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Lang Investment Services Life Insurance

Common Tax Traps Involving Life Insurance

Life insurance delivers cash to beneficiaries when it’s needed most. Plus, if the policy is properly structured, the beneficiaries receive the death proceeds income tax free. By understanding potential tax traps related to life insurance, you can avoid costly mistakes. A few of the most common pitfalls are outlined here.

Three people on a policy

If you gift property to another person, the transfer triggers gift taxes based on the taxable value of the gift. When you transfer ownership of an existing policy to someone other than your spouse, the gift is immediate and generally approximates the cash value. There is an important exception, however. When the owner, the insured, and the beneficiary are three different people, the gift occurs when the insured dies, and the death benefit is treated as a taxable gift from the policy owner to the beneficiary. Under what is known as the Goodman Rule, the gift is no longer based on the policy’s cash value but, rather, on its death benefit.

The solution is to eliminate one party. To avoid potential gift taxes, the owner and the beneficiary or the owner and the insured should be the same person. If the goal is to benefit a third party, an irrevocable life insurance trust should be the owner and beneficiary of the policy.

Three people on a policy in a business situation

This scenario is similar to the previous trap except that, rather than triggering gift taxes, the death benefit is treated as taxable compensation of the employee (or as a dividend of a shareholder). For corporate-owned policies with personal beneficiaries, the business is deemed to have received the death proceeds and then paid them to the employee or shareholder’s family. Thus, the beneficiary owes income taxes on the death benefit as a distribution from the business.

One possible solution is an endorsement split-dollar arrangement. With this kind of plan, the business owns the policy but allows the employee to name a personal beneficiary. While the employee is working, the employer is taxed on the policy’s “economic benefit.” If the policy is properly structured, the death proceeds should be income tax free. Keep in mind that a notice and consent requirement must be met before an employer-owned life insurance contract is issued.

Alternatively, an executive bonus plan can eliminate the tax-on-death problem. The business pays the premiums for a life insurance policy personally owned by the employee. While the employee is working, the payments are treated as additional taxable compensation.

Exchange of a policy encumbered with a loan

Under Section 1035 of the Internal Revenue Code, you can exchange one life insurance contract for another without triggering income taxes. But when an existing loan is extinguished in the exchange, it may cause unwanted tax consequences. Generally, if the loan will be cancelled (discharged) in the course of the exchange, then the amount of the loan is treated as ordinary income up to the amount of the policy’s gain. The first-in, first-out rule does not apply when a withdrawal is made from the cash value to pay off a loan during or shortly before a 1035 exchange transaction.

One solution is to arrange for the new life insurance policy to take over the existing loan. Because you’re in the same economic position before and after the exchange, no gain should result. But keep in mind that the loan may affect the new policy’s performance and possibly shorten or eliminate the guaranteed death benefit.

Alternatively, you may wish to pay off the loan with out-of-pocket dollars before the exchange. One word of caution: a normally tax-free withdrawal of basis to pay off the loan shortly before an exchange is treated by the IRS as a step transaction and can trigger taxes.

Gift of a policy encumbered with a loan

Typically, the gift of life insurance creates no income tax recognition for either the donor or the recipient, although gift taxes may be involved. When a policy is subject to a loan, however, the transfer of the policy relieves the original policy owner of the debt. Because the donor is deemed to have received an economic benefit from transferring the loan obligation to the new policy owner, the transfer is treated as if the policy were sold. If the loan exceeds the policy owner’s basis, the donor will recognize taxable income.

Lapsing a policy encumbered with a loan

One key benefit of permanent insurance is the right to take out a policy loan without having to qualify financially. An insurance company makes a policy loan from its general fund using the policy cash value as collateral. Repayment of the loan principal or the annual interest is optional, and unpaid interest is added to the loan principal. If the borrower fails to repay the loan before the death of the insured, the money is simply withdrawn from the insurance death benefit before it is distributed to the policy beneficiaries.

It’s important to note that life insurance contracts may have an automatic premium loan provision that authorizes the insurance company to lend money to pay the premiums if the policyowner fails to do so. Left unmonitored, an automatic loan provision can result in a lapse of the policy and unexpected taxes.

Taking a withdrawal in the first 15 policy years

Normally, a withdrawal from a policy’s cash value is treated as coming first from cost basis and subsequently from the contract’s gain, resulting in a one-to-one reduction of the death benefit. There is an important exception, however. A withdrawal from a universal life or variable universal life policy within the first 15 policy years will be treated as coming from gain first, if there is any.

To deal with this risk, some insurance companies allow for up to a 10-percent withdrawal with no reduction in the death benefit. If you wish to take more than 10 percent of the policy’s cash value, consider structuring the transaction as a loan. Be sure to weigh the long-term cost of the loan against the potential tax associated with a withdrawal.

