New Tax Bill Requires Updated Planning Approach

July 21, 2025 — Sam H. Fawaz

President Trump signed into law the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, after months of deliberation in the House and Senate. The legislation includes multiple tax provisions that will guide individuals, business owners, and investors in planning their finances for many years to come.

The OBBBA makes permanent most of the 2017 Tax Cuts and Jobs Act (TCJA) tax provisions that were set to expire at the end of this year, while delivering several new deductions and changes.

Many of the new and modified provisions seem simple on the surface, but will require new approaches to tax planning to optimize the benefits of various tax breaks.

On behalf of all CPA’s and accountants, and before delving into the various provisions below, I want to thank Congress for renewing the “CPA Full Employment Act,” also known as GOFA (Guaranteed Overtime for Accountants), proving once again that while tax breaks may expire, job security for tax professionals is eternal.

TCJA Expiring provisions that are now permanent

Rates and structure

The TCJA reduced the applicable tax rates for most brackets from 2018 through 2025, while increasing the income range covered by each bracket. The new legislation makes the TCJA rates and structure permanent. Individual marginal income tax brackets will remain at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Standard deduction amounts

The TCJA established larger standard deduction amounts. The OBBBA includes an additional increase, and for 2025, the standard deduction amounts are:

  • $31,500 for married filing jointly
  • $23,625 for head of household
  • $15,750 for single and married filing separately

Personal exemptions

The TCJA eliminated the deduction for personal exemptions. The last year it was available was 2017 at $4,050 per exemption. This deduction is now permanently eliminated.

Child tax credit

Prior temporary increases to the child tax credit, the refundable portion of the credit, and income phase-out ranges are made permanent. The OBBBA increases the child tax credit to $2,200 for each qualifying child starting in 2025.

Mortgage interest deduction

The TCJA imposed a limit of $750,000 ($375,000 for married filing separately) on qualifying mortgage debt for purposes of the mortgage interest deduction. It also made interest on home equity indebtedness nondeductible. Both provisions are now permanent.

The OBBBA reinstates the previously expired provision allowing for the deduction of mortgage insurance premiums as interest (subject to income limitations), beginning in 2026.

Estate and gift tax exemption

The TCJA implemented a larger estate and gift tax exemption amount (essentially doubled it). The OBBBA increases it to $15 million in 2026 ($30 million for married couples), and it will be indexed for inflation in subsequent years.

Alternative minimum tax (AMT)

The TCJA implemented significantly increased AMT exemption amounts and exemption income phase-out thresholds. The OBBBA makes them permanent.

Itemized deduction limit

The OBBBA replaces the previously suspended (from 2018 to 2025) overall limit on itemized deductions. This was known as the “Pease limitation.”

For taxpayers with adjusted gross income (AGI) above a specified threshold (for example, in 2017, $254,200 for single filers and $305,050 for married filing jointly), the Pease limitation reduced total itemized deductions by 3% of the amount by which AGI exceeded the threshold. The haircut could not exceed 80% of the total itemized deductions.

The Pease limitation is now replaced with a percentage reduction that applies to individuals in the highest tax bracket (37%), effectively capping the value of each $1.00 of itemized deductions at $0.35.

Most taxpayers will find the new limitation more generous, as the cap only affects the highest earners.

Qualified business income deduction (Section 199A)

The TCJA created the deduction for qualified business income. The OBBBA additionally increases the phase-in thresholds for the deduction limit. A new minimum deduction of $400 is now available for specific individuals with at least $1,000 in qualified business income.

TCJA Existing provisions with material changes

The One Big Beautiful Bill Act also makes significant changes to other provisions, some of which are temporary, while others are permanent. Two of the changes that received substantial coverage leading up to passage and enactment include a temporary increase in the limit on allowable state and local tax deductions and the rollback of existing energy tax incentives.

State and local tax deduction (SALT)

The new legislation temporarily increases the cap on the SALT deduction from $10,000 to $40,000 through 2029. This increased cap is retroactively effective for the entire year 2025. The $40,000 cap will increase to $40,400 in 2026 and by 1% for each of the following three years.

The cap is reduced for those with modified adjusted gross incomes (AGI) exceeding $500,000 (tax year 2025, adjusted for inflation in subsequent years), but the limit is never reduced below $10,000. In 2030, the SALT deduction cap will return to $10,000.

Careful income and deduction planning for taxpayers around the $500,000 AGI level will be critical going forward.

Repeal and phase-out of clean energy credits

The new legislation significantly rolls back energy-related tax incentives. Provisions include:

  • The Clean Vehicle Credit (Internal Revenue Code or IRC Section 30D), the Previously Owned Clean Vehicle Credit (IRC Section 25E), and the Qualified Commercial Clean Vehicles Credit (IRC Section 45W) are eliminated effective for vehicles acquired after September 30, 2025.
  • The Energy Efficient Home Improvement Credit (IRC Section 25C) and the Residential Clean Energy Credit (IRC Section 25D) are repealed for property placed in service after December 31, 2025.
  • The New Energy Efficient Home Credit (Section 45L) will expire on June 30, 2026; the credit cannot be claimed for homes acquired after that date.
  • The Alternative Fuel Vehicle Refueling Property Credit (IRC Section 30C) will not be available for property placed in service after June 30, 2026.

