Brian Littlejohn

How to Choose the Right Estate Planning Attorney

How to Choose the Right Estate Planning Attorney

Choosing the right estate planning attorney can be important for many reasons. However, knowing who to choose isn’t always very straightforward. The best estate planning attorney in your area might not be the best one for your situation. As such, you should consider focusing on the attorney’s technical skills, personality, wisdom, and values.

Here are three factors to consider when choosing an estate planning attorney:

1. Are they are technically proficient?

First, the right estate planning attorney for you must be technically proficient. Indeed, they need to know estate and trust law inside and out. But more importantly, they need to understand how it applies to someone like you.

In addition, they need to stay current by familiarizing themselves with existing and any expected legislation changes. And they need to know how all these things apply to your unique situation and location, as state-by-state inheritance and estate laws can vary significantly.

When evaluating an estate planning attorney’s technical skills, consider the following:

Specialty — what percentage of their work pertains to trust and estate planning?

Jurisdiction — what jurisdictions and physical locations do their expertise cover?

Differentiation — what sets them apart from their competitors?

Risk Management — how do they manage and communicate the potential risks you face?

Operations and accountability — how do they ensure proper action is taken to complete the estate plan, and what’s their ongoing review process?

2. Do they work with clients like you?

Once you’ve found an estate planning attorney with the technical expertise you need, determine whether they work with clients like you.

While many estate planning techniques and strategies are common, some are not. Ideally, you want to find an estate planning attorney who works with clients just like you when it comes to attributes like net worth, asset and income types, family dynamics, and legacy goals. Ask potential attorneys what their typical client profile looks like. For example:

  • Do they work with business owners?
  • Are their typical clients part of traditional or blended families?
  • What’s the average net worth of their clientele?

If you’ve recently experienced a $10 million windfall but your prospective attorney typically works with smaller clients, it may be best to look elsewhere. Often, the strategies, considerations and techniques to plan for a six-figure net worth aren’t the same as those that are needed for a seven- or eight-figure net worth.

3. Do they feel like a good fit?

Lastly, the right estate planning attorney for you must feel like a fit.

Consider their personality — does it jibe with you and your family? Remember that your attorney will work closely with your immediate family to communicate and implement your estate plan. Therefore, find someone who is likely to be a good fit, so you can develop a healthy working relationship.

In addition, consider your prospective attorney’s values, legacy views, wisdom and personal experiences. Indeed, many attorneys will do their best to understand and implement your unique wishes. However, some may have conflicting views, thereby creating some unnecessary challenges.

You can start by identifying your own thoughts on legacy, stewardship, and multi-generational wealth, and then finding an attorney with similar ideas. This will help ensure that your wishes are fully understood and implemented in the best possible way.

Sherwood Wealth Management provides our clients with customized investment management and comprehensive financial planning services to help them organize, grow, and protect their assets. Please contact us if you’d like to learn more about how we work with affluent individuals and families in Aspen, CO and beyond.

This article was also featured in the Post Independent.

The Complete Guide to Umbrella Insurance

Umbrella Insurance

If you don’t have umbrella insurance, it may be time to get it. This is especially true for high-net-worth individuals, wealthy families, and sudden inheritors.

That’s because umbrella insurance can provide extra liability protection above and beyond your existing coverage. And as your net worth grows, creditors and predators are more likely to go after your assets.

Unfortunately, the wealthy are largely underinsured, despite being attractive targets for lawsuits. Of those with at least $5 million in personal assets, one in five don’t have an umbrella policy, according to an ACE Private Risk Services report. And of those who do, nearly 25% report having less coverage than their net worth.

If you don’t have umbrella insurance or aren’t sure if your coverage is complete, here’s our guide to what it covers, how it works, and when to buy it.

What is Umbrella Insurance?

Umbrella insurance is liability insurance that offers protection above and beyond existing coverage. It becomes more valuable the wealthier you are, as you’re more likely to be a target of expensive lawsuits.

Indeed, your homeowner’s insurance policy will provide liability coverage up to a certain amount. However, umbrella insurance continues that coverage to much higher limits.

Say a visitor injures themselves on your property, for example, and sues you for an amount that exceeds your homeowner’s liability coverage. Umbrella insurance would then protect your personal assets in full, assuming you’re fully insured.

What Does It Cover?

Umbrella insurance covers you and your family against liability claims that exceed the limits of your other insurance policies. This generally includes:

  • Others’ injuries
  • Damages to others’ property
  • Certain lawsuits involving libel, defamation of character, and slander
  • Personal liability situations

For example, let’s say you’re hosting a party at your home. One of your guests accidentally falls down the stairs and gets hurt, so they sue you to cover their medical bills. Once your homeowner’s liability policy is exhausted, your umbrella insurance kicks in to cover the rest.

Alternatively, imagine your teenage son is at fault in an auto accident that results in a five-car pile-up. Some of the other drivers suffer serious injuries, resulting in high medical costs and lost wages. If your auto insurance isn’t sufficient to cover the extent of the damage, your umbrella policy would cover the additional amounts up to the limit in your policy.