Incorrectly structured cross-purchase policies

If it’s not properly structured, life insurance purchased to fund buy-sell plans may have unwanted tax consequences. In a cross-purchase buy-sell arrangement, each business partner owns a policy on the other partners. At the death of a partner, the survivors use the insurance proceeds to buy out the estate of the deceased. Thus, each business partner is both the owner and beneficiary of the policy he or she has taken out on the other. Any other arrangement can fall into the transfer-for-value trap.

If a policy is transferred for money or something of value, the death benefit is no longer fully income tax free. For example, the mutual obligation to purchase a co-owner’s business interest at his death would be considered something of value. The transfer-for-value rule also applies when one partner buys a personal policy on his or her own life and makes his or her partner the policy beneficiary.

Exceptions to the rule include:

  • A transfer of the policy to the insured
  • A transfer of the policy to a partner of the insured or to a member of a limited liability company taxed as a partnership
  • A transfer of the policy to a partnership in which the insured is a full partner
  • A transfer of the policy to a corporation in which the insured is a stockholder, an officer, or both
  • A bona fide gift, such as a transfer of the policy to a spouse or trust of the insured

The simplest solution is to purchase new policies to fund the buy-sell arrangement. If that’s not possible, the business owners should try to qualify under one of the exceptions above. If the business owners are not already partners in some business entity, they may consider creating or investing in a partnership.

Using life insurance instead of a trust
To avoid the cost and complexity of a trust, some parents elect to have their adult children jointly own their life insurance policies. In such cases, the parent’s payment of the premiums directly to the insurance company will not qualify for the annual gift tax exclusion. Although the parent is making an indirect gift to his or her children, the gift tax exclusion is only available if each policy owner has an unrestricted right to access the policy’s cash value. With joint ownership with right of survivorship, neither child can access the cash value without consent of the sibling.

Sometimes, a parent may transfer his or her life insurance policy to one child and ask that all siblings remain as beneficiaries, which is a classic example of the Goodman Rule. At the parent’s death, the child who owns the policy will be deemed to give the policy proceeds to his or her siblings, possibly incurring gift taxes.

If optimizing the annual gift tax exclusion is an important goal, consider a trust to hold the life insurance. Alternatively, you can explore ownership as joint tenants in common. With joint tenants in common registration, each owner has an undivided 50-percent interest in the policy’s cash value. Not all insurance companies offer this kind of registration, however.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2019 Commonwealth Financial Network®

Death of a Spouse

Survivor’s Financial Reminders: Death of a Spouse

The death of a spouse or life partner is difficult enough without having to make decisions about a host of financial issues. To help minimize stress when this sad time arrives, the following list provides a framework for organizing your financial affairs and those of your partner.

Death certificates. To file for various benefits, you must provide a death certificate. Obtain at least 10 certified copies from the funeral director or from your state’s department of health or vital records. An excellent resource for finding the appropriate office in your state is the Where to Write for Vital Records page on the Centers for Disease Control and Prevention (CDC) website, www.cdc.gov/nchs/w2w.htm.

Insurance policies. Have on hand a list of insurance companies, policy numbers, and social security numbers. Although you don’t need to produce the original copy of the policy to file for a death claim, it will speed up the process.

 For coverage written in the past 15 years, you may be able to locate missing policies through MIB Solutions, Inc., a company that provides services to the insurance industry. You can access the company’s Policy Locator Service, for a $75 fee, at mib.com/lost_life_insurance.html.

  • Contact numbers for old policies may no longer be valid. Get in touch with your state’s department of insurance to obtain new telephone numbers for filing death claims with carriers that do business in your state.
  • Look through your (and your deceased partner’s) checkbook registers for records of insurance premium payments, and contact the carrier(s) to ask about possible benefits.
  • Contact your deceased partner’s most recent employer regarding group benefits.
  • Check with your credit card, bank, and loan companies regarding eligible death benefits.

Military discharge papers. You may be entitled to veteran benefits if your spouse served in the military. Obtain a copy of his or her military records through the Veterans’ Service Records page on the National Archives website at www.archives.gov/veterans/military-service-records.

Marriage certificate. You may need copies of your marriage certificate to apply for certain dependent benefits. Obtain copies through the county or town in which your marriage license was issued. You can also use the CDC’s Where to Write for Vital Records page, mentioned above, to obtain contact numbers for where to get this information in your state.

Children’s birth certificates. Your dependent children may be eligible for benefits. Refer to the CDC’s Where to Write for Vital Records page to obtain contact information for the state where the child was born.

Last will and testament. Most people keep their will in a safe deposit box, a safe, or an important document file drawer. If you cannot locate your partner’s will, you can most likely obtain one from your attorney. If no will was created or you cannot find one, contact your county’s probate department to determine whether your partner’s estate qualifies for a simplified probate procedure. If necessary, make a formal application to the court to be appointed personal representative of your partner’s estate. Please note: It is not recommended to store a will in a safe deposit box if it is to be sealed upon your death.

