Do you want to shave your tax bill, while also benefiting your favorite charity?
I know I get excited anytime I can knock out two or more items with a single punch (i.e. the old kill two birds with one stone analogy). I am sure many of you are like me.
In fact, this weekend is a great example as we celebrated Father’s Day for my father-in-law and combined that with my daughter’s 22nd birthday. How much more bang for the buck can you get unless maybe you were also celebrating everyone in the family’s birthdays the same weekend! I am sure my wife will not let me get away with that one!
Today, I am going to give you three strategies that can help you kill two birds with one stone. They are two-fers (i.e. two for one ideas)!
Donate Appreciated Stock
Let’s face facts, after a ten-year economic cycle, we all should have some stocks, mutual funds or ETFs that now have low cost basis. This is the perfect time to give these appreciated marketable securities to charity instead of your hard-earned cash in the form of after-tax dollars.
It seems so simple, but very few people consider it. As an example, we run a strategy called IA Equity Value whereby we buy and hold the ten highest dividend paying stocks in the Dow Jones Industrial Average, plus three additional positions that are either long or short at any point in time. (You can reach out to me if you want additional information on this strategy).
The ten highest yielding stocks in the Dow Jones Industrial Average are rebalanced annually and do not change much from year-to-year. They tend to have some pretty large built-in gains when they do change.
The strategy then is to donate that stock or stocks that will change in the annual rebalance, and then use the cash you would have used for charitable donations to buy the replacement stock positions.
The result is a full charitable deduction for the donations (subject to certain limitations), the removal of a possible source of future capital gains from portfolio and the ability to rebalance without tax consequences. Pretty neat huh?
Most charities will accept donations of marketable securities or you can use a donor advised fund to transfer the stock and then make your donations at a later time. Either way it works well.
Qualified Charitable Distributions
This second idea is only available to those taxpayers over age 70 and with large Individual Retirement Account (IRA) holdings. Although, I don’t know why Congress does not lower the age limit on this idea?
A Qualified Charitable Distribution is the ability of a taxpayer to give to charity directly from their IRA up to $100,000 per annum. This gift allows the taxpayer to avoid the ordinary income tax on the distribution and still support their favorite charity.
The taxpayer does not receive a charitable deduction, but with the new higher standard deductions under the Tax Cuts and Jobs Act of 2017, this may not be a big deal.
For more on this strategy see our past post entitled “Help Your Favorite Charity And Save Tax Dollars.”
Our final two-fer is gift sequencing. What is gift sequencing? It is timing charitable gifts as to most benefit you and your income tax situation.
Here is a simple example, let suppose you have been giving $10,000 annually to your favorite church, synagogue or temple. Unfortunately, these charitable expenses, your mortgage interest and property taxes add up to just $23,999, when the new standard deduction of $24,000 for married filing joint clients. This essentially gives you no incremental tax benefit for these cash outlays since you are $1 shy of the standard deduction amount.
In our example, let suppose it is also nearing year-end and you closed on the sale of a property or received a large bonus. Lucky you!
The solution is gift sequencing. In this example, why not make next year’s $10,000 charitable gift in the current year to essentially double up your charitable deductions in the current year. In most cases, you will not make a charitable contribution next year and will double up again the year after.
This does two things, it puts you over the standard deduction and allows you to deduct $9,999 of charitable contributions that would likely not be deductible next year given similar inputs. It puts real money back in your pocket.
Secondly, if you use a donor advised fund like Fidelity Charitable Gift or Vanguard Charitable Fund, you can still decide when to ultimately put that money in the hands of the charity based on when and how you make grant recommendations. Obviously, you need to be supporting a real 501(c)3 charity or you risk your grant recommendation being denied, but for most of you that should not be a problem.
There you have it, how to get more bang for your charitable buck while potentially reducing your income tax bill. Let me know your thoughts or ideas.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.
Did you know that in Florida whatever property or assets that do not have a beneficiary designation, a joint title or are not titled in the name of a trust, must go through the probate process at your demise?
It does not matter whether your estate is taxable for Federal Estate purposes or not.
Why do you care?
Simple, in Florida the cost of probating an estate can be expensive. It is also required that an attorney probate an estate. There is no do-it-yourself option, especially if you are the “dearly departed” one.
Absent a negotiated fee structure, attorneys have the statutory right to charge based on the size of the probate estate in Florida.