Umbrella coverage often applies anywhere in the world. In some cases, it may even extend to certain rental items like boats, RVs, or cars.

What Umbrella Insurance Doesn’t Cover

There are certain instances umbrella insurance won’t cover. Examples include:

  • Intentional acts. If you intentionally cause damage, harm, or injure another person or property, umbrella insurance won’t cover you.
  • Business losses. Umbrella coverage doesn’t extend to your business, even if you operate it from home.
  • Your injuries or damage to your property. While umbrella insurance covers others’ injuries and damage to others’ property if you’re liable, it generally won’t cover your injuries and damage to your property.

How Does It Work?

Once you’ve purchased umbrella insurance, your protection is in place. If you’re involved in an accident or lawsuit and found liable, your umbrella policy will cover you above your existing liability coverage.  

Consider the following worst-case scenario:

You run a stop sign, hitting another car and totaling it. In addition, some of the passengers suffer injuries as a result.

The other car has $50,000 in damage, and the medical bills total $350,000. Meanwhile, the other vehicle’s driver is a successful cardiologist who’ll be unable to work for four months due to a broken hand. She sues you for $300,000 in lost earnings.

In total, you’re liable for $700,000. Unfortunately, your auto insurance only covers up to $250,000. With sufficient coverage, your umbrella policy will cover the additional $450,000. Otherwise, you’re responsible for paying the difference.

When to Consider Purchasing Umbrella Insurance

Generally, financial experts recommend purchasing umbrella insurance when your assets exceed your existing liability coverage. For most, this is when personal assets exceed roughly $250-300k—the average liability limit for auto and homeowner’s insurance.

Your personal risk tolerance and exposure to risk may also determine whether you need umbrella coverage. For example, if you like to host and entertain guests, you’re at a higher risk of someone experiencing injuries at your home, which may result in a costly lawsuit. In addition, if you have teenage drivers, umbrella insurance can help protect your nest egg in the event of an accident.

You may also want to consider purchasing an umbrella policy if:

  • You coach kid’s sports.
  • You’re a landlord or public figure.
  • You serve on the board of a non-profit.
  • You own property, pools, trampolines, guns, or dogs.

How Much Does It Cost?

According to the Insurance Information Institute, coverage costs about $150 to 300 per year for each $1 million in coverage.

Keep in mind that most insurance providers will also require you to have the maximum coverage amounts on your auto and homeowner’s policy before purchasing umbrella coverage. Depending on your existing coverage, this could increase your current insurance rates, thus increasing the total cost of adding umbrella coverage.

How Much Coverage Do You Need?

Policies are usually sold in $1 million increments, and coverage limits start at $1 million. While each situation is unique and coverage needs will vary, a good rule of thumb to is to purchase enough umbrella insurance to cover your current assets minus current liability coverage.

To find this number, first total your assets. Then, subtract the amount of your existing liability coverage. You can round the difference up to the nearest million to find how much umbrella coverage you may need.

A Trusted Wealth Manager Can Help

For many wealthy individuals and families, umbrella insurance is a key asset protection strategy. Having the right coverage can go a long way towards protecting your financial resources if a worst-case scenario occurs.

A trusted wealth manager like Sherwood Wealth Management can help you determine which asset protection strategies make sense for you and your family. We serve affluent individuals and families in Aspen, CO and beyond. If you’d like to develop a comprehensive plan to grow and preserve your wealth, please schedule a call.

This article was also published in The Aspen Times.

Tax and Estate Planning Tips Post-SECURE Act

Tax and Estate Planning Tips

These tax and estate planning tips can help you efficiently transfer your money to the next generation despite the SECURE Act’s elimination of the stretch IRA.

In December 2019, the Setting Every Community Up for Retirement Enhance­ment (SECURE) Act was signed into law by then-President Trump. In addition to a variety of retirement-related provisions, the SECURE Act included changes that may impact the estate plans of wealthy Americans.

Today, SECURE Act 2.0 is making headway in Congress. Meanwhile, many anticipate changes to the tax code as President Biden proposes tax hikes for the wealthy. Plus, many of the provisions included in the Tax Cut and Jobs Act are set to expire in 2025.

As these events unfold, now may be a good time to review your estate plan and look for possible tax planning opportunities.

Eliminating the “Stretch IRA”

The SECURE Act of 2019 made several notable changes to American retirement plans. Yet the elimination of the “stretch IRA” stands to meaningfully impact the estate plans of many affluent Americans.

Prior to 2020, a beneficiary who inherited a traditional IRA could stretch their required minimum distributions (RMDs) over their lifetime. Now, the SECURE Act gives non-spousal beneficiaries (with certain exceptions) a 10-year window to draw down the entire account balance. This can result in significant tax consequences for inheritors of large IRAs—especially those in the highest tax brackets.

