Properly Title Your Real Estate into Your California Living Trust
Properly transferring your real property into a living trust ensures your desires upon death are upheld. Many people fail to file the proper deeds after establishing the trust. When this happens, the property is still subject to probate court and costs. Ultimately, the property may not go to the desired beneficiary. A California revocable living trust gives a person control of the trust assets while alive but establishes the parameters of transfer to beneficiaries after death. A trust is a unilateral contract between the grantor who owns the assets and the beneficiary receiving the assets. It is managed by a trustee. Revocable means it can be withdrawn at any time by the trustee during the grantor’s life. As such, the grantor and trustee are often the same person in a revocable living trust. Trusts allow assets to pass to beneficiaries avoiding the entire probate process as long as the trust is properly created, funded and executed.
Real estate property must be properly listed on the schedule of assets including the address, assessor’s parcel number and legal description of the property. The name on the title should match exactly the name of the grantor. Discrepancies open the door for someone to contest the trust. Trusts are often created by attorneys, but this isn’t required. As long as the elements are described, and the document is dated and notarized with original signatures, it is a legal trust. Many grantors make the mistake of never funding the trust. They think that the schedule of assets is the only thing necessary for the successor trustee to execute their wishes. This is wrong. All accounts must be renamed with the owner becoming the trust.
California law allows the use of three different types of deeds to convey title to real estate. A grant deed is the middle-level deed because it includes more guarantees of title than a quitclaim deed but few guarantees than a warranty deed. The grant deed is also sometimes known as the special warranty deed. Like a quitclaim or warranty deed, the main purpose of the grant deed is to transfer property title from one person to another, such as from a seller to a buyer. A grant deed is written evidence that you actually own your property. Additionally, the grant deed provides title guarantees to the new owner. To be legally effective, a grant deed must include certain basic information, including the name of the new owner, the signature of the person conveying title and a legal description of the property being conveyed by the deed. The person conveying title is the grantor, and the new owner is the grantee. In California, grant deeds are filed at the county assessor’s office with a Preliminary Change of Ownership Request, applicable fees and a Tax Affidavit. All must be notarized for legal transfer and recording.
The grant deed includes a significant title guarantee. Basically, the grantor under the grant deed guarantees to the grantee that the grantor has not transferred her title to anybody else first. So, if the new owner later discovers that two weeks before the grantor provided the grant deed, the grantor actually sold the title to a third party, the new owner can sue the grantor under this title guarantee to recover the value of the property. A grant deed can include exceptions to the title guarantee. The grant deed may, for example, identify an easement running across the property. Any exception listed in the grant deed will not be covered by the title guarantee, so the new owner takes title subject to those listed exceptions. A grant deed is better than a quitclaim deed because when a grantor provides a quitclaim deed you have no guarantee that an hour earlier the grantor did not give title to somebody else. However, the grant deed is not as good as a warranty deed because a warranty deed guarantees that the grantor actually has good, marketable title to the property, while the grant deed just guarantees that the grantor has not personally done anything to affect the title of the property. However, because most property owners purchase a title insurance policy, the significance of using one type of deed over any other has diminished. Most owners will sue under the title insurance policy even if they have a warranty or grant deed from the grantor.
August 2018 Market Recap: Do Midterm Elections Matter?
Since the global financial crisis, August has regularly proved difficult for financial markets. This summer was no exception. Investors had to digest the reintroduction of US sanctions against Iran, new tensions between Turkey and the US, a deterioration of trade talks between the US and China, and volatility in the Italian government bond market. Most equity markets and risk assets sold off, with the notable exception of the S&P 500, where extraordinarily strong macro data, and a general absence of any inflation concerns, once again pushed the index higher. Amid the geopolitical turmoil, the search for a safe haven helped push government bond prices up, with the 10-year US Treasury yield falling by 10 basis points (bps) to 2.86%. The labor market goes from strength to strength. The U6 unemployment rate – a broader measure of unemployment than the headline rate – dropped to 7.5% in July, its lowest level since 2001. This is considered to be one of the best measures of unemployment since it accounts for underemployment, such as those working part time that wish to work more, and those currently discouraged but considering re-entering the labor market.
With no shortage of political noise and the midterm elections quickly approaching, many investors have been asking what this means for markets. Putting political issues aside, we maintain the view that investors should work to separate the signal from the noise, and only make portfolio changes when the facts have changed. Midterm election years have historically seen worse than average returns, and these negative excess returns have typically come with a price of higher volatility. Since 1970, midterm election years have seen average annual returns of 6.1%, versus average returns of 11.9% during the full period. Furthermore, volatility has historically increased as the midterm elections approach, with S&P 500 realized volatility an average of 1.8%pts higher on average in the three months leading up to November. That said, the equity market has typically enjoyed a relief rally from September through the end of the year, rising 7.1% versus an average return of 3.7% during the full period, as uncertainty recedes and investors refocus on the fundamentals. As such, the historical data suggests that investors should not necessarily seek cover as midterm elections approach, but rather understand the market dynamics that will be at play and position portfolios accordingly.