The statutory Florida rate schedule is below and starts at 3.75% for a $40,000 estate:
These fees are only for “ordinary” services. Anything the lawyer does that isn’t ordinary—for example, handling a will contest or giving tax advice—is presumed to justify a larger fee. If a lawyer follows the fee schedule, the fee may be almost unrelated to the amount of legal work done. It may be the same amount of work to handle a $1 million brokerage account as it is to probate a $100,000 account—but under the statutory fee schedule, the bill for the million-dollar account would be ten times larger.
Now you may be ready after reading this to immediately go “those dirty rotten attorneys” and quite frankly this article is not intended to denigrate our estate attorney friends. It is to merely point out that this process can be expensive and like much in life, a little advanced planning goes a long way.
Here are few things you can do in advance to lower that cost:
1) Establish Your Beneficiaries
The simple answer to this issue is to make sure every asset you own that can have a beneficiary designation has one. This includes every retirement account such as 401(k)s, 403(b)s, IRAs and even your life insurance policies.
Be sure to name both a primary and contingent beneficiary in case you and your primary beneficiary would to perish at the same time.
2) Joint Ownership for Some Property
The next not so simple answer is to consider how your taxable accounts and assets are titled. For example, if you own a home and many Americans do, consider holding it in joint tenancy with the right of survivorship with your partners. If you live in a state, such as Florida, that allows tenancy by entireties for married couples, consider holding the title to the home or vacation house as tenants by entirety.
3) Pay-On-Death or Transfer-On-Death Designations
If you own a bank or investment account, it is now possible to designate someone as a beneficiary on many of these accounts. This is called either Pay-On-Death (POD) or Transfer-On-Death (TOD). Unlike some joint ownership structures, the POD or TOD beneficiary has no rights to this property while you are still alive.
4) Fund that Trust
How about those ownership interests in businesses, partnerships or other investments where there are no POD or TOD options?
Ideally these assets are titled in the name of your revocable trust. You know revocable trusts are not just for the affluent. They can be a viable option for anyone!
Let me give you a recent example from one of our families.
We recently started working with a new family with a successful medical practice. When we started looking at her ownership interests in various entities, we noticed that they were all in her name personally.
When we sat down with her and explained that her $12.1 million in entity values would have to go through probate on her demise she seemed disinterested.
We then explained that these assets would be in the public record at her demise, she perked up a little. However, she figured she would be gone anyways and who cares what the public knows at that point.
However, when we explained that these assets would cost her estate an estimated $215,000 in legal fees based on the statutory schedules above as part of the estate process in Florida, that is when she fell off her chair.
The solution is a simple assignment agreement for each of her 20 entities and probably less than $5,000 in legal fees today.
Would you rather pay $5,000 today to save your heirs $210,000 tomorrow? I think just about anyone would.
However, the truth is the most neglected step in the estate process for the affluent is the retitling of assets, called funding the trust.
The moral of the story today is a little advanced work, can save your heirs a lot of headache and your estate money in legal fees.
It is a little like the old FRAM oil filter commercials, “You can pay me now or you can pay me later.” The same concept applies here, except the bill down the road could be much larger.
A word of caution, although it is easy to implement some of the ideas, above, to reduce legal fees in the probate process, there are many pros and cons to blindly relying on beneficiary designations, joint ownership, and POD designations. It is recommended you always seek the help of a qualified attorney in this process.
Let us know how we can help.
In this month's post, we will try to answer the nagging question on so many minds today. Is this a new bull market or just a big bear market bounce?
Let's start with a bit of a primer on how we view markets. First, we are a technical shop. Yes, we look at some fundamental data (example, sequential GDP growth or decline), however we also believe the charts reflect all known information at any point in time from a fundamental perspective.
We use monthly charts the same way you might use a Google Maps satellite view to see the big picture on an area. Can you tell where this is?
We use weekly charts to determine trend or the intermediate term direction of the markets as reflected, below, for Apple Inc. and Sears Holdings Corp.
As you can see in our examples above, Apple is still in an uptrend. Sears (right) is still in a downtrend despite the recent bounce.
Finally, we use daily charts to determine short-term buy or sell timing and overbought or oversold conditions that could lead to market strength or weakness.
We will come back to this chart later for a deeper dive.
Is this a new bull market or just a big bear market bounce?
The short answer is that no one knows for sure. I could make the case that we could see a significant rally from here to new highs. Not necessarily as the start of a new bull market but as a final blow off top.
I can also make the case that this is just a bounce in a consolidation range that will eventually move higher or lower from the range. This is the case I will show you today and that seems to make the most sense to me now..
Since we are now in year ten of an economic expansion, typically you would assume the next move would be down, but in this managed economy anything is possible!