Bank and brokerage accounts. Jointly owned accounts are not tied up in the probate process. Contact your bank and broker to change the account to your name. Accounts owned individually by your spouse must be transferred to an estate account.

IRAs and employer retirement plans. It may be beneficial to roll over your spouse’s IRAs into your own IRA. If you are younger than 59½ and intend to use the IRA for living expenses, you may decide to move the account to an inherited IRA to avoid tax penalties for early withdrawal. In addition, your spouse’s plan may offer a survivor annuity or a lump-sum payout. To avoid unnecessary taxes, discuss the options with your financial advisor.

Contact the Social Security Administration (SSA). You and your dependent children may be eligible to receive a small social security death benefit and survivor income benefits. Contact your local social security office, or visit the Survivors Benefits section of the SSA website at www.ssa.gov/benefits/survivors.

Tax identification numbers (TINs). You, your spouse’s executor, or your spouse’s trustee will need to obtain TINs for the estate and for any formerly revocable trust. Give these numbers to your bank and brokerage firms.

Taxes. You may incur additional taxes at your spouse’s death. Before transferring accounts or distributing estate assets, talk with your attorney and accountant. You will also have to file a final income tax return for your spouse.

Health insurance. If your spouse had health insurance at work, you may qualify for COBRA benefits for up to 36 months. Although the premiums may increase, they are generally considerably less costly than private insurance. Contact your spouse’s employer for more information. Also contact your own employer to find out whether you are eligible for health insurance benefits following your change in status.

Credit cards. Notify your spouse’s credit card issuers to cancel the account. If it is a joint account, cancel it or list the account in your name only.

Your personal financial affairs. It is advisable to avoid major changes for at least six months after a partner’s death or until you feel that you can make sound financial decisions.

  • Take time to consider any proposals from family, friends, and your professional advisors.
  • Ask as many questions as necessary, and have a trusted advisor look over any financial decision you are considering during this stressful time.
  • Review the beneficiaries of your own insurance policies, IRAs, and other retirement accounts, and make appropriate changes.
  • Beneficiary designations can always be changed later—after you and your attorney have reviewed and updated your estate plan.

 This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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 Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2019 Commonwealth Financial Network®

Transfer on Death (TOD) Accounts

What You Need to Know About TOD Accounts

A relatively new option for clients, transfer on death (TOD) accounts offer a unique beneficiary feature. Unlike similar non-retirement accounts, TOD accounts allow investors’ assets to transfer directly to their designated beneficiaries when they pass away, circumventing the probate court process. The TOD registration, which is available for both individual and joint accounts, not only streamlines the account disbursement process, it also lets account holders rest assured that their beneficiaries will receive the intended amount of assets.

TOD features

Streamlined administration. With a traditional brokerage account, the owner’s assets go to the estate upon his or her death, and distribution is delayed until the probate process is completed. By contrast, funds held in TOD accounts are considered non-probate assets and pass straight to the designated beneficiaries. Once a TOD account has been established, neither a court appointment nor an account holder’s will can supersede the Supplemental Transfer on Death Registration and Beneficiary Designation Form, which designates the account’s beneficiaries. If necessary, powers of attorney may be added to TOD accounts, but they cannot establish the account or update the beneficiary designation.

TOD accounts have no contribution limits and can hold all types of positions. When the owner dies, all trading in the account must cease to prevent taxable events to the estate. The TOD account assets can, however, be transferred to the beneficiaries’ accounts, and the beneficiaries may then sell the positions, if desired. In order for a beneficiary to receive assets from a TOD account, he or she must have a brokerage account open at Commonwealth.

Tip: Before opening a TOD account, consider the location of your beneficiaries. For example, if a beneficiary lives out of the country, you will need to plan accordingly.

Unlimited number of beneficiaries. TOD account holders can designate an unlimited number of beneficiaries, each of whom will be considered a primary beneficiary. Contingent beneficiaries may be added as well. The TOD account owner can choose, among other entities, his or her estate, individuals (including minors), trusts, and churches, as beneficiaries.

You retain control. As the account owner, you continue to manage the account assets as you wish. Your beneficiaries have no rights to the account while you are living. If necessary, you can revise your beneficiary designations.

Keep in mind

TOD accounts are not for everyone. It’s important to consider how establishing this type of account will affect your overall estate plan and the provisions of your revocable trust or will.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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 Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2019 Commonwealth Financial Network®

Stock market ebb and flow

The worries on the market ebb and flow like the tides.

Last autumn, the worries were in full force: are we nearing a recession, is inflation coming, is this the big market correction, will the trade war escalate, will we have a lasting government shutdown, and many more.  Consequently, the market had a big drop in Q4 of last year, bottoming on Dec 24 with a drop of about 20% in 3 months.  Ouch.

Then something remarkable happened.  The worries all seemed to go away.  And just like that, the market has bounced back entirely and is right now butting up against the all-time high levels.