Gambling losses

The new law changes the treatment of gambling losses, effective as of 2026.

Before the legislation, individuals could deduct 100% of their gambling losses against winnings (the deduction could never exceed the amount of gambling winnings). Now, a new cap limits deductions to 90%.

Bonus depreciation and Section 179 expensing

Before this legislation, the additional first-year “bonus” depreciation was being phased out, with the maximum deduction dropping to 40% by 2025.

The new legislation permanently establishes a 100% additional first-year depreciation deduction for qualifying property, allowing businesses to deduct the full cost of such property in the year of acquisition. The 100% additional first-year depreciation deduction is available for property acquired after January 19, 2025.

Effective for property placed in service in 2025, the legislation also increases the limit for expensing under IRC Section 179 from $1 million of acquisitions (indexed for inflation) to $2.5 million, and it increases the phase-out threshold from $2.5 million (indexed for inflation) to $4 million.

OBBBA New provisions

The One Big Beautiful Bill Act includes several new tax deductions intended to represent a step toward fulfilling campaign promises that eliminate taxes on Social Security, tips, and overtime. Some of these new deductions are temporary, others are permanent.

Deduction for seniors

Effective for tax years 2025–2028, the legislation creates a new $6,000 deduction for qualifying individuals who reach the age of 65 during the year. The deduction begins to phase out when modified adjusted gross income exceeds $75,000 ($150,000 for married filing jointly).

Tip income deduction, AKA “no tax on tips”

Effective for tax years 2025–2028, for the first time, tip-based workers can deduct a portion of their cash tips for federal income tax purposes. Individuals who receive qualified cash tips in occupations that customarily received tips before January 1, 2025, may exclude up to $25,000 in reported tip income from their federal taxable income. A married couple filing a joint return may each claim a deduction of up to $25,000.

The deduction phases out at a modified adjusted gross income of $150,000 for single filers and $300,000 for joint filers. This provision applies to a broad range of service occupations, including restaurant staff, hairstylists, and hospitality workers.

Overtime deduction, AKA “no tax on overtime”

A new temporary deduction of up to $12,500 ($25,000 if married filing jointly) is established for qualified overtime compensation. The deduction is phased out for individuals with a modified adjusted gross income of over $150,000 ($300,000 if married filing jointly).

The deduction is reduced by $100 for each $1,000 of modified adjusted gross income exceeding the threshold. To claim the deduction, a Social Security number must be provided. The deduction is available for tax years 2025 through 2028.

Investment accounts for children, AKA “Trump accounts”

A new tax-deferred account for children under the age of 18 is created, effective January 1, 2026. With limited exceptions, up to $5,000 in total can be contributed to an account annually (the $5,000 amount is indexed for inflation). Parents, relatives, employers, and certain tax-exempt, nonprofit, and government organizations are eligible to make contributions. Contributions are not tax-deductible.

For children born between 2025 and 2028, the federal government will contribute $1,000 per child into eligible accounts. Distributions generally cannot be made from the account before the account holder reaches the age of 18, and there are restrictions, limitations, and tax consequences that govern how and when account funds can be used. To have an account, a child must be a U.S. citizen and have a Social Security number.

Charitable deduction for non-itemizers and itemizers

The legislation reinstates a tax provision that was previously effective for tax year 2021.

A deduction for qualifying charitable contributions is now permanently established for individuals who do not itemize deductions. The deduction is capped at $1,000 ($2,000 for married filing jointly). Contributions must be made in cash to a public charity and meet other specific requirements. This deduction is available starting in tax year 2026.

For itemizers, the legislation introduces a “haircut” to charitable contributions, equivalent to 0.5% of adjusted gross income, similar to the 7.5% haircut for medical expenses.

These provisions possibly make donor-advised funds and qualified charitable distributions (from IRAs for those age 70.5 or older) more critical than ever to incorporate into charitable giving strategies and planning.

Car loan interest deduction, AKA “no tax on car loan interest”

For tax years 2025–2028, interest paid on car loans is now deductible for certain buyers.

Beginning in 2025, taxpayers who purchase qualifying new vehicles assembled in the United States for personal use may deduct up to $10,000 in annual interest on a qualifying loan.

The deduction is phased out at higher incomes, starting at a modified adjusted gross income of $100,000 (single filers) or $200,000 (joint filers).