After a solid 2017, emerging markets (EM) currencies have had a tough 2018, with the JPM EM trade-weighted currency index falling 14% year-to-date. EM economies have been stuck in a tug of war between still solid fundamentals, with economic growth continuing to improve relative to developed markets and earnings growing by 20% in the second quarter, and sentiment, which has turned much more negative. This deteriorating sentiment reflects rising trade tensions, some disappointment in Chinese data and concerns of second round effects of dollar strength, all of which have been clouding the outlook for EM investors. However, as we highlight in this week’s chart, there has been a wide difference in performance within EM, with certain currencies punished much more than others. In particular, countries with significant external vulnerabilities, such as Turkey and Argentina, and countries with limited visibility on growth, such as Brazil and South Africa, have been hit hardest. The takeaway for investors is not to view EM economies as one homogenous group but to separate those economies with vulnerable dynamics from those with stronger fundamentals in order to uncover the still present long-term investment opportunities.
Q&A: Can I deduct my leased vehicle? Did I lose my employee deductions?
If you lease a car, truck, or van that you use in your business, you can use the standard mileage rate (54.5 cents per mile in 2018)or actual expenses to figure your deductible expense.If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. The standard mileage rate is simple and easy to calculate. Let’s say Brooke used her leased car for business use 75% of the time and drove a total of 15,000 miles in 2018. Then she would have a car business deduction of $6,131.25 (15k x 0.545 x 0.75). If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses. If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls(Parking fees you pay to park your car at your place of work are nondeductible commuting expenses.)
If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. Actual car expenses include: Depreciation, Licenses, Lease payments, Registration fees, Gas, Insurance, Repairs, Oil, Garage rent, Tires, Tolls&Parking fees. If you choose to use actual expenses, you can deduct the part of each lease payment that is for the use of the vehicle in your business. You can’t deduct any part of a lease payment that is for personal use of the vehicle, such as commuting. You must spread any advance payments over the entire lease period. You can’t deduct any payments you make to buy a car, truck, or van even if the payments are called lease payments.
A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that lessees can’t avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction, if the vehicle’s fair market value (FMV) exceeds $50,000.So, if you plan on leasing a car with a fair market value of $50,000 you will need to include a certain amount in income during each year of the lease to partially offset the lease deduction.
If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expense based on the miles driven for each purpose.You must make a choice to use the standard mileage rate by the due date (including extensions)of your return. You can’t revoke the choice.
>Ask your Employer to set up an Accountable Plan
If you are a W-2 employee and you are required to use your car for business purposing (outside of commuting to work), then you want to make sure your employer has an Accountable Plan. Accountable plans are an IRS-approved way to reimburse employees for various business expenses in a tax-advantaged manner. Everyone wins … employees are not taxed on reimbursements (the reimbursements not even reported on W-2s) and employers don’t pay employment taxes on the reimbursements.
The Tax Cuts and Jobs Act made changes that may be favorable to your business but at the same time made one big unfavorable change for employees. The Act suspended for 2018 through 2025 the miscellaneous itemized deduction for unreimbursed employee business expenses. This deduction had allowed employees who itemized their deductions to write-off their work-related costs as a deduction to the extent they exceeded 2% of adjusted gross income (AGI). Examples of employee business expenses that fell within the 2%-of-AGI rule (and could have been deductible on employees’ 2017 returns) include:
• Car or truck expenses
• Education expenses
• Home office deduction (if the office is used for the convenience of the employer)
• Subscriptions
• Tools and equipment
• Work clothes and uniforms
• Union Dues
So for 2018 through 2025, employees who pay for these business expenses out of their own pockets get no tax deduction. This limitation applies not only to rank-and-file employees but also to owners of C or S corporations who personally pay for corporate expenses because they are employees of their businesses.
There isn’t any excuse for your employer to not adopt this because there is no IRS form for this purpose. In fact, there’s technically no requirement to have the plan in writing, but you should do so. You can use a template from a CPA firm or create your own. And if you’re incorporated, it’s a good idea to reflect the adoption of the plan in your corporate minutes.
When Disaster Strikes Does Your Homeowners Policy Have Your Back?
One of the big lessons of last year’s major hurricanes and current California wildfires is in many instances; homeowners couldn’t fully repair their damaged homes with insurance proceeds because they didn’t understand until too late what their policies did and didn’t cover. And in general, over the past couple of decades, insurers have made it tougher on consumers. Increasingly, they have made home policies less generous and more complicated, shifting risks and costs off their books and onto policyholders. As insurance rates go up, people will go without, and that’s not acceptable.
A perfect example is Earthquake insurance. Your standard homeowners insurance policy doesn’t cover earthquake damage and destruction. That’s because the standard homeowners policies sold these days are a variation of a standard form called the HO-3. The more recent versions of the HO-3 have very limited coverage for household water damage leaks and pipes and expressly exclude coverage for a flood event and any type of earth movement,like what happens during an earthquake.That’s assuming you’re able to obtain earthquake coverage at all. According to the Actuarial Foundation’s and the Federal Alliance for Safe Homes’ “If Disaster Strikes, Will You Be Covered?” report, “the closer a home is to a fault line, or sits on soil types with greater exposure to loss in an earthquake, the more limited insurance options may be because of the extreme risk of earthquake loss.”If you are able to obtain it, though, you’ll likely be required to prove that your home has been bolted to its foundation before an insurer will extend this sort of endorsement or coverage to you—a renovation that can cost as much as $6,000 depending on where you live as well as the size and style of your home. You also may have to agree to a property inspection or show that you’ve properly secured certain fixtures, like hot-water heaters, using strapping guards.