So what happened?  Nothing. The worries which existed in Q4 still exist.  In actuality these worries plus a myriad of other worries are always present.  The worries represent the balance of risk, which is essential in a functioning market.

I remember when I was a 25 year old advisor in 1999 at the peak of the tech bubble (we didn’t know it was a bubble then however) hardly anyone was worried, including myself.  “This is the new, connected world….a new economy,” was what everyone was saying.  And my least favorite expression of all, which I still hear on the financial news is, “we are in a goldilocks economy.”  I know what the talking heads are trying to say; the economy is neither too hot or too cold…just right; but personally I think they should find an example that doesn’t have bears in it.  More to my point, in 1999 the worries were gone, but the underlying risks were as high as ever.  The second chapter of the Goldilocks should have been published in 2000 with the bears chasing down a terrified Goldilocks and getting even.

The current worry list has some of the same entries as Q4 last year, minus a few that are resolved and plus a few new ones.  I’m happy the worries are there.  I’m happy the market risk is balanced.  I’ll be worried when everyone else is not.  I’m not worried about rain while its raining, I’m worried about rain while its sunny.

We’ve enjoyed a 2019 rally (bouncing off the 2018 swoon) and the market is probably due for a breather in the short term.  However, I think this will continue to be a good year in the market overall.  Instead of looking at the worries, I look at the reality.  We have a great economy, everyone who wants a job has one, low inflation, low interest rates, people are spending money, business is expanding, capital expenditures are up, and people are generally happy.

Spring is in the air.  In Colorado we are having our first 70 degree days this week.  Enjoy this time of year…..and leave the worrying about your money to me!

 

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

Another one of those days

Its another one of those days. Everything sells down on the market and bad news seems everywhere. Today the sell off was a result of Apple lowering guidance. I guess for some odd reason the Chinese are buying fewer phones because they are pissed off at America about the tariff and trade issues.

The bigger questions about today’s sell off are still: is the economy really weakening? Is the trade war going to soften or resolve? Is the government shutdown going to end soon?

I think the answer to a softening economy question is that the economy is slowing, but we still added 100,000 new jobs over expectations on today’s report (good news which was ignored). And slowing doesn’t mean a recession, it means positive growth, but just a slower pace.

I also think the trade war finds common ground and softens sooner than later. It is in both the US and China’s best interest to find a solution and I think they will.

The government shutdown won’t go on much longer. Someone is going to give.

What happens when the worries go away? All we are left with is a growing economy, low inflation, everyone who wants a job has one, and the world isn’t all that bad….oh and the stock market is cheaper than it was. People say to buy low….right?

Stock Market Panic

Market Panic: December 2018 edition

December has been a bad month for the markets worldwide. This bull market we are in is being shaken and people are worried. I’ve had a few panic calls from clients, but even if you didn’t pick up the phone I can sense you are nervous.

Here are the facts:

  • We have low unemployment
  • We have low inflation
  • We have low interest rates
  • We have a growing economy.

Here are the worries:

  • Trade war with China
  • Looming recession
  • Rising interest rates
  • Government shutdown
  • Mueller Investigation
  • President Trump putting foot in his mouth
  • Border security
  • Terrorist attacks
  • and finally (for my vegetarian clients) … romaine lettuce contamination.

If you concentrate on the worries blasted all over the news, you might be a little freaked out.

But if you turned off the news, you’d realize:

  • You have a job
  • You probably earned more money this year
  • Your company is hiring
  • Your mortgage rate is low
  • Your home has appreciated in value
  • and you’re generally happy.

Why is everyone so worried? Why do people think a recession is looming? I don’t have that answer, but just because we haven’t a recession in ten years doesn’t make it any more likely.

It’s okay to feel nervous and its okay to ask your advisor what’s going on with your accounts, but making a change because of non-quantifiable worries vs. quantifiable facts is likely going to be a mistake.

I feel this market is massively oversold and is now trading at a lower valuation than its 65 year average. International and emerging markets are even more disproportionately undervalued in my opinion.

I have the only store in the world where when my inventory goes on sale no one wants to buy … everyone wants to wait for full price to come back!

Take care, have a great Christmas, turn off the news, enjoy your family.

Elder care

Caring for an Aging Parent

Caring for aging parents can be a difficult planning aspect to balance. If you are among the “Sandwich Generation,” you may be trying to support your aging parents as well as your own children. Today, individuals are living longer than before, so it is better to be prepared.

Having the conversation

The first step—and often the most challenging one—is to find out what your parent needs or expects from you. It’s always best to have this conversation before a crisis occurs. Also, keep in mind that your parent may resist discussing the topic at first. He or she has lived a long time without much assistance from you, and the transition to accepting your new role in his or her life may be bumpy. Understanding and respecting your parent’s wishes will go a long way toward smoothing the process. It is also important to understand the difficult conversations for a number of reasons. How will your parent deal with incapacity, the fear of becoming dependent, or the reluctance to burden you with his or her needs?