529 Education Savings Plans

Section 529 college savings accounts are expanded in three critical ways:

First, you can withdraw up to $20,000 per year tax-free for K-12 schooling beginning in 2026, an increase of $10,000 from the current annual cap. As always, there is no limit on the amount of tax-free withdrawals that can be used to pay for college.

Second, more K-12 expenses are covered. It used to be that distributions for K-12 education were tax-free only if used to cover tuition. Now covered are costs of tuition, materials for curricula and online studying, books, educational tutoring, fees for taking an advanced placement test or any exam related to college admission, and educational therapies provided by a licensed provider to students with disabilities. This easing begins with distributions from 529 accounts made after July 4, 2025.

Third, certain post-high school credentialing program costs are eligible for payment via 529 plans. This expansion supports individuals pursuing alternative educational and career pathways outside of traditional degree programs. Eligible costs typically include:

  • Tuition, books, and required fees for credentialing and licensing programs.
  • Testing fees to obtain or maintain a professional certification or license.
  • Continuing education costs needed to renew or maintain specific credentials.
  • Supplies and equipment required for a recognized credentialing program.

1099 Reporting

A 2021 law required third-party settlement networks to send 1099-Ks to payees who were paid more than $600 for goods and services. The OBBBA repeals this change and restores the prior reporting rule. Third-party networks are now required to send 1099-Ks only to payees with over 200 transactions who were paid more than $20,000 in a calendar year.

The filing threshold for 1099-MISC and 1099-NEC forms increases from $600 to $2,000, effective with forms sent out in 2027 for tax year 2026. This figure will be indexed for inflation. The $600 reporting threshold has not changed since 1954, even though prices have increased by about 1095% since then.

But wait….there’s more …

The One Big Beautiful Bill Act includes broad and sweeping changes that will have a profound impact on tax planning. The legislation is over 800 pages long, and we have only scratched the surface here.

While income and estate tax provisions are highlighted in this summary, the legislation also makes fundamental changes that impact areas such as healthcare, immigration, and border security, as well as additional tax changes. Further information and details will be forthcoming in the coming weeks and months. There are numerous unanswered questions that will be addressed through Congressional technical corrections, IRS Bulletins, and upcoming regulations.

As always, if you have questions about how these changes affect your specific situation, please don’t hesitate to contact us. Although I expect a jump in my overtime this year as a result of this tax bill, the no-tax-on-overtime provision does not apply to yours truly. I guess that’s the price to pay for having a job for life.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.

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Does the new Social Security ID Verification Affect You?

June 25, 2025 — Sam H. Fawaz

This spring, the Social Security Administration (SSA) announced that some individuals who want to claim Social Security benefits or change their direct deposit account information will need to prove their identity in person at a local Social Security field office.

According to the SSA, stronger identity verification procedures are needed to prevent fraud. The new rule is already confusing, partly because of its hasty rollout, so here are answers to some common questions and links to official SSA information.

Who will need to visit a Social Security office to verify their identity?

This new rule only affects people without or who can’t use their personal mySocialSecurity account. If you already have a mySocialSecurity account, you can continue to file new benefit claims, set up direct deposit, or make direct deposit changes online — you will not need to visit an office.

You must visit an office to verify your identity if you do not have a mySocialSecurity account and you are:

· Applying for retirement, survivor, spousal, or dependent child benefits

· Changing direct deposit information for any type of benefit

· Receiving benefit payments by paper check and need to change your mailing address

You don’t need to visit an office to verify your identity if you are applying for Medicare, Social Security disability benefits, or Supplemental Security Income (SSI) benefits — these are exempt from the new rule, and you can complete the process by phone.

If you’re already receiving benefits and don’t need to change direct deposit information, you will not have to contact the SSA online or in person to verify your identity. According to the SSA, “People will continue to receive their benefits and on time to the bank account information in Social Security’s records without needing to prove their identity.” There’s also no need to visit an office to verify your identity if you are not yet receiving benefits.

The SSA has also announced that requests for direct deposit changes (online or in person) will be processed within one business day. Before this, online direct deposit changes were held for 30 days.

What if you don’t have a mySocialSecurity account?

You can create an account anytime on the SSA website, ssa.gov/myaccount. A mySocialSecurity account is free and gives you access to SSA tools and services online. For example, you can request a replacement Social Security card, view your Social Security statement that includes your earnings record and future benefit estimates, apply for new benefits and set up direct deposit, or manage your current benefits and change your direct deposit instructions.

To start the sign-up process, you will be prompted to create an account with one of two credential service providers, Login.gov or ID.me. These services meet the U.S. government’s identity proofing and authentication requirements and help the SSA securely verify your identity online, so you won’t need to prove your identity at an SSA office. You can also use your existing Login.gov or ID.me credentials if you have already signed up with one of these providers elsewhere.