A major question to consider is, with all these natural disasters dominating the headlines, will this drive up home insurance rates for everyone in 2018? You would assume so. The insurance market is already overdue for an upward correction. So for most of us, it’s a good bet that home insurance rates will rise somewhat, but not enough to give you a heart attack.Homeowners in some, but not all, high-risk areas could face big increases or even problems getting insured at all.Along with — and because of — the recent disasters, there’s growing concern about what climate change may bring, which may soon put more upward pressure on rates.
Understanding what is and is not covered by your homeowners insurance policy can be daunting. If you’re like most, your policy is in an envelope somewhere, and you probably haven’t referred back to it for a while (maybe even since buying your home). Well, find that envelope! Because in addition to understanding just where you’re protected, you may be able to make some simple changes that can save you money.
Homeowners insurance is no place to skimp, but we’ve found eight smart ways for you to save:
1. Wildfire damage is covered by standard home insurance, too. The key here is to make sure that your particular policy provides you with enough coverage. Review your policy to see if it’ll allow you to rebuild your home from the ground up, should the need arise. Also, your insurance company may require you to make a few changes to the exterior of your house and the property that surrounds it if they’re located in an area that’s especially vulnerable to wildfire.
2. Hazard insurance on a standard homeowners insurance policy covers many natural disasters, like tornadoes or hurricanes. Other natural disasters, including floods, mudslides, and landslides, aren’t covered by most homeowners insurance companies. That’s why you should always refer to your policy documents for information about coverages under your particular policy.Hurricane Harvey showed last year that flooding could damage properties outside the highest-risk zones and leave empty-handed homeowners who aren’t required to buy flood insurance. People with federally backed home mortgages must purchase the coverage if they are in a designated high-risk flood area. The government policies provide up to $250,000 for rebuilding and $100,000 for contents for roughly $600-a-year policy. Consumers typically have a 30-day waiting period after purchase before the government policies take effect. A small number of private-sector insurers also provide the coverage, typically for amounts that kick in above the federal policy limits. Just make sure your policy doesn’t include an “anti-concurrent cause.” This type of clause limit(s) coverage when multiple perils combine to cause loss or damage. Wind and water is a good example.
3. For affluent families, you should consider a flood policy for the peace of mind, even if not required under terms of a mortgage. During Hurricane Harvey’s aftermath, the U.S. Army Corps of Engineers released reservoir water that caused additional flooding in areas not initially affected.
4. Check your policy limits. The maximum payout in a standard home policy may be insufficient to rebuild and replace contents. Homeowners often fail to increase policy limits if they upgrade their homes. In the past 10 years, about 10% of residential properties nationwide had remodels worth more than $25,000, according to data provider BuildFax. Homeowners also can find that their policy limits are inadequate when everyone in a disaster-hit area seeks building materials and contractors’ services simultaneously, driving up costs.
5. Homeowners also need to be aware of another pitfall: Insurers sometimes provide “actual cash-value coverage,” which takes depreciation into account, rather than replacement-cost coverage. Actual cash value could fall short of covering replacement, leaving the policyholder to foot more of the bill.
6. Make a list. Homeowners should inventory possessions and store the list outside the home. People with expensive items like jewelry can get specialized coverage.After wildfires in California last year, the state insurance department asked insurers to immediately pay policyholders for living expenses and a portion of personal contents, without requiring a very time-consuming inventory when someone had just lost everything. Many insurers agreed to waive the inventory requirement partially.
7. When you renew, scour the fine print. Especially if you’re in a recently affected area. Insurers have been known to quietly change the terms, moving more risk to the homeowner rather than raising the premium. Apparently, they hope you won’t notice. Don’t be afraid to shop around. Different insurers calculate risks in different ways, so another company’s formula might come out in favor of a lower rate. Plus, some companies offer new customers attractive rates, while loyal customers find their rates creeping up. (What the heck?!) They’re counting on you not to shop around. Just make sure you’re comparing the same coverage and the same replacement value. I tell all my clients that you can always save money on insurance, but you won’t necessarily have enough coverage.Many companies offer discounts if you take certain steps to prevent damage to your home — steps that you should consider anyway. For example, installing hurricane shutters or fire-resistant roofing, or participating in a Firewise community program.
For many people, their home is their greatest asset, so it is crucial to avoid being underinsured. To properly insure your home, it is important to ask your insurance professional three key questions: Do I have enough insurance to rebuild my home and replace all my possessions? Do I have enough coverage for additional living expenses?Do I have enough insurance to protect my assets?
Three Award-Winning Financial Planning Considerations for Actors/Writers
With the passing of the Tax Cuts and Jobs Act of 2017, many actors, writers, directors, and other professionals in the entertainment industry will likely see their taxes increase beginning in 2018. The entertainment professionals who earn wages are being hit the hardest because employee business deductions will no longer be allowed in 2018 going forward. Prior to the passing of the new bill, entertainers receiving a W-2 were able to deduct the costs for their union dues, agent commissions, talent managers, accountants, attorneys, and other ordinary business expenses. Altogether, those business expenses typically add up to roughly 20 percent to 35 percent of an artist’s income but will no longer be deductible going forward. The disallowance of these expense deductions will have a particularly negative impact on the entertainment industry.
Loan Out Corporations – To be or not to be?
