond the traditional FDIC limits and likely would do this for other banks that came under duress, there is no guarantee. As such, one step you could consider taking is to spread out any bank balances in excess of FDIC limits, if any, to other banks (or new account types at the same bank). See the below chart as a reminder of FDIC insurance limits. Remember that all of these limits below are per bank.

Example 1: if Tim opens an individual account at five different banks, each of them is insured for up to $250k ($1.25M total).

Example 2: if Tim has an individual account and a joint account with Jenny at the same bank, the individual account is insured for up to $250k and the joint account is insured for up to $500k for a total of $750k. They could replicate these accounts at a second bank and double their total FDIC coverage.

Cash at TD Ameritrade and Schwab has always been allocated to a FDIC insured deposit account where the funds are held at one or more banks. These deposits are insured by the FDIC up to $250,000 per account, per bank.

Please contact us if you have any questions about the SVB failure or restructuring your bank accounts to increase FDIC coverage.

The Inflation Story

When we look back at 2022, there will be plenty of material for the history books. Few, if any, predicted the size and scope of the declines and volatility seen this year. So, while it’s cliché, that is exactly why we emphasize time in the market rather than timing the market. It’s impossible to consistently move in and out of the market with good timing. Rather, investors are rewarded for taking on thoughtful risk within a diversified portfolio and sticking with that strategy despite years like this one.

The Inflation Story

For decades, we’ve been operating in a world with falling interest rates, low and steady inflation, globalization, and rapid technological progress. Technology and globalization have worked together to make the global economy more efficient, more stable, and more open. As such, inflation was low and stable, allowing policy makers and economies to enjoy low interest rates. The pandemic flipped everything upside down and interest rates have surged to counter the highest inflation in 40 years, as seen in the chart below from Morningstar. 2022’s ten Fed rate hikes (horizontal axis) moved the Fed funds rate higher by 4.5% (vertical axis).

Higher interest rates seem to have helped dampen demand. Coupled with improving supply chains and falling food & gas prices, we’re moving in the right direction: December’s annualized inflation rate of 6.5% is a good deal below the June high of 9.1% here in the US. But it’s still a far cry from the Fed’s 2% target rate. The ongoing concern is whether the Fed’s delicate dance – raising rates enough to bring down inflation but not high enough to cause a serious recession – can be achieved.

The uncertainty of inflation’s path and the economy’s resilience are reflected in asset prices, and it’s a big part of why 2022 has been difficult for investors. As we highlighted last quarter, Boardwalk is here to help our clients focus on meeting their short and long-term goals and stay invested through market turbulence. Evidenced by returns in 2021 and 2022, investors won’t ever receive the average return for a portfolio in a given year. But staying disciplined with a strategy will bring investors closer to the expected annual average return – and their goals – over time.

Mean Reversion

“Reversion to the mean” refers to the concept that statistical observations return to their average (mean). Take a coin toss for example – there could be a decent stretch of heads or tails (the Guinness World Record is 8 head tosses in a row). But if you flipped a coin enough times it’s extremely likely that the rate of occurrences for either side would revert towards 50%. In investing, this phenomenon is called “mean reversion” and it’s the theory that returns, prices, growth, etc. move back towards their long run average after experiencing a period above or below that trend line.

It’s a powerful force. At times, there is a systemic shift in the data that would cause the long-term future trend to be meaningfully different than in the past. However, when the “this time is different” assertion arises, history tells us that it’s usually not different – it’s just that mean reversion hasn’t occurred yet. Let’s look at two examples of this in investing.

Our 2021 year-end commentary featured the wide gap between valuations for the growth style of investing verses its value style counterpart. 2022 proved to be a year of significant mean reversion. Global value stocks had their largest outperformance since 2000, coming out ahead by 21%. This has certainly helped our recommended holdings, given their value tilt.