If you’re unable or unwilling to create a mySocialSecurity account, you can call the SSA and start a benefits claim; however, if you’re filing an application for retirement, survivor, spousal, or dependent child benefits, your request can’t be completed until your identity is verified in person. You may also start a direct deposit change by phone and subsequently visit an office to complete the identity verification step. You can find your local SSA office using the Social Security Office Locator at ssa.gov.

To complete your transaction in one step, the SSA recommends scheduling an in-person appointment by calling the SSA at (800) 772-1213. However, you may face delays. According to SSA data (through February), only 44% of benefit claim appointments are scheduled within 28 days, and the average time you’ll wait on hold to speak to a representative (in English) is 1 hour and 28 minutes, though you can request a callback (74% of callers do). These wait times will vary, but are likely to worsen as the influx of calls increases and the SSA experiences staffing cuts.

What if your Social Security account was created before September 18, 2021?

Last July, the SSA announced that anyone who created a mySocialSecurity account with a username and password before September 18, 2021, would need to begin using either Login.gov or ID.me to continue accessing their Social Security account. If you haven’t already completed the transition, you can find instructions at ssa.gov/myaccount.

How can you help protect yourself against Social Security scams?

Scammers may take advantage of confusion over this new rule by posing as SSA representatives and asking individuals to verify their identity to continue receiving benefits. Be extremely careful if you receive an unsolicited call, text, email, or social media message claiming to be from the SSA or the Office of the Inspector General.

Although SSA representatives may occasionally contact beneficiaries by phone for legitimate business purposes, they will never contact you via text message or social media. Representatives will never threaten you, pressure you to take immediate action (including sharing personal information), ask you to send money, or say they need to suspend your Social Security number. Familiarize yourself with the signs of a Social Security-related scam by visiting ssa.gov/scam.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

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Hidden Risks of Naming a Trust as Your IRA or 401(k) Beneficiary

May 4, 2025 — Sam H. Fawaz

EXECUTIVE SUMMARY

Naming your trust as the beneficiary of your IRA or 401(k) can be a powerful estate planning tool, but it comes with significant complexities and trade-offs.

Recent IRS regulations, particularly the final regulations issued in July 2024, have made several significant changes affecting individuals who have named a trust as the beneficiary of their IRA or 401(k). These changes address required minimum distributions (RMDs), beneficiary classifications, documentation requirements, and tax implications.

If you have a trust, it may no longer be prudent to name your trust as your 401(k) or IRA beneficiary. You may need to consult with your estate planning attorney to confirm that naming your trust as the beneficiary is still a valid designation.

If your trust document is over five years old, you may need to consult your estate planning attorney to modify your trust or update your beneficiary designations to avoid unintended accelerated distribution timeframes or subject the distributions to steep trust tax rates.

Before discussing the latest tax regulations and the implications of naming a trust as your IRA or 401(k) beneficiary, let’s look at the pros and cons of doing so:

PROS OF NAMING A TRUST AS AN IRA BENEFICIARY

• Control Over Distributions: A trust allows you to set specific terms for how and when assets are distributed. This is particularly useful if your beneficiaries are minors, have special needs, or may not be financially responsible [9][10][11][12].

• Protection for Vulnerable Beneficiaries: Trusts can protect beneficiaries who are minors, disabled, or have issues with creditors, addiction, or poor financial decision-making [9][13][14][11][12].

• Asset Protection: A trust can safeguard assets from a beneficiary’s creditors, divorce, or lawsuits [10][12].

• Estate Planning for Blended Families: Trusts can ensure assets are distributed according to your wishes, such as providing for a spouse during their lifetime with the remainder going to children from a previous marriage [13][14][10][12].

• Privacy: Distributions through a trust avoid probate, keeping your estate details private [10].

• Special Needs Planning: A properly structured trust can provide for a beneficiary with special needs without disqualifying them from government benefits [14][10][11].

• Contingency Planning: Trusts can specify what happens if a beneficiary dies before receiving their full share, offering more control over the ultimate disposition of assets [12].

CONS OF NAMING A TRUST AS AN IRA BENEFICIARY

• Accelerated Taxation and RMD Rules: Trusts are subject to RMDs based on the oldest beneficiary’s life expectancy, which can accelerate withdrawals and taxes compared to naming individuals directly [9][13][11].

Under the SECURE Act, most non-spouse beneficiaries, including trusts, must withdraw the entire account within 10 years, eliminating the “stretch IRA” (explained below) in most cases [14][10][11].

• Potential for Higher Taxes: Trusts reach the highest federal income tax rate much faster than individuals. If the trust accumulates income instead of distributing it, this can result in significantly higher taxes [15][10].

• Loss of Spousal Rollover: Naming a trust as beneficiary means a surviving spouse cannot roll the account into their own IRA, losing the ability to defer taxes over their lifetime [14].

• Increased Complexity and Cost: Administering a trust as a retirement account beneficiary involves more paperwork, legal compliance, and potentially higher administrative costs [13][15][10].