In light of the new tax reform changes, many accountants are advising their entertainment clients to form a loan-out corporation for them to deduct their business expenses. Under a normal employment arrangement, a movie, TV show, or theater production would hire the individual actor, writer, or director. Under a loan-out arrangement, the individual would incorporate and set up a loan-out company. The loan-out company would employ the individual and “lend out” their services to the movie, TV shows, or theater production. Prior to the enactment of the Tax Cuts and Jobs Act of 2017, the main benefit of the loan-out corporation was a full benefit of the business expenses otherwise limited on the personal returns, as well as avoiding the alternative minimum tax. Under the new law, loan-out corporations remain unaffected whereas entertainers receiving a W-2 can no longer deduct any business expenses to offset their income. The benefits of having a corporation fall into three basic categories, business expenses, pension plans and medical expenses.
Here is a list of common reasons performers set up loan out corporations:
1. One of the major benefits of having a loan-out corporation is the ability to manage tax payments and cash flow. Many entertainment professionals work on numerous projects every year which means they are on some different payrolls. Generally, professionals without a loan-out corporation are paid W-2 wages. The problem with this is that since the professional is on numerous payrolls with irregular pay periods, the tax withholdings could be more than necessary.
2. Another tax planning benefit of utilizing a loan-out corporation is the ability to take advantage of Qualified Pension and 401ks. In the case of an S-Corporation, certain shareholders are able to deduct health insurance premiums. In addition, pension contribution limits can be more than double that of a standard 401(k) plan when administered properly. The S-Corporation election is one of the ways to reap the immediate benefit. Service providers can save money on FICA taxes by receiving a “reasonable salary” from the corporation and allowing the remaining profit to pass-through to their tax return as ordinary income taxed only at their ordinary, marginal tax rate. As for medical and other business expenses, a “C” corporation can adopt a medical reimbursement plan, which in effect, allows the corporation to pay all of your medical expenses directly to the doctor or hospital and take a tax deduction of all amounts paid (less amounts covered by medical insurance). These can include costs for mental health, eye care, chiropractic, etc.
3. The other factor to consider is the new section 199A 20% “Qualified Business Income Deduction” calculated on your net business income. This new tax change for 2018 provides an additional deduction based on your net corporate business income. For folks in creative fields, there are 2 limitations in the calculation. Individuals in the arts are considered as part of the laws “specified service businesses” and are thus limited to the 20% deduction but ONLY if their taxable income is less than $157,500 if single and $315,000 if married (after that it phases out). This is a deduction not available to an employee, but if a performer were to set up a “loan out” corporation, they might be able to avail themselves of this new tax benefit.
The question then becomes, when does this make any sense for me? We feel the individual would need at least $100k to $125K in gross income before the loan out corporation would make any sense financially, but this would also depend on the level of expenses one was going to lose under the 2017 Tax Cuts and Jobs Act legislation. Consequently, this is a movable calculation depending on the mix of gross income and expenses.While a loan-out corporation seems like a great alternative to mitigate the increased tax burden for entertainment professionals, it may not be the best solution for everyone. Entertainers must consider the costs associated with incorporatingwhich include attorney fees to set the entity up (at least $1,000), the annual report filing fee of$125, the cost of the corporation return preparation at +/- $700, cost of payroll processing +/- $500, a minimum $800 corporate franchise tax per year (for California residents), and additional payroll taxes, which include the employer’s portion of social security taxes (as high as $9,800 or 7.65 percent of wages paid up to about $128,000), workers compensation insurance at $300 and $300-$400 in Federal and state unemployment taxes. The additional costs of incorporating may offset any tax benefit received, and government compliance can be an administrative burden for the entertainer. This means that the corporation adds over $13,000 of additional expenses for the business owner. By forming a loan-out corporation, an entertainer is also forfeiting their opportunity to claim unemployment.Ideally, we want the corporation to SAVE you at least this amount in taxes, so the performer is at break even with the loan out corporation.
These fees can go significantly higher (up to 5-6% of your gross income) if “business management” services are also provided, although some firms are now charging a fixed monthly fee for these services rather than a percentage of gross income. Business management involves turning over almost all responsibility for your finances to a business manager. They, in turn, pay all of your corporate and personal bills, invoice production companies for your services and monitor the collection of income, assist with insurance and real estate issues, provide investment guidance, etc.In addition to federal and state corporate and payroll taxes, the City of Los Angeles enacted legislation requiring all loan-out corporations “doing business” in the City to pay a business tax (however, corporations generating less than a certain threshold in gross income may be exempt from this tax).
With an S corporation structure, the one we prefer for smaller operations, the performer will claw back the heretofore lost deductions plus some FICA tax savings and perhaps (depending on income levels) section 199A 20% “Qualified Business Income Deduction” that will generally offset the additional fees and taxes the corporation incurs. If you are dealing with larger amounts of income, one might look at the C corporation and the ability to defer income into other years by using a fiscal year-end as well as some additional employee benefit options that the C corporation structure provides.
The final advantage I often mention in this structure is that generally speaking, your chances of getting audited by the Internal Revenue Service drop substantially inside the corporation. That is because the Internal Revenue Service does not do as much sampling or DIF scoring of business returns like they do on personal income tax returns. Secondarily the Internal Revenue Service does not require 3rd party 1099 reporting when the payment is made to a corporation. Consequently, the business will not receive 1099’s.
Don’t ignore the low-hanging fruit
For those consistently working actors, they know the QPA (Qualifying Performing Artists) is and has been, virtually worthless for many years as the qualifying threshold is unrealistically low (adjusted gross income of $16,000 or less before deducting expenses as a performing artist).However, for those actors, who are getting started, stage performers or don’t book a ton of workthis is a great way have your performing-arts-related business expenses deductible whether or not you itemize deductions.If you meet all the requirements for a qualified performing artist, include the part of the line 10 amount attributable to performing-arts-related expenses in the total on Form 1040, line 24 (or Form 1040NR, line 35), and attach Form 2106 to your return.