The removal of the stretch provision eliminated a valuable estate planning strategy for many families. But there are other strategies you may want to consider building into your estate plan to minimize your heirs’ potential tax burden and preserve more of their inheritance.

Roth Conversions

The IRS allows individuals—regardless of income—to convert a traditional IRA to a Roth IRA. With a Roth conversion, you pay taxes on the amount you convert in a given tax year at your ordinary income tax rate. You can then make withdrawals tax-free if you’re over age 59 ½ and satisfy the five-year rule.

Since Roth IRAs don’t have RMDs, you can let your funds grow tax-free until you need them or transfer them to a beneficiary. However, inherited Roth IRAs do have RMDs.

Therefore, you may want to consider a second step to ease your beneficiaries’ potential tax burden—for example, creating a trust for the benefit of your heirs and naming it as the beneficiary of your Roth IRA. Just keep in mind that with some of these strategies, you may end up bearing the tax consequences instead.

Charitable Remainder Unitrusts

Another alternative to the stretch IRA is to use a charitable remainder unitrust (CRUT). Unlike a charitable remainder trust, a CRUT allows the owner to make additional contributions after the first year. Additionally, the CRUT beneficiary isn’t required to make withdrawals.

You can fund a CRUT all at once with your entire IRA distribution or over several years. While the IRA distribution is taxable, you can offset the tax consequences with the tax deduction you get from funding the trust.

The trust then pays income to your beneficiaries over a maximum period of 20 years, and these payouts are taxable. However, stretching them out over many years can make the annual tax liability more manageable. At the end of the period, any remaining trust balance transfers to a qualifying charity of your choice.

As an additional step, you can buy a life insurance policy within the CRUT once you fund it. The conversion is tax-free, as are distributions to the trusts’ beneficiaries.

Consult an Estate Planning Attorney and Wealth Manager for More Tax and Estate Planning Tips

The SECURE Act of 2019 may indeed warrant a review of your estate plan. Yet major changes may not be necessary depending on your goals.

In addition, the strategies mentioned above aren’t exhaustive and may not be appropriate for you and your family. There may be alternative strategies that make more sense. Be sure to consult an estate planning attorney and wealth manager to ensure your estate plan is aligned with your objectives.

Sherwood Wealth Management works with affluent individuals and families in the Roaring Fork Valley with a specialty in inherited wealth. If you’re looking for a fiduciary financial advisor to help you plan your legacy, please schedule a call.

As Volatility Continues, Here Are the Potential Costs of Market-Timing

The Potential Costs of Market-Timing

As stock market volatility continues into the second half of the year, many investors are growing increasingly concerned about their investment portfolios. Many have already fled the market for the perceived safety of cash. Yet market-timing is often more costly than sticking to your investment plan in turbulent times.

Indeed, long-term investors benefit from equities because of the higher returns they generate over time. This growth is necessary to outpace inflation, so that your dollars maintain their value well into the future. However, growth comes at a cost. Meaning, investors must endure periods of discomfort to successfully achieve their goals.

Naturally, staying the course may be easier said than done, especially as your account balances decline. At the same time, it’s important to remember that paper losses aren’t permanent—unless you decide to sell.

Before you let your emotions get the better of you, consider the potential costs of market-timing:

#1: The average investor consistently underperforms the broad market due to poorly timed trades.

Successful investors aim to buy low and sell high. Yet research shows that in practice, the average investor does just the opposite. Dalbar’s annual Quantitative Analysis of Investor Behavior report repeatedly shows that across time horizons, investors tend to consistently underperform broad market benchmarks by wide margins.

For example, the average equity investor earned an annualized return of 7.13% over the last 30 years through 2021. Meanwhile, the S&P 500 Index generated an annualized return of 10.65% over the same period. That means the average investor underperformed the market by about 3.5% annually over 30 years. According to Dalbar, the disparity in results can largely be attributed to investors buying and selling at the wrong times. 

#2: Market-timers are more likely to miss out on market rebounds.

When the S&P 500 dropped 34% from peak to trough at the beginning of the Covid-19 pandemic, many investors panicked. Fortunately, that bear market was surprisingly short-lived, lasting only 33 days.

The S&P 500 subsequently gained 75% over the next year. Investors who stayed the course were rewarded handily, while those who sold prematurely locked in their losses.

Research shows that while the duration and magnitude of bear markets vary, they tend to share one commonality: the recovery in the first year tends to be significant. Though no one can predict the future, there’s no reason to believe this time will be different.

#3: Deviating from your investment plan may keep you from reaching your financial goals.

No one likes market volatility. Nevertheless, when you expect it, you can plan for it. While your investments may lose value from time to time, a sound investment plan is designed to help you successfully reach your financial goals.

However, deviating from your investment plan can undo years of progress towards your financial goals. While the potential consequences of market-timing may feel abstract now, they can have a very real impact on your quality of life down the road.

How to Avoid Market-Timing in Turbulent Times

Keeping your emotions in check can be challenging—especially when it comes to your money. The good news is there are steps you can take to avoid the potential costs of market-timing.