• Risk of Non-Compliance: If the trust is not drafted correctly as a “see-through” (or “look-through”) trust (see below), it may trigger even more accelerated distribution rules, such as the five-year distribution rule [15][11].

• Plan Restrictions: Some employer plans may not allow trusts as beneficiaries or may require lump-sum distributions, which could trigger full immediate taxation [13].

• No Probate Avoidance for Trust Assets: While retirement accounts avoid probate when a beneficiary is named, naming a trust does not provide additional probate avoidance for the retirement account, though it does for assets distributed from the trust [11].

When Naming a Trust as Beneficiary Makes Sense

• You have minor, disabled, or financially irresponsible beneficiaries.

• You want to control the timing and amount of distributions.

• You need to protect assets from creditors or divorce.

• You have a blended family and want to ensure specific inheritance outcomes.

• You have a beneficiary who relies on government benefits.

When It May Not Be Advantageous

• Your beneficiaries are financially responsible adults.

• You want to maximize tax deferral and minimize complexity.

• Your spouse is the primary beneficiary and would benefit from rollover options.

KEY TAX CHANGES AND THEIR EFFECTS

Before the SECURE Act, passed in December 2019, IRA beneficiaries enjoyed a long “stretch” of time to take distributions from the IRAs they inherited. Beneficiaries could distribute the inherited IRA assets over the remainder of their lifetimes using the IRS RMD rules.

That stretch was largely eliminated for most IRA beneficiaries who inherited an IRA from a decedent starting in 2020. The IRS took over 4 1/2 years from the passage of the SECURE Act to finalize regulations surrounding distributions from post-2019 inherited IRAs.

1. Required Minimum Distributions (RMDs) and the 10-Year Rule

As mentioned above, the SECURE Act and its subsequent regulations essentially eliminated the “stretch IRA” for most non-spouse beneficiaries, including trusts, replacing it with a 10-year payout rule. This means that, in most cases, all funds in an inherited IRA or 401(k) must be distributed by the end of the 10th year following the account holder’s death.

If the account owner died after their required beginning date (RBD), annual RMDs must be taken during years 1–9, with the entire balance distributed by year 10.

If the account owner died before their required beginning date (RBD), annual required minimum distributions (RMDs) are not required in years 1–9. Instead, the entire inherited IRA or retirement account balance must be distributed by the end of the 10th year following the year of the original owner’s death. Depending on the size of the IRA and the beneficiary’s tax bracket, taking some distributions in years 1-9 may be prudent, even if not required.

The RBD for most IRA owners is age 70-1/2 to 73 (soon to be 75). Remember that the “M” in RMD is the minimum you must distribute. Depending on the size of the IRA, more than the minimum distribution will often make more sense.

Only “Eligible Designated Beneficiaries” (EDBs), such as spouses, minor children (until age 21), disabled or chronically ill individuals, or beneficiaries less than 10 years younger than the decedent, can still use the stretch distribution based on their life expectancy.

2. Trust Types and Beneficiary Analysis

The IRS continues to recognize “see-through” (or “look-through”) trusts, which allow the trust’s individual beneficiaries to be treated as the IRA’s beneficiaries for RMD purposes.

To qualify as a see-through trust under IRS rules, the trust must meet specific criteria that allow its beneficiaries to be treated as direct beneficiaries of an inherited IRA or 401(k). These requirements ensure the trust can utilize stretch distributions or the 10-year rule based on beneficiary status (i.e., EDB or non-EDB).

Here are the key requirements of a see-through trust:

a. Validity Under State Law

The trust must be legally valid in the state where it was created. This typically requires proper execution, witnessing, and notarization of the trust document.

b. Irrevocability Upon Death

The trust must be irrevocable from inception or upon the account owner’s death. Revocable trusts that convert to irrevocable status at death are acceptable.

c. Identifiable Beneficiaries

All trust beneficiaries must be clearly named, identifiable, and eligible individuals (e.g., people, not charities or other entities). This ensures the IRS can “see through” the trust to determine distribution timelines based on beneficiary life expectancies or the 10-year rule.

If a trust is not a see-through trust, it may be considered a:

  1. Conduit Trust: All IRA distributions must be immediately passed to beneficiaries. Taxes are paid at the beneficiaries’ individual rates, but the 10-year rule generally applies unless all beneficiaries are EDBs.

OR

  1. Accumulation (Discretionary) Trust: Distributions are retained in the trust, which pays taxes at higher trust tax rates. All trust beneficiaries are considered when determining the payout period, and the 10-year rule usually applies.

The Final Regulations allow trusts that split into separate subtrusts for each beneficiary upon the account holder’s death to apply RMD rules based on each subtrust’s beneficiary status. This can preserve stretch treatment for EDBs even if other beneficiaries are subject to the 10-year rule.