One of the best ways to build savings when starting your acting career is to fully fund a Roth IRA. In 2018, you can put $6,500 (If under 50) into a Roth IRA (grows tax-free and distributions are tax-free). The contributions can be withdrawn without taxes or penalty (the earnings cannot be withdrawn until age 59.5). But if you’re 18 or older, not a full-time student and are not claimed as a dependent on another person’s return, then you can take the Saver’s tax credit. The amount of the credit is 50%, 20% or 10% of your Roth IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (phased out at $63,000). Remember a tax credit is a dollar for dollar reduction of your tax bill.
Book your own kids
As the owner of a business, you have the advantage of being able to hire your child to work in your business, and that creates tax-saving opportunities for both you and your child.They can do print modeling, video, and social media marketing for your business.The new standard deduction means that a single taxpayer such as your child can earn up to $12,000 in W-2 wages and pay not a penny in federal taxes.Especially if you’re already paying them an allowance or putting money away for college. As a California resident, you do not get a state tax deduction for contributing to your child college saving 529 plan (as a few other states do).
When you hire the child under age 18, the Form 1040, Schedule C business and the partnership with only the child’s parents are exempt from Social Security, Medicare, and federal unemployment taxes. The S and C corporations and the non-spouse partnerships do not qualify for this benefit. They have to pay the payroll taxes on all employees—period. There is no parental benefit. (Similarly, the self-employed individual or the spouse-only partnership with a child age 21 or over does not qualify for any employment tax breaks.)
Talk with your tax advisor to see if you qualify for the tax-favored educational assistance program. If so, you can hire your child age 21 or older. Grant the education program to all your employees, including your employee child. Now, you may deduct up to $5,250 of your employee-child’s college tuition and book fees. The $5,250 is the annual, per-employee limit on Section 127 educational assistance.
July 2018 Market Recap: Job Gains, the Fed, and Accelerating Earnings Growth
The stock market posted its largest monthly gain since January as rising corporate earnings and strong GDP growth numbers helped overcome concerns over tariff and trade issues. The S&P 500 Index moved up 3.60% in July after several months of lackluster results. Through the first seven months of 2018, the S&P 500 is up 5.34%. (The S&P 500 Index is a market-cap-weighted index that represents the average performance of a group of 500 large-capitalization stocks.)
July’s jobs report, which showed that the U.S. economy added 157,000 jobs and the jobless rate fell to 3.9%, highlighted the continued strength in the U.S. labor market. While July’s headline figure came in slightly lower than expectations, net revisions to the previous two months showed an impressive increase of 59,000 jobs. In addition, through 2018, monthly job gains have averaged 215,000, and wage gains have increased gradually. It is also encouraging to see another strong gain in manufacturing payrolls, which increased by 37,000. We believe that July’s jobs report did little to change the narrative of the Federal Reserve (Fed), which announced last week that it would keep its federal funds rate unchanged. Although, if the economy continues to grow moderately, wages keep rising, and inflation stays near its 2% target, we expect the Fed to continue quarterly increases in short-term interest rates. In addition, the Fed is steadily reducing its bond purchases to shrink its balance sheet. These actions mean monetary policy will slowly reduce the amount of stimulus for the economy, but we don’t think conditions have become tight enough to start to slow activity. JPMorgan Chase CEO Jamie Dimon recently commented that the expansion is only in the “sixth inning,” which is consistent with ISI Evercore’s recession model that shows the next recession is still years away.
Accelerating earnings, a steadily improving labor market, and a patient Fed all point to continued support for consumer spending, which accounts for nearly 70% of economic growth. A healthy consumer and a strong economy provide a good environment for stocks, in our view, although we still expect to see volatility given the ongoing trade headlines. It’s also important to not let rising rates keep you from owning investment-grade bonds – they still help reduce swings in the value of your portfolio when stocks drop because they tend to decline less or even rise. Higher rates make bonds more attractive for current income, too.
Volatility may have you thinking it is crazy right now and that it hasn’t been like this in a long time. The truth is that we’ve gone through an extended period of time with little or no volatility. The expansion from quantitative easing coming out of the Great Recession led to a prolonged period of super low volatility that began to feel, for many, like the norm. Well, the reality is, the volatility we are experiencing in the market today is back to more normal behavior. Downward movement of 1% or more on the S&P 500 will occur, on average, around 15-20 times per year. So that volatility is normal even though it isn’t what we’ve been experiencing over the last several years.
There is unlikely to be a shortage of market excitement in the final months of the year. The US mid-term elections will be particularly important, so some consideration of the likely outcomes and market impact is a worthy exercise in these quiet summer weeks. Whether growth outside the US reaccelerates will also be an important factor shaping markets in the second half of the year. But with some trade tensions still unresolved and later cycle risks looming on the horizon, a more balanced approach to risk is appropriate. Investors should think about adding fixed income and alternatives selectively to provide downside protection but without increasing the vulnerability of portfolios to rising interest rates.
Monthly Letter From CEO, Chris Jackson (July 2018)
In his 2014 book “The Zero Marginal Cost Society, “Jeremy Rifkin writes about technology’s leading roles in bringing about changes to lifestyles and society during the first half of the 21st century. One of the key themes for the 21st century will be a “zero marginal cost society” that will reduce the marginal cost of goods and services to near zero. In other words, we will soon enter into an age in which we can obtain many goods and services free of charge without going through markets.