First, be sure to set clear and realistic financial goals. Aiming too high can lead you to take on excess risk to close the gap between where you are now and where you want to be.

In addition, don’t let market activity be a reason to change your investment approach. Instead, focus on the things you can control—for example, your asset allocation, investment costs, and spending habits. Furthermore, make sure your investment portfolio is properly diversified. This may help smooth the ride over time as markets fluctuate.

Lastly, consider working with a fiduciary financial advisor like Sherwood Wealth Management who can help you develop a long-term investment plan that’s aligned with your risk tolerance and goals. We can also help you stay the course when your emotions begin to get the better of you. To get started, schedule an introductory phone call.

5 Red Flags to Look for When Hiring a Financial Advisor

5 Financial Advisor Red Flags

Want to avoid hiring the wrong financial advisor? Look out for these five financial advisor red flags during your search process.

As your financial life becomes more complex, it’s natural to seek guidance from an experienced professional. Ideally, you want someone who’s highly qualified and trustworthy to manage the details of your finances, so you can focus on the rest of your life. Yet finding and hiring the right financial advisor isn’t always as easy as it seems.

Indeed, there’s no shortage of people who call themselves a financial advisor in the United States today. According to the Bureau of Labor Statistics, there are over 260,000 “personal financial advisors” in the U.S. as of May 2021. If you happen to live in a big city or busy suburb, you may have dozens of financial advisors within a mile of your home.

So how do you choose the right financial advisor? And more importantly, how can you avoid entrusting the wrong person with your money? In this article, we’re sharing five red flags to look for when hiring a financial advisor.

Before hiring a financial advisor, look for these five red flags:

Red Flag #1: They’re not a fiduciary.

You be surprised to learn that not all financial advisors act in their clients’ best interest. In fact, only financial advisors that hold themselves to a fiduciary standard of care must legally put your interests ahead of theirs.

Meanwhile, broker-dealers, banks, and insurance companies typically hold their financial advisors to a less stringent suitability standard. That means they may be considering other factors when making investment recommendations—for example, their payout.

Keep in mind that in the United States, registered investment advisors (RIAs) must act in a fiduciary capacity. In addition, financial advisors who are CFP® professionals follow a strict code of ethics that requires them to put their clients’ interests first.

Bottom Line: If a financial advisor isn’t a fiduciary, they may not be giving you reliable advice.

Red Flag #2: They can’t explain their fees.

In general, financial advisors are compensated in client fees, sales commissions, or both. Fee-only financial advisors are paid directly by clients—and only clients—for their services. These advisors typically have a straightforward fee schedule they can show you, so you know exactly what you’ll pay for their services ahead of time. In addition, fee-only advisors have no hidden fees.

Why is this important? A fee-only compensation structure helps ensure that the financial advisor’s interests are aligned with yours. For example, if the advisor charges a percentage of assets under management, their compensation only increases if your assets appreciate in value.  

On the other hand, fee-based or commission-based advisors may earn part or all of their compensation in sales commissions. In other words, these financial advisors may be more incentivized to sell products than give advice. And since they’re paid on commission, it’s far more difficult to understand the cost to you ahead of time.

Bottom Line: A financial advisor who can’t clearly explain their fees may have hidden incentives when managing their clients’ money.

Red Flag #3: They’ll take anyone as a client.

Many financial advisors limit who they’ll accept as clients by setting minimums on investable assets, net worth, or fees. While this helps ensure their firm remains profitable, it also allows them to take on fewer clients so they can provide better service.  

If a financial advisor doesn’t have minimums or other new client criteria, you may want to ask about their assets under management (AUM) and current client base. Low AUM may indicate that their business isn’t stable or sustainable. Meanwhile, too many clients may limit the amount of personal attention you’re likely to receive.

Depending on your personal or financial circumstances, you may prefer to work with a financial advisor who specializes in serving clients like you. When your financial advisor has expertise in a certain niche, they can help point out your blind spots and anticipate future challenges.   

Bottom Line: Beware of financial advisors who will work with just anyone.

Red Flag #4: They don’t answer their phone or emails.

A recent Vanguard and Spectrum Group study revealed that four of the top five reasons investors fire their financial advisor have to do with communication. Asking a financial advisor how often you can expect to hear from them up front can help you avoid potential issues down the road.

In general, a financial advisor should meet with you formally at least annually to review your investment plan and progress towards your financial goals. However, life changes and other circumstances may warrant more frequent contact.

If nothing else, you should feel confident that your financial advisor will be available and responsive when you need them. If you call or email and don’t hear back—or only hear from their assistant—this may be an indication of the level of service you’re likely to receive as a client.

Bottom Line: If communication is rocky from the get-go, don’t expect it to change once you become a client.

Red Flag #5: They don’t have a clean regulatory history.

Lastly, make sure any financial advisor you’re considering has a clean history. Licensed financial advisors and RIAs must make regulatory deficiencies available to the public.