Gathering information and documents

Create a list of emergency contact numbers, including your parent’s medical providers; religious leader; neighbors; friends; and financial, tax, and legal advisors. You should also gather copies of legal documents, funeral plans, medical records, and medication information. Keep a list of investment, bank, and insurance accounts, in addition to the locations of safe deposit boxes, real estate deeds, and automobile titles. You may find it helpful to upload all of this information to a USB flash drive so that it’s readily available when you need it.

Evaluating your parent’s situation

It may be difficult for you to evaluate your parent’s mental and physical capabilities or to locate community services to support his or her independence. If that’s the case, a geriatric care manager can be indispensable, particularly if you live some distance from your parent. He or she can perform an in-home assessment, determine your parent’s housing needs, and recommend a plan of action. Your parent’s doctor should be able to refer you to a qualified geriatric care manager.

Can your parent remain at home? Just because your parent can no longer care for his or her home doesn’t mean that he or she has to move. In fact, staying in one’s home may offer better support and social networks than moving in with one’s children. If your parent can stay safely alone, you may want to divide up the household chores among family members or hire someone to provide housekeeping, cooking, and personal care. Here are a few other items to consider:

 Find out if Meals on Wheels is available in your area. The organization’s volunteers deliver meals to seniors who can no longer cook for themselves.

  • Look into modifying your parent’s home to help with any physical limitations.
  • Install a security system to summon emergency personnel if necessary.
  • Call the local police department to find out if it offers a program to check on elderly residents. If not, churches often have a volunteer group dedicated to checking in on older parishioners.
  • Post important telephone numbers for contacting you, emergency services, and your parent’s doctor in a prominent location.

As your parent grows older, an assisted living facility or retirement community may be a better solution than living at home. Such residences provide additional benefits, such as transportation, access to medical personnel, and a richer social life.

Another solution is moving mom or dad into your home. This is a big decision, and it may not be the best choice for every family. Ask yourself:

  • Will living together put stress on your relationship with your parent or on your relationship with your family?
  • Can you afford to remodel your home to provide a comfortable and private environment for your parent?
  • Do you have the flexibility to provide transportation as needed?
  • Will other family members step in to help, both financially and physically?
  • Will other family members share the cost of adult day care?

Can your parent continue to drive? If your parent is over age 75, takes medications, or both, his or her ability to drive a car may be impaired. Of course, it’s difficult to know when parents have become a danger to themselves or others. Give your parent’s friends and neighbors your contact information and ask them to make you aware of any changes in his or her driving skills. Or suggest that your parent accompany you for grocery shopping and other errands rather than driving alone. Many communities offer driver’s education courses that teach best practices for seniors (e.g., limiting drive time to daylight hours and good weather conditions, avoiding highway or high-traffic situations).

Keep in mind that this may be a very sensitive topic for your parent. Many seniors view driving as essential to their independence and will resist giving up the car keys. For help approaching the conversation, see AARP’s family discussion guide on senior driving: www.aarp.org/home-garden/transportation/we_need_to_talk.

Financial and legal issues

As we age, we lose mental alertness. Due dates for bills pass, insurance policies lapse, and poor financial decisions may be made. Your elderly parent will likely need your assistance with his or her financial, legal, and medical matters.

Banking. Most banks offer automatic bill-payment services from checking or savings accounts—a convenient option if your parent is Internet savvy. Or your parent can give you responsibility for his or her finances by having bills and financial statements sent to your address. You might also consider a bill-pay service, which receives a copy of invoices and then requests your parent’s bank or financial institution to send checks directly to payees.

Investments and insurance. If day-to-day management of your parent’s finances is too much for you to handle, talk to your financial advisor. He or she can recommend products that provide income on a regular basis, such as managed retirement income portfolios, annuities, or bonds. Your financial advisor can also propose cash-management solutions, which allow your parent’s monthly social security, retirement plan, and annuity payments to be deposited automatically into an account. You can typically access these funds through a debit card, unlimited checkwriting capabilities, and online bill-pay services—everything that a bank checking account offers.

Also review your parent’s existing life and long-term care insurance coverage and make changes if necessary.

Legal concerns. An elder law attorney can help you prepare documents to manage your parent’s health care and financial affairs. In fact, many states provide free legal services to the elderly. Your parent may wish to seek an attorney’s help in the following areas:

  • Appointing a health care representative. Without legal authorization from your parent, medical privacy laws prevent doctors from discussing his or her medical conditions with you. In addition to appointing a health care power of attorney, your parent may want to consider a living will, which provides instructions on how to manage treatment if he or she has a terminal or irreversible condition and cannot communicate.
  • Understanding the process for qualifying for government programs like Medicaid or veterans benefits. Don’t rely on the experiences of family or friends, as their situations may differ from your parent’s.
  • Reviewing and updating estate planning documents, including his or her will, durable power of attorney, and any revocable trusts. Besides the basic estate planning documents, your parent may wish to draft a letter outlining who will receive personal effects like jewelry and family heirlooms.