A rather academic explanation may be helpful here. The marginal cost is defined as the cost a corporation needs to shoulder when it increases the goods or services it provides by one unit. For example, the marginal cost of renewable energy is near zero. Once solar panels are installed on a roof, they generate electric power at a close to a zero-marginal-cost. The same is true of wind power generation. Some well-known universities in the United States are offering massive open online courses (MOOC) free of charge and with unlimited participation and open access, enabling anybody in any part of the world to receive a university education. Since the marginal cost of such courses is zero, students do not have to pay tuition.
The interesting shift we are seeing in the retail investor landscape is the move to a ‘Zero Marginal Cost Investor’. The marginal cost to offer index funds or commission-free trading is now zero. The investor can now replicate an index and do not have a direct cost (There will be an in-direct cost, if you end up paying for broader services within the brokerage firm that is priced to recoup the lost-leader expenses). Fidelity Investments just beat all of the low-fee index fund competition to a move long expected: It will be the first fund company to offer core index funds (Fidelity Zero Total Market Index Fund and the Fidelity Zero International Index Fund) without any management fee and regardless of how much they invest in either fund. In addition, Vanguard announced its move to make all ETF trading free on its brokerage platform this month. Now there will be no restrictions, and no minimums required, to use the free-trading feature with any ETF. ETF experts expect Vanguard rivals to fire back with their own enhanced free-trading offers. All of the established players in the financial services sector also face pressure from venture capital-funded start-ups, such as Robinhood, which offers a free brokerage trading app and has been growing rapidly — in May Robinhood surpassed E-Trade in a number of users for the first time.
What does this mean for retail investors? First, they shouldn’t overact to the news and race to put all their money in this free index fund. Vanguard’s Total Return Index Fund cost 0.04%, and Schwab’s Total Return Index Fund cost 0.03%. The presumption that a difference of 1-3 basis points matter is more marketing than quantitative. The difference in expense ratios among Vanguard, Fidelity, and Schwab matter far less than which index is tracked and how well it is tracked. Being the market has been a more successful and reliable strategy that is trying to beat the market. Review your current fund holdings. What do they cost? How have they performed relative to its benchmark? Is it tax-efficient? Most importantly, are you paying too much to simply mirror the market or even underperform the market?
Audit your investments. Know what you own. It’s your money and your responsibility. Everyone doesn’t need a financial planner, but everyone needs a financial plan. If you don’t have the time, knowledge, technology and intellectual intrigue, then find a flat-fee fiduciary to help stop the potential hemorrhaging for your financial security.
Joint vs. Separate Trusts for Married Couples
Deciding between joint and separate trusts for married couples has been a conundrum within the estate planning community for a long time. While many attorneys swear by one trust over the other, there are many factors—such as, the state in which the couple resides, the total of their marital estate, and the couple’s relationship itself—that contribute to the decision of which trust is more suitable. Historically, joint trusts have been popular among married couples due to their cheaper start-up costs, ease of management, and the fact that a joint trust reflects the traditional view of a marital estate as a singular unit. However, separate trusts, have some great (and often superior) benefits for a married couple in regards to asset protection, management flexibility, and cost savings after the death of the first spouse.
To aid in this decision process, I’ve compared the strength and weaknesses of each trust type for various situations. The check mark signifies which trust is the better option for that category.
Asset Protection
Separate Trusts – Depending on state law, separating the marital estate into two separate trusts may insulate the assets of one spouse from any financial risks brought on by, or actions taken against the other spouse. Since the innocent spouse’s assets are in a separate trust, they may be out of reach from his or her spouse’s creditors.
Joint Trusts – Since all marital assets are located in one trust, all assets would be at risk if a creditor obtains judgment over either spouse.
Note, however, that some states have extended tenancy by the entirety (T/E) protection to T/E property contributed to a joint trust. See e.g. MO Rev Stat § 456.950 and 765 ILCS 1005/1c. (If your client is domiciled in a T/E state, check your state law for possible statutory protection.) If so, the joint trust will provide superior protection from judgments against one spouse.
Planning Tip: Separate trusts may be a better option to protect assets from creditors.
Administration during the couple’s lifetime
Separate Trusts – Separate trusts require a bit more work, as each spouse is required to manage their own trust. If a couple wishes to keep their martial estate as a singular unit, separate trusts can still accommodate this by naming each spouse as the other’s co-trustee. This allows both spouses to maintain control of all assets, despite being located in separate trusts.
Joint Trusts – Joint trusts are easier to manage during a couple’s lifetime. Since all assets are rolled into one trust, trust management would be very similar to pre-trust ownership, in that both spouses control their separate assets in the trust and have equal say in the management of the joint assets held by the trust. Since each spouse, however, has the right to revoke the trust as to his or her separate property or trust share, this may not be a safe solution if there exists any volatility between spouses.
Planning Tip: Joint trusts may be easier to manage during a couple’s lifetime.
Administration after the first spouse’s death
Separate Trusts – Separate trusts provide more flexibility in the event of the first spouse’s death because the trust property is already divided when the trust is funded. Separate trusts preserve the surviving spouse’s ability to amend or revoke the assets held in the surviving spouse’s trust. Separate trusts also allow each spouse to designate exactly what they would like done with their assets—who inherits what, if they would like to provide for their surviving spouse—all while protecting their assets from being inherited by new children from another marriage (should their spouse ever remarry).