To research this information yourself, you can leverage free tools like FINRA’s BrokerCheck and the SEC’s Investment Adviser Public Disclosure website. These websites contain information about past regulatory issues as well as the outcome (unless the outcome is pending). They will also give you more insight into an advisor’s history and how they run their business.

Whether you think a financial advisor is risky or not, be sure to spend some time on these websites before meeting with them. If nothing else, you can make sure their answers align with the information that’s available online.

Bottom Line: If a financial advisor doesn’t have a clean history or can’t explain their history to your liking, move on.

Hiring a Financial Advisor You Can Trust

Of course, this is not a comprehensive list of red flags you may encounter when interviewing financial advisors. However, if any of these red flags pops up during your search, it’s probably a sign you should move on and find someone else to entrust with your wealth.

In addition, be sure to pay attention to your overall comfort level and chemistry with the advisors you interview. Did you like them? Did they ask good questions and listen to your responses? And most importantly, do you trust them? If you’re still not sure, ask if they can share a few client references that you can contact. Ultimately, you should feel completely confident that your money and future are secure.

Sherwood Wealth Management specializes in inherited wealth. If you’ve recently inherited a windfall or your financial situation has gotten too complex to manage yourself, we invite you to schedule a call to see if we’re a good fit.

Rising Interest Rates and Your Portfolio

Rising Interest Rates and Your Portfolio

If you’re unsure how rising interest rates may impact your investments and overall wealth plan, here’s what to look out for and how you can prepare accordingly.

For over two years, the Covid-19 pandemic has presented a variety of new challenges to our health, lifestyle, and the economy. As the pandemic wanes, we continue to feel the impact of ongoing labor shortages and supply chain disruptions.

One of the most pronounced effects of the pandemic in recent months is record-high inflation levels. As a result, the Federal Reserve announced their first interest rate hike since 2018 in March, and economists expect several more increases this year.

Indeed, many of us have grown accustomed to near-zero interest rates. If you’re unsure how rising interest rates may impact your investments and overall wealth plan, here’s what to look out for and how you can prepare accordingly.

#1: Rising Interest Rates and Your Real Estate Portfolio

The federal funds rate influences the prime interest rate, which lenders use to determine interest rates for credit cards and other loans, including mortgages.

Up until recently, mortgage rates have been relatively low for borrowers with strong credit. However, earlier this month, the average rate on the popular 30-year fixed mortgage crossed 5% for the first time since 2011 (except for two days in 2018).

For some people, rising mortgage rates may add to the pain of an already hot housing market. If you have the resources, you may want to consider paying off mortgage debt ahead of schedule to eliminate the expense entirely. Alternatively, refinancing may help you lock in a lower fixed rate before interest rates potentially soar higher.

#2: Rising Interest Rates and Your Bond Portfolio

In general, bond prices fall as interest rates rise (also known as interest rate risk). As governments and private companies issue new bonds at higher rates, old bonds become less attractive and therefore lose value.

Not all bonds are equally sensitive to interest rates. Interest rate sensitivity is measured by duration; the longer a bond’s duration, the more sensitive its value is to changes in interest rates. One way to reduce interest rate risk in your bond portfolio is to shift towards shorter duration bonds.

However, if you have a longer time frame to invest, you may not want to make any changes to your portfolio. As your bond holdings mature, you can reinvest them at higher rates in the future.

It’s also worth noting that higher yielding and lower quality bonds tend to be less sensitive to interest rate changes. Of course, these types of bonds can introduce other risks to your portfolio. So, be sure to do your homework first.

#3: Rising Interest Rates and Your Stock Portfolio

It’s cheaper for businesses to borrow expansion loans when rates are low, which is generally seen as favorable for the economy. On the other hand, the prospect of rising interest rates typically signals slower economic growth. This, in turn, tends to spook equity investors (at least temporarily).  

At the same time, bonds and cash often become relatively more attractive as interest rates rise. This can cause stocks to lose value as demand shifts from equities to income-generating securities. And as personal debts become more expensive to service, consumers tend to spend less, further driving down stock prices.

You may not want to abandon your equity investments altogether. However, a diversified portfolio can help mitigate potential volatility as interest rates rise.

#4: Your Savings

With interest rates close to zero for the last several years, savers have earned virtually nothing on cash. Currently, the average savings account interest rate is 0.06%, according to Bankrate’s weekly survey of institutions.

One benefit of rising interest rates is that you may earn a higher rate of return on your cash. Just don’t expect a dramatic change immediately. Deposit rates are typically much slower to respond to changes in the federal funds rate.

Bottom Line: Don’t Panic

With rates at historic lows for so long and inflation at record highs, it’s no surprise that a new rate hike cycle is underway. If you have a disciplined wealth management plan, there’s no reason to panic. Interest rates tend to be cyclical and will eventually return to more normal levels.

If you don’t have a plan for your wealth, you may want to consider working with a trusted advisor like Sherwood Wealth Management. A long-term plan can help you navigate the inevitable ups and downs of the market. And it can help you successfully weather periods of uncertainty. To get started, please schedule a complimentary consultation.