3. Documentation Requirements

For IRAs, the IRS has eliminated the requirement for trustees to provide detailed trust documentation to the IRA custodian. Now, only a list of trust beneficiaries and their entitlements may be required, greatly simplifying compliance for see-through trusts.

Some documentation requirements remain for 401(k) and other employer plans, but they have been simplified.

4. Tax Consequences

As mentioned above, trusts reach the top income tax bracket much faster than individuals. In 2024, trust income over $15,200 is taxed at 37%, whereas individuals do not hit this rate until much higher income levels. This can result in significantly higher tax bills if IRA distributions are accumulated in a trust rather than paid to beneficiaries.

Lump-sum distributions or failing to comply with the new rules can result in accelerated taxation and potential penalties.

5. Special Provisions and Clarifications

The IRS clarified that if a trust divides into separate subtrusts immediately upon the account owner’s death, each subtrust is analyzed separately for RMD purposes.

If trust terms or beneficiaries are modified after the account owner’s death (by September 30 of the following year), these changes will affect RMD calculations as if they were always part of the original trust.

Payments made “for the benefit of” a beneficiary (such as to a custodial account for a minor) are treated as direct payments to the beneficiary for RMD purposes.

PRACTICAL CONSIDERATIONS

Most trusts named as IRA or 401(k) beneficiaries will now face the 10-year payout rule, with fewer opportunities for long-term tax deferral.

Under the new rules, trusts must be carefully analyzed and possibly restructured to maximize tax efficiency and achieve estate planning goals.

Simplifying documentation requirements reduces administrative burdens for IRA trusts, but not necessarily for employer plans.

High trust tax rates make accumulation trusts less attractive for holding retirement assets over the long term.

ACTION MAY BE REQUIRED

If your IRA or 401(k) names your trust as a beneficiary, it’s advisable to consult with your estate planning attorney to ensure that, in light of the recent tax regulations, naming the Trust as beneficiary is still prudent.

If you’re unsure whether your trust is considered a see-through trust, consult with your estate planning attorney to determine if the trust must be modified to ensure that the 10-year distribution for beneficiaries remains intact. Otherwise, that 10-year period might be inadvertently shortened to five years, or worse, subject distributions to overly steep trust tax rates.

Whether you have a trust or have named your trust as a beneficiary of your IRA or 401(k), now is a good time to check the beneficiary designations on all of your retirement accounts and insurance policies to ensure they are up to date and reflect all of your recent life changes. If something should happen to you, your loved ones will be most grateful.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

1-8. Deleted

9. https://www.voya.com/blog/retirement-account-pros-and-cons-naming-trust-beneficiary

10. https://www.markruizlaw.com/should-your-living-trust-be-the-beneficiary-of-your-ira-or-401-k-pros-and-cons-explained

11. https://www.investopedia.com/ask/answers/09/trust-beneficiaries.asp

12. https://www.drobnylaw.com/articles/designating-a-trust-as-beneficiary-of-individual-retirement-account-benefits

13. https://www.myubiquity.com/resources/can-a-trust-be-a-beneficiary-of-a-401-k-plan

14. https://www.katz-law-firm.com/can-a-trust-be-the-beneficiary-of-an-ira/

15. https://caryestateplanning.com/blog/should-i-have-a-trust-as-my-ira-beneficiary/

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The Outlook for Social Security and Medicare

May 31, 2024 — Sam H. Fawaz

In a recent survey, 87% of Americans said that Congress should act now to shore up the Social Security program rather than waiting 10 years to find a solution. The sooner they do, the better.

Each year, the Social Security and Medicare trust fund Trustees provide detailed reports to Congress that track the programs’ current financial condition and projected financial outlook. These reports have warned for years that the trust funds would be depleted in the not-too-distant future, and the most recent reports, released on May 6, 2024, show that Social Security and Medicare continue to face significant financial challenges.

The Trustees of both programs continue to urge Congress to address these financial shortfalls soon so that solutions will be less drastic and may be implemented gradually.

Despite the challenges, it’s important to remember that neither of these programs is in danger of collapsing completely. The question is what changes will be required to rescue them.

More Retirees and Fewer Workers

The fundamental problem facing both programs is the aging of the American population. Today’s workers pay taxes to fund benefits received by retirees, and with lower birth rates and longer life spans, fewer workers pay into the programs, and more retirees receive benefits for a longer period. In 1960, there were 5.1 workers for each Social Security beneficiary; in 2024, there were 2.7, projected to drop steadily to 2.3 by 2040.

Dwindling Trust Funds

Payroll taxes from today’s workers and income taxes on Social Security benefits go into interest-bearing trust funds. During times when payroll taxes and other income exceeded benefit payments, these funds built up reserve assets. But now, the reserves are being depleted as they supplement payroll taxes and other income to meet scheduled benefit payments.

Social Security Outlook

Social Security consists of two programs, each with its own trust fund. Retired workers, their families, and survivors receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program, and disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program.