The cyclicality of performance leadership between US and international stocks could point towards another area of the markets that’s ripe for mean reversion. Looking back at the last 10 years, US stocks returned 12.1% per year through the end of last year while international stocks lagged with a 4.6% annual return for US investors. That great stretch for US stocks came after the S&P 500 had a “lost decade” between 2000-2009 – it lost money while international stocks dominated. Currency returns impact international stock returns for US investors, and we’ve recently had a period with a very strong US dollar. The last time it was this strong was in the early 2000s and a weakening dollar during the rest of that decade produced a tailwind for international stock returns. Heading into 2022, valuations were also stacked in international stocks’ favor. As the dollar began to weaken in the fourth quarter of 2022, international stocks returned 16.2% compared to 7.6% for large US stocks. This doesn’t mean we should abandon US stocks all of a sudden. We think that maintaining both US and international diversification makes the best use of the global opportunity set over the long run, regardless of which area has had better performance recently.

Looking Back To Look Ahead

As we begin 2023, no one knows how markets will fare. Inflation and economic growth will likely persist as headlines. And while corporate earnings and households have been able to hold up against rising rates and record inflation, many expect this year to reveal the “lagged” impact of these forces. Most economists are expecting a recession within the next two years. The equity and bond markets are forward looking, however, so the current probability of these risks is factored in. Better-than-expected news could usher in strong portfolio returns even amid deteriorating conditions.

Looking back at 60% stock/40% bond portfolio returns since 1926 shows that the years after a 10%+ drawdown often post strong positive performance (data compiled by Dimensional Fund Advisors). Of course, we construct our recommended 60/40 portfolios to include much more than just the S&P 500 and US Treasuries, but that’s the typical mix that Wall Street references. That 60/40 portfolio was down 14% in 2022.

Patience and discipline can be in short supply when investors experience rough waters. But that’s also when future expected returns are often at their highest. Looking backward at the stellar returns exiting a market crash, investors habitually remark that they wished they maintained their stock holdings or even added cash to their portfolios when down. However, in the midst of a pandemic or global financial crisis it can be very difficult to do so. Despite the uncertainty ahead, we believe this bear market will eventually prove to be a similar opportunity for disciplined, long-term investors.

We know maintaining peace of mind after a year like 2022 is easier said than done and we’re here to discuss any concerns or questions you may have.

Sequels are Never As Good – Are They?

Sequels are never as good – are they? Well, that may just hold to movies. There’s plenty of new tax & retirement planning implications from SECURE Act 2.0, passed Dec. 29, 2022.

The original 2020 act had many impactful provisions, but we’ll remind everyone of one very significant change: money in retirement plans that is inherited by non-spouse beneficiaries generally must be taken out (and taxed) within 10 years. Previously, tax law allowed distributions from inherited retirement money to be stretched over the course of the beneficiary’s lifetime.

The retirement and tax planning implications from the SECURE Act 2.0 are far broader – there are over 100 provisions – but no single change is as impactful as the elimination of the stretch IRA in the first bill. Given the breadth of provisions, we’ll focus on three of the most important areas for our clients and their families.

Required Minimum Distributions:

The first Secure Act pushed the required age at which distributions must be taken from retirement plans back from age 70.5 to 72. If you were was born before 1951, there’s no change since you’re already taking distributions. For those born between 1951 and 1959, RMDs now begin at age 73. If you were born after 1960, the first RMD has been pushed back to age 75.

What’s the impact on me?

  • For those who started taking RMDs in 2022 and prior, there’s no impact.
  • For everyone else, there will be a longer gap of time between retirement and your RMD age. The potential for lower income during that “gap” allows for additional tax planning – such as Roth conversions, taking capital gains at 0% or 15%, and even taking a distribution from a retirement plan voluntarily while in a low tax bracket. It also means your tax rate on distributions from age 73/75 through the end of your life could be higher, since there will be more income those years.

There are a number of other provisions relating to distributions as well – two of which we discuss below.

  • For those that are charitably inclined: there’s no impact to the age at which a “qualified charitable distribution” (QCD) can be made (age 70.5). However, the wider gap between when someone may take RMDs and their age 70.5 opens the door to more tax planning opportunities.
    • There are several other provisions related to QCDs that don’t apply to many retired givers, such as an inflation-indexed maximum and a one-time ability to fund a split-interest entity (e.g., a Charitable Remainder Annuity Trust).
  • Lastly, we’ll note that there’s a provision allowing a spouse to elect to take RMDs as if he/she was the original IRA’s owner. It gets complicated, but this could make sense for the older spouse to elect before a younger spouse passes away so that the older, surviving spouse can use the decedent’s life expectancy to delay and stretch out required distributions.