Funding Education Expenses for the Next Generation: 4 Tax-Efficient Strategies

Funding Education Expenses

As the cost of college tuition continues to rise, many people are looking for ways to reduce these expenses. And if you’ve accumulated significant savings, you may be seeking tax-efficient ways to transfer your wealth to the next generation. Funding education expenses for your younger family members can be a great way to achieve both objectives. 

Taxes on Gifts

Unfortunately, gifting large sums of money to family members often comes at a cost. Currently, you can gift up to $16,000 annually ($32,000 per couple) per beneficiary without triggering the federal gift tax. The IRS also imposes a generation-skipping transfer tax (GST tax). This tax discourages people from deliberately skipping the next generation in their estate plan in favor of younger generations.

Indeed, these taxes can be a headwind for assisting younger family members financially. Fortunately, there are strategies you can use to transfer wealth without incurring a hefty tax bill—especially if your younger family members seek higher education. 

Consider these four tax-efficient strategies to fund education expenses:

Strategy #1: Fund Education Expenses Directly

One of the simplest ways to fund your family’s education expenses is to pay the educational institution directly. First, you’ll avoid gift and GST taxes. In addition, the amount won’t count towards your annual exclusion or lifetime exemption. 

Notably, this strategy doesn’t limit you to funding college-related expenses. You can pay for any level of education for your family members tax-free, so long as you write the check directly to the institution. 

Strategy #2: “Superfund” a 529 Plan

A 529 plan is an investment account that offers certain tax advantages if the funds go towards qualifying education expenses. Currently, you can contribute up to the annual exclusion amount each year without incurring the gift tax. 

In addition, many people don’t realize that you can contribute up to five years of gifts at once, per beneficiary. Meaning, in 2022 you can contribute up to $80,000 ($160,000 per couple) to a 529 plan at one time. That money can then grow tax-free until the beneficiary is ready to withdraw it.

It’s important to note that the tax treatment of 529 plans varies by state. To avoid unintended tax consequences, be sure to speak with your financial advisor before using this strategy. 

Strategy #3: Make Annual Tax-Free Gifts

If you can’t “superfund” a 529 plan, you can make annual contributions up to the annual gift exclusion limit tax-free. Alternatively, you can fund a Uniform Transfer to Minors Act (UTMA) account, an IRC Section 2503(c) Trust, or a Crummey Trust.

These accounts have similar benefits to a 529 plan but allow you to maintain more control over your gifted assets. However, these strategies can also be more complicated. It’s typically a good idea to consult a trusted advisor to determine what type of account makes most sense for you and your family.

Strategy #4: Lend Your Family Members Money

You may want to support younger family members financially without gifting them money outright. Instead, you can lend them money to pay for their education expenses.

Each month, the IRS releases Applicable Federal Rates, which represent minimum interest rates for family loans to avoid tax complications. These interest rates vary depending on the term of the loan. However, they’re typically more favorable than federal or private student loan rates. 

Funding the Next Generation’s Education Expenses

If you’ve been fortunate enough to accumulate significant wealth during your lifetime, you may be thinking about ways to pay it forward to the next generation. Since the IRS makes it difficult to transfer wealth completely tax-free, careful tax and financial planning can be beneficial. 

If you’d like to speak with a fiduciary wealth advisor about incorporating some of these strategies into your financial plan, please give us a call. We’d be happy to help. 

Stock Market Volatility Is Spiking, But Don’t Panic

Market Volatility Is Spiking

Markets are off to a bumpy start so far this year, and many investors are concerned about what this means for their investment portfolios. Indeed, record-high levels of inflation, the likelihood of rising interest rates, and the ongoing Russia-Ukraine conflict are causing fear and uncertainty in financial markets. But just because market turbulence is uncomfortable doesn’t mean it’s time to panic. If you’re a long-term investor (i.e., you don’t need to access your funds for at least 10 years), it’s important to keep market volatility in perspective.

What’s Causing Recent Market Volatility?

Rising inflation has been a source of concern for investors since the start of the year. Ongoing supply chain issues and labor shortages due to the Covid-19 pandemic sparked an uptick in prices beginning in early 2021. Though the Federal Reserve initially dismissed rising prices as transitory, it has since adjusted its stance. Now, it seems likely the Fed will raise interest rates 0.25% this month.

However, the Fed has been very transparent about its intention to increase interest rates. Consequently, markets are unlikely to react strongly to the news if the Fed proceeds as planned. Instead, investors remain focused on the conflict in Ukraine, which has caused a surge in oil prices and pushed U.S. stock prices lower.

Geopolitical Events & The U.S. Stock Market

U.S. stocks have been on a rollercoaster ride since Russia invaded Ukraine. And while volatility is unsettling, it’s not unusual given the many uncertainties this conflict creates. Though we don’t know how this will play out, nor do we know how long it will last, we are likely to see more volatility in the near-term.