The OASI Trust Fund reserves are projected to be depleted in 2033, unchanged from last year’s report. At that time, incoming revenue would pay only 79% of scheduled benefits. Reserves in the much smaller DI Trust Fund, which is on stronger footing, are not projected to be depleted during the 75 years ending in 2098.

Under current law, these two trust funds cannot be combined, but the Trustees also provide an estimate for the hypothetical combined program, referred to as OASDI. This would extend full benefits to 2035, a year later than last year’s report, at which time, incoming revenue would pay only 83% of scheduled benefits.

Medicare Outlook

Medicare also has two trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care under Medicare Part A. The Supplementary Medical Insurance (SMI) Trust Fund comprises two accounts: one for Medicare Part B physician and outpatient costs and the other for Medicare Part D prescription drug costs.

The HI Trust Fund will contain surplus income through 2029 but is projected to be depleted in 2036, five years later than last year’s report. At that time, revenue would pay only 89% of the program’s costs. Overall, projections of Medicare costs are highly uncertain.

The SMI Trust Fund accounts for Medicare Parts B and D are expected to have sufficient funding because they are automatically balanced through premiums and revenue from the federal government’s general fund. Still, financing must increase faster than the economy to cover expected expenditure growth.

Possible Fixes

Based on this year’s report, if Congress does not take action, Social Security beneficiaries might face a benefit cut after the trust funds are depleted. Any permanent fix to Social Security would likely require a combination of changes, including:

• Raise the Social Security payroll tax rate (currently 12.4%, half paid by the employee and half by the employer). An immediate and permanent payroll tax increase to 15.73% would be necessary to address the long-range revenue shortfall (or 16.42% if the increase starts in 2035).

• Raise the ceiling on wages subject to Social Security payroll taxes ($168,600 in 2024).

• Raise the full retirement age (currently 67 for anyone born in 1960 or later).

• Change the benefit calculation formula.

• Use a different index to calculate the annual cost-of-living adjustment.

• Tax a higher percentage of benefits for higher-income beneficiaries.

Addressing the Medicare shortfall might necessitate spending cuts, tax increases, and cost-cutting through program modifications.

Based on past changes to these programs, future changes are likely to primarily affect future beneficiaries and have a relatively small effect on those already receiving benefits. While neither Social Security nor Medicare is in danger of disappearing, it would be wise to maintain a strong retirement savings strategy to prepare for potential changes that may affect you in the future.

Many people believe the social security system will not be around when it’s their turn to collect benefits. I don’t believe that to be the case. Based on everything I’ve studied, I believe Congress will act, but not any sooner than they have to, or perhaps when it becomes a crisis. And when they do, combining some or all of the above techniques will extend the social security fund and medicare benefits for many more decades. There’s no rush, in my opinion, to collect benefits as soon as possible out of fear of the system running out of money.

You can view a summary of the 2024 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

All projections are based on current conditions, subject to change, and may not come to pass.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

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Year-end 2022 Tax and Financial Planning for Individuals

November 30, 2022 — Sam H. Fawaz

As we wrap up 2022, it’s important to take a closer look at your tax and financial plans and review steps that can be taken to reduce taxes and help you save for your future. Though there has been a lot of political attention to tax law changes, inflation and environmental sustainability, political compromise has led to smaller impacts on individual taxes this year.

However, with the passage of the Inflation Reduction Act of 2022, there are new tax incentives for you to consider. There are also several tax provisions that have expired or will expire soon. We continue to closely monitor any potential extensions or changes in tax legislation and will update you accordingly.

Here’s a look at some potential planning ideas for individuals to consider as we approach year-end:

Charitable Contribution Planning

If you’re planning to donate to a charity, it may be better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies related to charitable giving. For example, if you give gifts larger than $5,000 to a single organization, consider donating appreciated assets (such as collectibles, stock, exchange-traded funds, or mutual funds) that have been held for more than one year, rather than cash. That way, you’ll get a deduction for the full fair market value while side-stepping the capital gains taxes on the gain.

Because of the large standard deduction, most people no longer itemize deductions. But bunching deductions every other year might give you a higher itemized deduction than the standard deduction. One way to do this is by opening and funding a donor-advised fund (DAF). A DAF is appealing to many as it allows for a tax-deductible gift in the current year for your entire contribution. You can then grant those funds to your favorite charities over multiple years. If you give $2,000 or more a year to charity, talk to us about setting up a DAF.

Qualified charitable distributions (QCDs) are another option for certain taxpayers (age 70.5+) who don’t typically itemize on their tax returns. If you’re over age 70.5, you’re eligible to make charitable contributions directly from your IRA, which essentially makes charitable contributions deductible (for both federal and most state tax purposes) regardless of whether you itemize or not. In addition, it reduces future required minimum distributions, reducing overall taxable income in future years. QCDs keep income out of your tax return, making income-sensitive deductions (such as medical expenses) more viable, lowers the taxes on your social security income, and can lower your overall tax rate. They may also help keep your Medicare premiums low.