The big picture
The big picture is simple: We have entered a period of consolidation in the markets where it will trade in a large range or we are in a bear market. That is it. There are no other options!
That is not to say we cannot eventually leave this consolidation range and enter a new bull phase, but right now we just don't have the visual evidence to make that proclamation.
Let's take a closer look at the monthly S&P 500 index chart to see why I make this statement.
Notice how on this monthly chart, the last several times the lower MACD histogram (in blue) fell below its zero line, it either meant a consolidation phase as in 2015-2016 or a full blown bear market in stocks as in 2007-2008. It has never ever been anything else.
If you go back in history as far as we can chart, you only see these same two choices: consolidation or bear market. So we can narrow all options to these two things. It is not a new bull market as some would like you to believe, at least not yet.
I also want to point out that it is not uncommon to see a move down and then get a large bounce like we have seen in 2019. You can see a number of historical large bounces following the MACD histogram crossing its zero line to the downside such as in 2015, 2008 and even 2000 after that initial leg or move down.
If we follow the script from 2015-2016, we will likely test the prior highs and then retest the 2018 lows in a large vacillating range until we break either higher or lower from the range.
If we follow the 2007-2008 script, this bounce in the markets will eventually lead to lower equity prices as the bear market really gets rolling.
So which is it? Lets focus on some shorter term charts to see if we can find an answer.
The Trend is Your Friend!
Traders have sayings like "the trend is your friend" or "don't fight the trend." It is true, it is very tough to make money when you are not aligned with the trend.
So what is the trend of the markets?
Below, we see a weekly chart of the S&P 500 index. What it shows is that we are in a bullish or upward trend on intermediate term basis.
A couple of interest points:
1) We are very overbought. The candle that formed at the end of last week can be a reversal candle (called a Doji in Japanese Candlestick trading) and I would not be surprised to see us finally pull back and give up some gains here. We have drawn out this possible pullback in blue dotted lines to the right of the actual market data.
2) When the lower chart window MACD histogram moves above its zero line, we typically have at least one thrust higher, followed by a pullback and a final thrust higher. You see this visually in the histogram forming several humps as I call it with a lower dip in between when it is above the zero line. It is possible that is what is happening here and that might portend a retest of the 2018 highs also drawn in the blue dotted line.
3) The big question in our minds is "what happens as we approach the old highs?" Obviously, there are two choices: 1) we break to new highs or 2) we bounce lower from without making new highs. At this point, no one knows what will happen if we retest the 2018 highs.
How do I know the market is not going to just take a nose dive and move substantially lower when it starts to correct? First, most market participants seem much more comfortable that I relying on Central Banks for direction and at the moment they are telling us all is fine! Second, the black and red moving averages that surround the MACD indicator at the bottom of the chart are still widening. If they were ready to cross that might be a whole different scenario! A widening set of MACD moving averages generally mean there is continued upside in the stock or index.
The Short Term View
Finally, let's take a short-term market view. Again we will focus on the broad S&P 500 equity index.
Let's go back to the chart I showed you at the beginning of this post and let's notice a couple of things that might point to the market's next short-term move.
First, we have reached the next area of resistance (in yellow) where prior market moves have stalled. So far we appear to be stalling here as well.
Second, Friday's price candle did a common retest of the prior day's highs and also is reflecting a possible reversal candle know as a Doji in Japanese candlestick trading.
A word of caution, this market has already taken out level after level of what we call resistance getting to Friday's close, it could do so again. Also, this market is really being driven by Central Bank liquidity, U.S. China trade news and corporate share buybacks so it may not heed traditional technical levels depending on what is said, agreed to or implemented in the coming days by those aforementioned Central Bankers or our elected officials in Washington.
However, at this time, we believe there is a chance the markets pull back here. If you were to ask for a price target for the pullback, I would guess that we might hit the bottom of the risk range at 2700 before we bounce higher.
The U.S. markets appear to be in a period of consolidation at present. We would expect it to move within a large trading range from the December lows to the November 2018 highs.
They will eventually exit the range and this will either start a bear market move lower or the next bull market leg. If it is the latter, it will probably be a historical blow off to the upside leg that could mean big profits on the way up.
On an intermediate and short term basis, we expect the markets to pull back and then move higher, eventually retesting the prior November 2018 highs. Whether it then breaks to new highs or rolls over and retests the December 2018 lows at that point is really anybody's guess. I would tend to thing the latter, but in this managed market anything is possible.
I hope this has helped you see the markets over three different time periods.
I would love to hear your comments and feedback. Was this too much information or too technical? Did you enjoy it? Do you differ in your perspective? Feel free to leave a comment below.