On the bright side, stock market volatility has historically been short-lived following geopolitical events. In the United States, the median stock market drawdown due to geopolitical shocks was -5.7%, according to data from Deutsche Bank. Moreover, these drawdowns tend to take around three weeks to reach a bottom and an additional three weeks to recover. On average, the market was 13% higher from the bottom 12 months after.

Other data shows that since World War II, U.S. stocks were higher three months after a geopolitical shock, on average. And following about two-thirds of those events, they were higher after only one month.

What Does Market Volatility Mean for Long-Term Investors?

Unfortunately, volatility is the price investors pay for investing in stocks. But the good news is long-term investors tend to be rewarded for enduring these periods of discomfort. Finance professionals refer to this concept as the equity risk premium. Investors can expect to earn a higher rate of return on stocks over time to compensate them for taking on higher levels of risk.

In fact, the average annualized return of the S&P 500 Index since its inception in 1926 through the end of 2021 is 10.5%. That includes every correction and bear market since the index’s inception.

In other words, while volatility is an ever-present force, the equity risk premium endures. It’s this trade-off that allows long-term stock investors to outpace inflation and grow their financial resources for the future. Moreover, volatility often provides investors with the opportunity to purchase stocks at discounted prices, which can boost returns over time.

Bottom Line: Stay the Course

Historically, investors who stay the course during periods of uncertainty ultimately reap the rewards. We have no reason to believe this time will be different.

If you’re considering abandoning your investment plan, turn off the news and focus on what you can control instead. In addition, avoid checking your account balances too frequently. This may provoke you to make unnecessary trades that aren’t in your best interest. Lastly, consider working with a trusted financial advisor like Sherwood Wealth Management, who can help you develop an investment strategy that’s aligned with your goals, time horizon, and tolerance for risk. 

This article was also featured in the Post Independent.

You’ve Just Inherited a Windfall—Now What?

Inheriting a Windfall

Inheriting a windfall may seem like the answer to all of your financial problems. Yet sudden wealth is often a double-edged sword.

While money certainly allows you more freedom, it can also create new problems if you aren’t prepared to manage it. Fortunately, there are steps you can take to protect, preserve, and grow your newfound wealth, whether you’ve been anticipating it, or it comes as a complete surprise.

Consider taking these steps After inheriting a windfall:

1. Set Your Funds Aside for a Few Months

Though you may be anxious to put your new wealth to work, the best first step after inheriting a windfall is often to do nothing at all. This is especially important if the inheritance substantially changes your net worth. It may take a while to get comfortable with your new reality.

A conservative rule of thumb is to leave the inheritance untouched for at least 90 days. During that time, you can begin to assemble your wealth management team.

2. Determine the Tax Consequences

As Benjamin Franklin famously said, “Nothing is certain except death and taxes.” If you come into a large sum of money, it’s important to understand the potential tax consequences before making any big decisions.

A CPA or financial planner can help you determine your potential tax liability. In addition, they can recommend strategies to minimize the taxes you owe.

3. Eliminate High-Interest Debt

Once you come to terms with your newfound wealth and understand the tax consequences, you can focus on setting financial goals and developing your wealth plan. Typically, a good first step is to eliminate high-interest debt.

If you have so-called “bad debt” like credit card or other high-interest loans, paying it off with a portion of your inheritance can reduce financial stress and save you money over time. Additionally, if you have student loans you’ve been carrying for a while, now may be a good time to pay those off once and for all.

Having too much debt can create a variety of financial challenges. However, that doesn’t mean you need to eliminate all debt. For example, if you’ve locked in a low interest rate on your mortgage, you may want to focus on other financial priorities before paying off your home.

4. Check Your Emergency Savings

No matter your net worth, it’s important to have cash set aside for unexpected expenses and potential setbacks. Tying your wealth up in investments and illiquid assets can create difficulties if you need cash quickly.

Though most financial experts recommend having three to six months of living expenses in emergency savings, this is a broad rule of thumb. Consider consulting with a trusted financial advisor to determine how much cash makes sense for you.

5. Maximize Tax-Advantaged Accounts

Whether you’re working or not, tax-deferred retirement and health savings accounts can be useful tools for preserving more of your wealth long-term. Be sure to review which accounts are available to you and maximize their benefits.

If you’re still working, you may now have an opportunity to supplement your income with your inheritance so you can max out your retirement plan contributions. In addition, individual retirement accounts offer meaningful tax benefits, especially if you plan to invest long-term.

Lastly, health savings accounts (HSAs) offer unique tax savings as you can contribute, invest, and withdraw your funds tax-free, so long as you use them on qualifying healthcare expenses. However, not everyone is eligible to open an HSA. If you have a qualifying high-deductible health plan (HDHP), you may want to explore this option.

6. Invest for Your Financial Goals

When you come into sudden wealth, it’s not unusual for long-lost friends, family members, and other acquaintances to come out of the woodwork looking for opportunities to prey on your good fortune. While you may be tempted to invest in their startup or investment scheme, remember: if it seems too good to be true, it probably is.