What about taking care of you?

Although caring for an elderly parent can feel overwhelming at times, you are not alone. Many local and national groups are available to support you in providing the care and services your parent will need. To get started, visit the U.S. Administration on Aging’s Eldercare Locator at www.eldercare.gov, or call 800.677.1116.

At your workplace, talk with a member of the human resources staff to find out if you’re eligible for unpaid leave under the Family and Medical Leave Act. Also ask about the availability of an employee assistance program (EAP). EAPs are intended to help employees deal with personal problems—including concerns about aging parents—that might adversely impact their work performance, health, and well-being.

Finally, seek the help of a financial planner. Besides reviewing whether your parent’s resources are sufficient to pay for care, he or she can help you determine how to balance your own goals with your parent’s needs.

Additional online resources

For further information on caring for an aging parent, you may find these online resources helpful:

 This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

 Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2018 Commonwealth Financial Network®

 

Market volatility

The Beginning of the End? A Look at October 2018 Market Volatility

Not for the first time, October was a difficult period for the stock market. With the drop seen over this past month, there is increasing fear that this is it—the big one that will take us back to the depths of 2008. Although that level of concern is certainly understandable, a closer look at the real economic and market situation around the world suggests that the volatility we are now seeing (and may well continue to see) is perfectly normal. Over time, this kind of turbulence is why stocks can yield the returns they do.

Still, how do we know whether this decline is normal and whether we’re headed for another 2008? Is there a way to tell?

Is this decline normal?

Let’s start with the easy question first. As of this writing (October 31, 2018), the S&P 500 was down about 7 percent from its peak. It has recovered somewhat from its bottom, when it was down about 10 percent. That seems like a big decline; by recent standards, it is. When we look back further, however, this drawdown remains normal.

Since 1980, for example, declines during a calendar year have ranged between 2 percent and 49 percent, with the average at just more than 14 percent. So, the October declines are well within the normal range. The market could drop another 7 percent (i.e., as much as we have already seen), and we’d still be at the average decline for a typical year.

Another way to answer this question is to see how often a decline of any given size occurs. Markets experience a 10-percent decline every year, on average. Even if things get worse—we are not there yet—this is about the fifth drop we’ve seen in the past five years. In that sense, we are once again right in line with the averages.

Are we headed for another 2008?

These facts are all well and good. Even if things are normal now, however, we need to think about how much worse this situation could get. There are no guarantees, of course. But if we look at past bear markets (defined as declines of 20 percent or more), we can make a few observations.

First, of 10 such events since 1929, 80 percent have occurred during a recession. The U.S. economy, despite some slowing trends, continues to grow; we are not in a recession. A growing economy tends to support market values and limit declines.

Second, 40 percent of past bear markets have come during times of rapidly rising commodity prices (e.g., the 1973 oil embargo). Rising prices tend to choke off economic activity and slam profit margins. Now, we have moderate commodity prices overall, which support economic growth and help profit margins, at least here in the U.S. These moderate prices, generally speaking, are not a problem.

Third, during 40 percent of past bear markets, the Federal Reserve has aggressively raised interest rates. While rates have been rising, they are still very low by historical standards. In fact, they are at the lower end of the range that prevailed from 2008 to 2011, after the crisis. They are also likely to stay low by historical standards for some time. As such, we certainly do not have the conditions that fuel a bear market. Despite the recent increases, low rates continue to benefit the economy, which has supported the market so far and will continue to do so.

Finally, half of the bear markets were born when market values were extreme. Current valuations are high by historical standards but low by the standards of the past five years. As we are seeing, an adjustment to lower valuations is painful. But it also means the risk of a further drop dissipates, which takes us back to the fact that periodic drawdowns are not only necessary but healthy.

Almost all bear markets have more than one of these traits; right now, we have (at most) one and really more like one-half of one. This doesn’t mean that we won’t see further declines. It does suggest that they are less likely—and would probably be short lived.

We can also look at recent history to evaluate how much trouble we might see if the situation were to worsen. Earlier this year, for example, markets pulled back by 10 percent, only to rebound and reach new highs. In early 2016, markets were also down more than 10 percent, only to bounce back to new highs. And we can go back further, to even worse pullbacks. In 2011, when Greece almost declared bankruptcy and broke up the European Union, we saw markets drop 19 percent. In 1998, during the Asian financial crisis, we also saw a pullback of 19 percent. Despite the headlines, our current economic situation is much more like early 2018 and 2016, and it is nowhere near as bad as either 1998 or 2011. Even with those declines, the annual return for each year wasn’t disastrous. In 2011, the market ended flat; in 1998, it gained 27 percent.

What is the outlook for the rest of 2018?

Markets have recovered somewhat from October’s midmonth lows, and the economic fundamentals remain good. While further volatility is possible, based on history, it does not seem likely that we will see a further massive and sustained decline that takes us back to 2008. Worst case, if the Chinese trade confrontation situation gets as bad as the Asian financial crisis or the Greek crisis, we could see additional damage. But we likely won’t see anything worse than what occurred during those pullbacks.