Next up: there were many provisions related to Roth contributions. Notably, this bill did not close the ability to make “back-door Roth IRA” contributions. Rather than restricting Roth access, the bill’s various provisions expand access to or in some cases even require Roth contributions instead of the traditional “pre-tax” contributions. The idea behind why Congress is expanding Roth features is straightforward: it benefits the government via higher current tax revenue, and it helps savers via additional opportunities to grow tax-free wealth. Here are some details on two of the more interesting provisions:

Catch-up Contributions:

Effective in 2024 and for plans offering a Roth option, high wage earners will be required to contribute after-tax money via the Roth option of a retirement plan for any catch-up contributions. High wage earners are defined as making at least $145,000 from the employer whose plan the catch-up contributions are being made into. Catch-up contributions are allowed for employees age 50+. For 2023, after contributing the regular maximum of $22,500 into a retirement plan, employees age 50+ can still make their optional catch-up contributions of $7,500 with pre-tax money.

  • Further, catch-up contributions for participants aged 60-63 will be bumped up to a maximum of 150% of the regular catch-up amount. Though this provision takes effect in 2025, if it did apply to 2023 contributions, the “bumped up” maximum would be $11,250. Keep in mind that all this would have to be after-tax wages going into the Roth portion of the plan starting next year.

529-to-Roth Transfers

Starting in 2024, it will now be possible to transfer money leftover in a 529 plan to a Roth IRA for the beneficiary. In the past it usually didn’t make sense to fully fund a 529 plan since earnings on non-qualified withdrawals are subject to taxes and a 10% penalty. But now that there’s a release hatch for excess dollars, there will be more client situations where attempting to fully fund college with 529 plans will make sense. There is still some cloudiness that the IRS will clarify but as the law is written this release hatch is here to stay. Here are some major restrictions on this new ability:

  • The transfer must be a direct rollover into the Roth IRA of the 529 plan’s beneficiary. It can’t go to the owner’s Roth IRA.
  • The beneficiary must have earned income during the year of the rollover. However, the income limit that normally applies for Roth IRA contribution eligibility will not apply for these rollovers.
  • The IRA contribution limit still caps the total amount that can go into the Roth IRA each year ($6,500 in 2023). The maximum applies to the combined total of contributions and rollovers from a 529 plan – no doubling up!
  • The 529 plan must have been maintained for at least 15 years and money contributed within the last 5 years cannot be moved into the Roth IRA.
  • A lifetime transfer maximum of $35,000 applies to each beneficiary.

As you can see, these limitations mean that 529 plans should still be used with education funding as the intent. But this provision will provide flexibility to fund a 529 plan more aggressively if considered along with cash flow, retirement plan strength, and estate planning considerations.

There are over 100 provisions in the SECURE Act 2.0 – so we’ve only scratched the surface when it comes to the breadth of new changes. However, these are some of the most applicable changes for Boardwalk clients. Please let us know if you’re interested in learning more about the SECURE Act 2.0 and how it applies to your situation. But rest assured, we will be bringing planning considerations to you as we meet – including any financial planning recommendations based on the other provisions not outlined here.

Six Financial Best Practices for Year-End 2022

Picture of Mike Rodenbaugh

Mike Rodenbaugh

Founder

To say the least, there’s been plenty of political, financial, and economic action this year—from rising interest rates, to elevated inflation, to ongoing market turmoil.

How will all the excitement translate into annual performance in our investment portfolios? Markets often deliver their best returns just when we’re most discouraged. So, who knows!

Over the past few weeks, we have taken these six action steps on behalf of our clients. However, if you are not a client of Boardwalk Financial Strategies, now is a good time to take action before 2022 is a wrap.

1. Revisit Your Cash Reserves

Where is your cash stashed these days? After years of offering essentially zero interest in money markets, savings accounts, and similar platforms, some banks are now offering higher interest rates to savers. Others are not. Plus, some money market funds may have quietly resumed charging underlying management fees they had waived during low-rate times.

It might pay to …

Shop around: If you have significant cash reserves, now may be a good time to compare rates and fees among local institutions, virtual banks, and/or online services that shift your money around depending on best available offers (for a fee). Double check fees; make sure your money remains FDIC-insured; and remember, if it sounds too amazing to be true, it probably is.