Instead, start by creating a list of financial goals. For example, do you have young children you’d like to send to college? Do you want to stop working altogether or buy your dream vacation home?

Then, work with a trusted financial advisor to develop an investment plan that helps you achieve these goals without taking on unnecessary risk. This approach may not seem as exciting as investing in a friend’s startup venture. However, you’re more likely to preserve and grow your wealth following a disciplined investment plan.

7. Treat Yourself

Having a plan for your wealth is important. However, money should also be enjoyed. If there’s something you’ve always wanted to do but money has been an obstacle, now is the time to make those dreams come true.  

Perhaps you can finally take that exotic vacation you’ve been thinking about. Or your dream car is suddenly within reach. There’s nothing wrong with treating yourself. Just make sure you consider your long-term game plan, too.

Bottom Line: If you’re inheriting a Windfall, Manage Your Wealth So You Can Enjoy It Long-Term

Inheriting a windfall can be exciting and daunting at the same time. These steps can help you set yourself up for success, so your newfound wealth lasts through your lifetime and beyond.

If you anticipate an inheritance or other windfall or have recently come into sudden wealth, speaking with a fiduciary financial advisor like Sherwood Wealth Management can help. We specialize in the unique financial planning needs of inheritors and sudden wealth beneficiaries and always put our clients’ needs first. Please schedule an introductory consultation to see if we may be a good fit to help you manage your wealth.

Assembling Your Wealth Management A-Team After a Windfall

Assembling Your Wealth Management A-Team After a Windfall

After inheriting a windfall, the first step towards protecting your wealth is to assemble your wealth management A-team.

If you are the beneficiary of sudden wealth, you’re probably thrilled–but also potentially nervous about how to handle your money. You don’t want to make a mistake and owe a significant tax bill, purchase bad investments that quickly lose value, or overspend on luxury items you don’t really need.

What you do need is a team of highly qualified professionals who have your best financial interests in mind and can work with you to properly oversee your newfound wealth. After inheriting a windfall, consider these four financial experts who can provide you with the knowledge and advice you need.

A Qualified Fiduciary Financial Advisor

When you are the beneficiary of sudden wealth and need assistance with managing it, a fiduciary financial advisor should be the first person you speak with. An expert fiduciary advisor will work with you to understand your priorities for your wealth and develop a comprehensive plan to meet your objectives.                                                               

Unlike product-driven financial advisors, a fiduciary advisor has a legal obligation to put your best interests ahead of their own. Fiduciary financial advisors generally charge for their services based on a fee-only structure and do not receive any commissions for financial products that they recommend. In addition, they are required to fully disclose any conflicts of interest, must be loyal to their clients, and always act in good faith.

If possible, seek out a financial advisor who holds the CERTIFIED FINANCIAL PLANNER™, CFA®, or other advanced designation. These professionals must pass rigorous exams to demonstrate their knowledge and are typically held to the highest ethical standards.

A Knowledgeable CPA With Understanding of Tax Laws

Next on your wealth management A-team should be a Certified Public Accountant (CPA). A CPA is someone who has obtained significant experience and educational training in accounting skills, including auditing and taxation. They must pass four rigorous exams and usually have relevant, hands-on industry experience.

A CPA can advise on tax issues related to inheriting a windfall. They can also recommend strategies for reducing your potential tax liability. In addition, CPAs can coordinate with your fiduciary financial advisor to ensure that any wealth planning initiatives consider the potential tax ramifications.

An Informed Estate Planning Attorney

As a beneficiary of sudden wealth, it’s imperative to appoint a good estate planning attorney as part of your wealth management A-team. An estate planning attorney is a licensed legal attorney who can advise you on how your assets will be valued, dispersed, and taxed after your death.

In addition to probate advice, they can assist you with the following:

  • Creating a will
  • Designating your beneficiaries
  • Establishing a power of attorney
  • Finding ways to reduce estate tax where possible
  • Setting up trusts to protect your assets

In addition, estate planning attorneys may act on your behalf in case of disputes. They can also ensure your will is carried out according to plan when the time comes.

A Trustworthy Private Banker

Lastly, some beneficiaries of sudden wealth choose to enlist a private banker to help protect their assets. Many large financial institutions offer private banking as an enhanced service for high-net-worth clients.

Private banking often gives you access to a dedicated personal banker. You may also receive discounts or preferential pricing on certain products and services. Private banking may be appropriate for some inheritors of sudden wealth. Still, it’s important to note that private banking usually isn’t an adequate substitute for a full-service, fiduciary wealth manager.

Consider Sherwood Wealth Management for Your Wealth Management A-Team

If you’re the beneficiary of sudden wealth, consider working with a fiduciary financial advisor like Sherwood Wealth Management. Our boutique firm helps clients navigate newfound wealth in a supportive environment where your interests always come first. In addition, we help coordinate all aspects of your financial life. We’ll work with the other members of your wealth management A-team to protect and preserve your assets for generations. Contact us today to schedule an introductory call.