With a growing economy, with strong employment and spending growth, and with moderate oil prices and interest rates, the U.S. is well positioned to ride out any storms—more so, in fact, than we were in 2011. Current conditions look much more like 2016 than 2011. As the island of stability in the world, we are also very attractive to foreign investors, as we can see by the strength of the dollar.

Look beyond the headlines

By understanding the history and economic context of today’s turmoil, it is clear that markets may get worse in the short term. Still, the foundations remain solid, which should lessen the effect and duration of any further damage. Yes, the headlines are very scary, but things aren’t that bad. So, we will be postponing the beginning of the end . . . again.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

 All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

###

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2018 Commonwealth Financial Network®

Stock crash

Is this the beginning of the end?

With the recent two-day drop in the stock market, there is increasing fear that this is it—the big one that will take us back to the depths of 2008. Although that level of concern is certainly understandable, a closer look at the real economic and market situation around the world suggests that the volatility we are now seeing (and may well continue to see) is perfectly normal. Over time, this kind of turbulence is why stocks can yield the returns they do.

Still, how do we know whether this decline is normal and whether we’re headed for another 2008? Is there a way to tell?

Is this decline normal?

Let’s start with the easy question first. As of this writing (October 12, 2018), the S&P 500 is down about 7 percent from its peak. Since 1980, declines during a calendar year have ranged between 2 percent and 49 percent, with the average decline at just more than 14 percent. So, the market could drop another 7 percent (i.e., as much as we have already seen), and we’d still be at the average decline for a typical year.

Another way to answer this question is to see how often a decline of any given size occurs. Markets experience a 10-percent decline every year, on average. Even if things get worse—we are not there yet—this is about the fifth drop we’ve seen in the past five years. In that sense, we are once again right in line with the averages.

Are we headed for another 2008?

These facts are all well and good. Even if things are normal now, however, we need to think about how much worse this situation could get. There are no guarantees, of course. But if we look at past bear markets (defined as declines of 20 percent or more), we can make a few observations.

First, of 10 such events since 1929, 80 percent have occurred during a recession. The U.S. economy, despite some slowing trends, continues to grow; we are not in a recession. A growing economy tends to support market values and limit declines.

Second, 40 percent of past bear markets have come during times of rapidly rising commodity prices (e.g., the 1973 oil embargo). Rising prices tend to choke off economic activity and slam profit margins. Now, we have moderate commodity prices overall, which support economic growth and help profit margins, at least here in the U.S. These moderate prices, generally speaking, are not a problem.

Third, during 40 percent of past bear markets, the Federal Reserve has aggressively raised interest rates. While rates have been rising, they are still very low by historical standards. In fact, they are at the lower end of the range that prevailed from 2008 to 2011, after the crisis. They are also likely to stay low by historical standards for some time. As such, we certainly do not have the conditions that fuel a bear market. Despite the recent increases, low rates continue to benefit the economy, which has supported the market so far and will continue to do so.

Finally, half of the bear markets were born when market values were extreme. Current valuations are high by historical standards but low by the standards of the past five years. As we are seeing, an adjustment to lower valuations is painful. But it also means the risk of a further drop dissipates, which takes us back to the fact that periodic drawdowns are not only necessary but healthy.

Almost all bear markets have more than one of these traits; right now, we have (at most) one and really more like one-half of one. This doesn’t mean that we won’t see further declines. It does suggest that they are less likely—and would probably be short lived.

We can also look at recent history to evaluate how much trouble we might see if the situation were to worsen. Earlier this year, for example, markets pulled back by 10 percent, only to rebound and reach new highs. In early 2016, markets were also down more than 10 percent, only to bounce back to new highs. And we can go back further, to even worse pullbacks. In 2011, when Greece almost declared bankruptcy and broke up the European Union, we saw markets drop 19 percent. In 1998, during the Asian financial crisis, we also saw a pullback of 19 percent. Despite the headlines, our current economic situation is much more like early 2018 and 2016, and it is nowhere near as bad as either 1998 or 2011. Even with those declines, the annual return for each year wasn’t disastrous. In 2011, the market ended flat; in 1998, it gained 27 percent.

What is the outlook for the rest of 2018?

Markets are up for 2018 so far, even after the recent pullback, and the economic fundamentals are good. While further volatility is possible, based on history, it does not seem likely that we will see a further massive and sustained decline that takes us back to 2008. Worst case, if the Chinese trade confrontation situation gets as bad as the Asian financial crisis or the Greek crisis, we could see additional damage. But we likely won’t see anything worse than what occurred during those pullbacks.

With a growing economy, with strong employment and spending growth, and with moderate oil prices and interest rates, the U.S. is well positioned to ride out any storms—more so, in fact, than we were in 2011. Current conditions look much more like 2016 than 2011. As the island of stability in the world, we are also very attractive to foreign investors, as we can see by the strength of the dollar.