2. Put Your Money to Work

If you’re sitting on excess cash, you may be able to put it to even better use under current conditions.

Here are three possibilities:

Rebalance: You can use cash reserves to top off investments that may be underweight in your portfolio. Many stock market prices have been depressed as well, so this may be an opportune time to “buy low,” if it makes sense within your investment plans.

Lighten your debt load: Carrying high-interest debt is a threat to your financial well-being, especially in times of rising rates. Consider paying off credit card balances, or at least avoid adding to them during the holiday season.

Buy some I bonds: For cash you won’t need for a year or more, Treasury Series I bonds may still be a good deal, as described in this Humble Dollar post.

3. Replenish Your Cash Reserves

Not everybody has extra money sitting around in their savings accounts. Here are a couple ways to rebuild your reserves.

Earning more? Save more: To offset inflation, Social Security recipients are set to receive among the biggest Cost-of-Living Adjustments (COLAs) ever. Or, if you’re still employed, you may have received a raise or bonus at work for similar reasons. Rather than simply spending these or other new-found assets, consider channeling a prescribed percentage of them to saving or investing activities, as described above. If you repurpose extra money as soon as it comes in, you’re less likely to miss it.

Tap Required Minimum Distributions (RMDs): If you need to take required minimum distributions (RMDs) from your own or inherited retirement accounts, that’s a must-do before year-end. Set aside enough to cover the taxes, but the rest could be used for any of the aforementioned activities. Another option during down markets is to make “in-kind” distributions: Instead of converting to cash, you simply distribute holdings as is from a tax-sheltered to a taxable account. Or, to avoid being taxed on the distribution, you also could donate the assets through a Qualified Charitable Distribution to your favorite non-profit organization.

4. Make Some Smooth Tax-Planning Moves

Another way to save more money is to pay less tax. Here are a couple of year-end ideas for that.

It’s still harvest season: Market downturns often present opportunities to engage in tax-loss harvesting by selling taxable shares at a loss, and promptly reinvesting the proceeds in a similar (but not identical) fund. You can then use the losses to offset taxable gains, without significantly altering your investment mix. When appropriate, we’ve been helping [firm name] clients harvest tax losses throughout 2022. There still may be opportunities before year-end, especially if you’ve not yet harvested losses year to date. We encourage you to consult with a tax professional first; tax-loss harvesting isn’t for everyone, and must be carefully managed.

Watch out for dividend distributions: Whether a fund’s share price has gone up, down, or sideways, its managers typically make capital gain distributions in early December, based on the fund’s underlying year-to-date trading activities through October. In your taxable accounts, if you don’t have compelling reasons to buy into a fund just before its distribution date, you may want to wait until afterward. On the flip side, if you are planning to sell a taxable fund anyway—or you were planning to donate a highly appreciated fund to charity—doing so prior to its distribution date might spare you some taxable gains.

5. Check Up on Your Healthcare Coverage

As year-end approaches, make sure you and your family have made the most of your healthcare coverage.

Examine all your benefits: For example, if you have a Health Savings Account (HSA), have you funded it for the year? If you have a Flexible Spending Account (FSA), have you spent any balance you cannot carry forward? If you’ve already met your annual deductible, are there additional covered expenses worth incurring before 2023 re-sets the meter? If you’re eligible for free annual wellness exams or other benefits, have you used them?   

6. Get Set for 2023

Why wait for 2023 to start anew? Year-end can be an ideal time to take stock of where you stand, and what you’d like to achieve in the year ahead. 

Audit your household interests: What’s changed, and what hasn’t? Have you welcomed new family members or bid others farewell? Changed careers or decided to retire? Received financial windfalls or incurred capital losses? Added new hobbies or encountered personal setbacks? How might these and other significant life events alter your ideal investment allocations, cash-flow requirements, insurance coverage, estate plans, and more? Take an hour or so to list key updates in your life, so you can hit the ground running in 2023.

How We Help?

At Boardwalk Financial Strategies, we do all of this and more for our clients. We are with them through every transition and help them navigate life’s changes. We ensure every component that contributes to their financial well-being is well positioned—today, and throughout the years ahead.