Joint Trusts – Spouses can fund their joint trust with their joint or community property and with any property interests that the spouses own individually. An improperly drafted joint trust may result in the surviving grantor’s making a completed gift of his or her separate trust property and share of community property to the remainder beneficiaries of the trust when the joint trust becomes irrevocable upon a grantor’s death. See Commissioner v. The Chase Manhattan Bank, 2 AFTR 2d 6363, 259 F.2d 231 (5th Cir 1958). To avoid this gift tax issue, each spouse should be given the power to withdraw his or her separate trust property at any time without the consent of the other spouse. Retaining the unrestricted right to withdraw the grantor’s separate property makes any potential gift incomplete and thus creates no gift tax liability. In a properly drafted joint trust, the surviving spouse retains significant rights in his or her separate trust property and his or her share of any community property or tenancy in common property. The retained rights prevent the occurrence of an immediate gift to the remainder beneficiaries of the joint trust.
This division, however, must be recognized after the death of the first spouse, which may create additional complications both in the initial drafting of the trust and the subsequent administration. It is also especially difficult to draft a joint trust in which the beneficiaries receive different distributions upon the death of each spouse. This makes drafting problematic especially in second marriage situations where the spouses each have different distributions schemes for their beneficiaries. Joint trusts, however, are superior from an income tax perspective if funded with community property. Community property in a properly drafted joint trust receives a 100% step up in basis upon the death of the first spouse to die!
Planning Tip: Separate trusts may be easier to manage after one spouse has died.
Estate tax benefits
Separate Trusts – With property marital trust planning, separate trusts provide estate tax relief for affluent couples who’s estate totals higher than the federal estate tax exemption, (a combined $22,400,000 for 2018).
Joint Trusts – A property drafted and funded joint trust will consist of community property—property treated by law as ½ the separate property of each spouse. It may also be funded with joint property under common law and should be converted specifically to tenancy in common property (either by separate property agreement or by the trust language) so that ½ can be treated as each spouse’s separate property. By converting the property to separate property of each spouse for gift tax purposes, the separation allows a property drafted joint trust to achieve the same estate tax marital deduction planning benefits as separate trusts.
This one’s a tie, since, if properly drafted, both separate trusts for each spouse, and joint trusts can provide the same estate tax benefits.
Circumstances where one trust may be more advantageous than the other
Separate Trusts – Separate trusts are a good option for remarriages (who may differ in their beneficiary designations) or couples own individual property prior to the marriage; couples who expect to receive an individual inheritance that they would like to keep separate; and is a better option for common law marriages and couples who have already signed a prenup agreement.
Joint Trusts – Joint trusts are a good option for first marriages that have the same beneficiaries, the same distribution patterns, and the same trustee; and for couples who wish to keep their marital estate as a singular unit.
***Please note: in a community property law state, property that is acquired during marriage is considered to be jointly owned by both spouses. In these states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), an estate planner may want to only offer joint trusts.
5 Tax Breaks From Your Boat to Your Pocket
You can’t deny the allure of boat ownership: fishing, water skiing, and social day trips with family and friends. There is a kernel of truth, however, to the old saying that boats are “holes in water that you throw money into.” But if you take advantage of the tax breaks available to boat owners, you can hang onto some of your money, making your boat even more enjoyable to own.
Generally, the IRS says you cannot deduct any expense for the use of an entertainment facility. This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. A boat (like an airplane, fishing lodge, or vacation home) is considered by the IRS to be an “entertainment facility. The IRS says:
An entertainment facility is any property you own, rent, or use for entertainment. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort.
The IRS does allow a business to deduct expenses for entertaining on your boats, such as food and beverages, catering, gas, and fishing bait (2018 Tax Reform Changes -There is 0% deduction for entertainment expense in 2018). But you can’t deduct the direct expenses of using the boat for entertainment. Here are five tax breaks to help you stay afloat this tax season.
1. Home on the Water
Deducting the interest you pay on your boat loan by declaring the boat your second home is the biggest tax deduction there is for recreational boating. All you need to have on your boat to qualify is a sleeping place, cooking facilities, and a toilet (portable ones count). If you rent your boat out to others, you need to stay on it for at least 14 nights out of the year, or 10 percent of the number of days the boat was rented. Of course, there can’t already be a second home in existence somewhere, as this would technically make a livable boat your third house, which is not covered by any IRS deduction.
You need to ask the lender with your boat loan for an IRS form 1098 to report the interest or, in most cases, you can simply get a letter from the lender. If you used an equity line of credit with your home or the boat as security, you’re entitled to deduct those interest charges. Don’t forget that you can deduct not just the interest, but also any points paid to get the loan as well as the penalty for an early payoff of the loan. Again, this is an option available to those with itemized deductions. State and local personal property taxes can be written off so long as they are annually imposed and sync up with the value of the vessel. If you work from the boat, you also have the home office deduction. Those boats that have extra rooms can be used for short-term rentals.
2. Place Your Boat into Charter
By placing your new yacht in a charter management program, you are converting it from a personal asset to a business asset, essentially an equipment rental business. The relationship between you and the charter management company is structured so that you own the yacht and they assist you in managing your yacht rental business. But you can also deduct all your business expenses as long as you’re trying to make a profit from the boat and are not using it as a hobby. You can deduct boat depreciation (over 10 years), maintenance fees, fuel, mooring costs, and any equipment you need to buy. Yachts in a charter fleet are typically washed weekly and cleaned inside and out after each charter. Routine maintenance is performed on a regularly scheduled basis and damage promptly repaired. For you, as the yacht owner, it means that you can spend your time sailing your yacht and not doing cleaning, maintenance and repairs. Yacht owners can reduce the costs of purchasing and owning their yacht by over 50% in many cases through a combination of tax deductions, new Section 179 & Bonus Depreciation, and charter income. Actual savings vary depending on the size of the yacht and the location in which it is placed in charter.