Look beyond the headlines

By understanding the history and economic context of today’s turmoil, it is clear that markets may get worse in the short term. Still, the foundations remain solid, which should lessen the effect and duration of any further damage. Yes, the headlines are very scary, but things aren’t that bad. So, we will be postponing the beginning of the end . . . again.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

 All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2018 Commonwealth Financial Network®

2018 economic forecast

2018 Midyear Outlook: Will the Economy and Markets Keep Growing?

After the performance we saw last year, we had high hopes for the economy and markets in 2018, but the first half of the year was disappointing. Expectations softened as the stock market pulled back early in the year, economic growth slowed, and risks—largely in trade—rose. As we hit midyear, though, those initial hopes appear to be more realistic than they were even a month ago.

For example, job growth has accelerated this year, bringing us, more or less, to full employment. And with continued wage income growth and ongoing high confidence, consumers are both able—and willing—to spend. Businesses are confident, too, and business investment is showing signs of accelerating. Meanwhile, tax cuts and fiscal stimulus have taken government from a headwind to a tailwind.

With this foundation, we should see continued growth in the second half, fueled by the following:

  • Employment—which is likely to continue to grow, albeit at a potentially slower pace than in the first half of the year
  • Businesses—which should keep and even increase their investment as capacity utilization rises and labor becomes scarcer
  • Government spending—which should continue to revert to growth now that the tax cuts and spending deal are in place

What does this mean, then, for real economic growth? We can expect to see growth of around 3 percent, with the potential for better results. Assuming consumer spending growth of around 3 percent, business investment growth near 5 percent, and government spending growth around 2 percent, this 3-percent figure appears both reasonable and achievable. Combined with an anticipated inflation level of 2 percent for the year, nominal growth should approach 5 percent.

Opportunities and Risks

As always, there are risks to this outlook—both to the upside and the downside.

Looking at the economy, if wage growth increases, consumer spending power could increase more quickly. If consumer borrowing were to pick up, spending could grow even faster. Business investment could respond to improving demand and rise more than expected. Local and state governments could increase investment and hiring more than expected.

Politics presents the greatest risk on the downside. Here in the U.S., the midterm elections will certainly disrupt the political process. If it appears likely that Democrats will take one or both houses of Congress, it could raise substantial economic uncertainties. In the nearer term, the administration’s trade policies could disrupt supply chains and increase costs, which would have consequences for financial markets. Abroad, risks include North Korea and continued political turmoil in Europe. Any of these could result in systemic damage and create real drag on the U.S. economy and financial markets.

Another major downside risk is rising interest rates. In its most recent press conference, the Federal Reserve (Fed) seemed to declare victory on both employment and inflation, which could mean faster rate increases than previously anticipated. Current expectations are for at least two more increases in 2018, and with long-term rates constrained, we could be at risk for an inverted yield curve, which historically has been a sign of upcoming recession.

Turning to the stock market, the rest of 2018 could be quite exciting, in both a positive and a negative sense. Earnings growth should continue to improve overall on the heels of economic expansion, as companies reap the benefits from the tax cuts. As growth accelerates and risks from Europe and North Korea subside, valuations may rise back to previous highs—or even higher on a positive shift in investor sentiment.

There are certainly risks to the market on the downside, however. Valuations are at or above 2007 levels; in other words, they are at historic highs. Profit margins are also at historic highs, and the tailwinds that got them there are disappearing as interest rates rise and wage growth continues to pick up. That’s not to mention that rising interest rates could make bonds more attractive as an investment, which would also weigh on valuations.

Looking at the past three years, a typical lower-end multiple has been 15x forward earnings. Based on current analyst expectations of $176.52 in S&P 500 earnings for 2019, and using a 15x multiple, the 2018 year-end target for the index would be around 2,650, which represents a decline of about 5 percent from mid-June levels. This is a reasonable downside scenario for the end of the year.

If the economy continues to grow, and businesses continue to operate at very high profitability levels, valuations could rise back to around 17x forward earnings. This reasonable upside scenario would leave the S&P 500 around 3,000 at year-end, an increase of almost 8 percent above current numbers.

 Are Things Looking Up?

This is definitely not a prediction of a flat, boring market. Absent the Fed’s security blanket, the market should be more volatile, and it likely will be. A sell-off at some point in the next six months is very possible, with the rising concerns about trade one potential cause. In addition, as rates rise, investors will likely reassess the attractiveness of U.S. stocks versus fixed income. Meanwhile, accelerating wage growth should have a negative effect on profit margins, even as it boosts the economy as a whole.

While the downside risks are real, the ongoing strength of the U.S. economy should protect us from the worst and even continue to offer some upside. The second half of 2018, therefore, seems likely to provide us with more growth in the real economy and financial markets.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

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Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2018 Commonwealth Financial Network®