So, if you want to find ways to potentially reduce your income taxes on wages, have limited time to use your yacht and are willing to allow qualified people to charter your yacht when you’re not using it, then charter ownership might be right for you.
3. Business Transportation
Tax law classifies yachts and other pleasure boats as “listed property.” Therefore, you need to use the yacht more than 50% for business transportation. Once you beat the 50% test, your potential tax deductions include fuel costs, insurance, repairs, dock or slip fees, caretakers’ salaries, hurricane storage, and depreciation (including Section 179)—all of which is limited by tax rules on luxury water transportation. Even if you use your yacht 100% for business, one business entertainment use could sink your deductions. Tax law denies any deduction “with respect to a facility” used in connection with entertainment. And tax law classifies yachts and other pleasure boats as entertainment facilities. Obviously, if the yacht is used solely for business travel, you don’t have any entertainment that triggers the entertainment facility rules. For example, you could have a business office on Catalina island and a business office on the mainland area that would require water transportation for you to get to or from the island. You could do this in a yacht. If, at the end of a typical year you had 80% business use and 20% personal use of the yacht, you may deduct all of the yacht costs for the 80% business use, subject to the luxury water transportation limits.
Now that you have gone to the trouble to qualify your yacht for deduction, you face one final hurdle. Tax law places a daily limit on deductions for business transportation by water. The luxury water limit is double the highest per diem for federal employees traveling in the United States. For FY2017, the per diem rate for high-cost areas is $282 (IRS Pub 1542). If you use your yacht for business transportation for 45 days at double the highest per diem limit you would qualify for a tax deduction of up to $25,380. Not a bad payoff for a little tax knowledge.
4. Short-Term Rental
There are many short-term rental companies that can post your boat as a short-term rental. Much like how many people rent out their vacation homes in the mountains. The Tax Cuts and Jobs Act of 2017 also expands the definition of Section 179 property (allows a massive 1st year tax deduction) to include: Certain depreciate tangible personal property used primarily to furnish lodging (or in connection with furnishing lodging). This includes all furniture, kitchen appliances, and other equipment used in the living quarters.
5. Donating Your Boat
If you are in the market for a new boat, or if you’re done being a boat owner, consider donating your boat to charity. The IRS allows you to deduct the market value of your boat on the day you donate it (not what you originally paid for it). You can find out the fair market value of your boat by using an appraisal guide, such as BUCValu. Stipulations exist that determine how much you can deduct, however; these stipulations are based on what the charity does with the boat after donation, so be sure to read the fine print. In most cases, you can pick your favorite charity if it is qualified as a non-profit organization. Some groups, such as the Sea Scouts, are equipped to take care of all the paperwork and details involved in a donation.
Boats provide an assortment of pleasure and business opportunities for those able to own them. Tax deductions exist for both, but don’t expect anything other than a tightrope process from the IRS if you plan on writing off boat-related business expenses. The ultimate takeaway when it comes to any kind of tax deduction is that the truth shall set you free. Don’t exaggerate, misconstrue, or otherwise misrepresent the facts. If legitimate write-offs exist, take them, and never fear. Tax breaks are there for a good reason, even for boats.
Should You Pay Off Your Home Mortgage With Your 401K?
Bad idea! Looking ahead to retirement, your objective should be to accumulate a 401K nest egg of financial assets as large as possible, and pay off your mortgage as soon as possible. You should pursue these objectives independently, not sacrifice one to obtain the other. On balance, that would be a loser, for multiple reasons.
1. Early Withdrawal Costs: Paying off a mortgage balance with a 401K balance of the same amount would not be a break-even but would generate a sizeable cash outflow because it would trigger tax payments plus a 10% early withdrawal penalty if under 59 ½. While there are exceptions to the withdrawal penalty, paying off a mortgage balance is not one of them.
2. Opportunity Cost on the Existing 401K Balance: An even larger loss from liquidating your 401K is the future earnings on the funds withdrawn. These earnings accumulate tax free until you are 70 1/2, and at that point you pay taxes only on the amounts withdrawn at your tax bracket at that time – which could be a lot lower than it is now.
3. Possible Earnings Opportunity Loss on New Contributions: If your intention is to abandon your 401K after it has been depleted, given that you are still many years from retirement, the largest loss would be the tax-deferred income you could contribute plus the tax-deferred earnings on those contributions that you would be making in future years. Your major objective should be to contribute as much as possible – I have no advice on that without knowing your circumstance – and obtain as high an earnings rate as possible. I do have some thoughts about that.
4. Maximizing Earnings on 401K Accounts: Over a period of years, the rate of return on your 401K should be well above your mortgage rate. A diversified portfolio of common stock will generate high rates of return over long periods along with high short-term variability. For example, during the period 1926-2012, the median return on the common stock of large companies over 25-year periods was 11.34%. The highest 25-year return was 17.26% while the lowest was 5.62%. Even if you consider the period starting August 2000, that experienced two bear market declines of 50%, the S&P 500 Total Return Index had an average return of 4.78%.