Last year, individuals who did not itemize their deductions could take a charitable contribution deduction of up to $300 ($600 for joint filers). However, this opportunity is no longer available for tax year 2022 (and future years).

Note that it’s important to have adequate documentation of all donations, including a letter or detailed receipt from the charity for donations of $250 or more. That letter/receipt must include your name, the taxpayer identification number of the institution, the amount, and a declaration of whether you received anything of value in exchange for the contribution.

Required Minimum Distributions (RMDs)

Tax rules don’t allow you to keep retirement funds in your accounts indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally age 72). The RMD is calculated and based on the value of the account at the end of the prior tax year multiplied by a percentage from the IRS’ life expectancy tables. Failure to take your RMD can result in steep tax penalties–as much as 50% of the undistributed amount.

Retirement withdrawals obviously have tax impacts. As mentioned above, you can send retirement funds to a qualified charity to satisfy the RMD and potentially avoid taxes on those withdrawals.

Effective for the 2022 tax year, the IRS issued new life expectancy tables, resulting in lower annual RMD amounts. We can help you calculate any RMDs to take this year and plan for any tax exposure.

Digital Assets and Virtual Currency

Digital assets are defined under the U.S. income tax rules as “any digital representation of value that may function as a medium of exchange, a unit of account, and/or a store of value.” Digital assets may include virtual currencies such as Bitcoin and Ethereum, Stablecoins such as Tether and USD Coin (USDC), and non-fungible tokens (NFTs).

Unlike stocks or other investments, the IRS considers digital assets and virtual currencies as property, not as capital assets. As such, they are subject to a different set of rules than your typical investments. The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. We can help you understand any tax and investment consequences, which can be quite convoluted.

Energy Tax Credits

From electric vehicles to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles, and energy-efficient home improvements. The rules are complex, and some elements of the law are not effective until 2023, so careful research and planning now can be beneficial. For example, previously ineligible electric vehicles are now eligible for credits, while other eligible vehicles are now ineligible for credits if they don’t contain the right proportion of parts and assembly in the United States.

Additional Tax and Financial Planning Considerations

We recommend that you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs, and company retirement plans. It’s also advisable to take advantage of and maximize health savings accounts (HSAs), which can help you reduce your taxes and save for medical-related expenses.

Also, if you withdrew a Coronavirus distribution of up to $100,000 in 2020, you’ll need to report the final one-third amount on your 2022 return (unless you elected to report the entire distribution in 2020 or have re-contributed the funds to a retirement account). If you took a distribution, you could return all or part of the distribution to a retirement account within three years, which will be a date in 2023.

We can work with you to strategize a plan to help restore and build your retirement savings and determine whether you’re on target to reach your goals.

Here are a few more tax and financial planning items to consider and potentially discuss with us:

  • Life changes –– Let us (or your current financial planner) know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business, and significant capital expenditures (such as real estate purchases, college tuition payments, etc.).
  • Capital gains/losses –– Consider tax benefits related to harvesting capital losses to offset realized capital gains, if possible. Net capital losses (the result when capital losses exceed capital gains for the year) can offset up to $3,000 of the current year’s ordinary income (salary, self-employment income, interest, dividends, etc.) The unused excess net capital loss can be carried forward to be used in subsequent years. Consider harvesting some capital gains if you have a large capital loss from the current or prior years.
  • Estate and gift tax planning –– There is an annual exclusion for gifts ($16,000 per donee in 2022, $32,000 for married couples) to help save on potential future estate taxes. While you can give much more without incurring any gift tax, any total annual gift to one individual larger than $16,000/$32,000 requires the filing of a gift tax return (with your form 1040). Note that the filing of a gift tax return is an obligation of the giver, not the recipient of the gift. The annual exclusion for 2023 gifts increases to $17,000/$34,000.
  • State and local taxes –– Many people are now working from home (i.e., teleworking). Such remote working arrangements could potentially have state or local tax implications that should be considered. Working in one state for an employer located in another state may have unexpected state tax consequences. Also, ordering merchandise over the internet without paying sales or use tax might obligate you to remit a use tax to your home state.
  • Education planning –– Consider a Section 529 education savings plan to help save for college or other K-12 education. While there is no federal income tax deduction for the contributions, there can be state income tax benefits (full or partial deductions) for doing so. Funds grow tax-free over many years and can be distributed tax-free when used for qualified education purposes. Lower-income taxpayers (less than $85,800 if single, head of household, or qualifying widow(er); $128,650 if married filing jointly) can redeem certain types of United States savings bonds tax-free when redeemed for college.
  • Updates to financial records –– Tax time is the ideal time to review whether any updates are needed to your insurance policies or various beneficiary designations (life insurance, annuity, IRA, 401(k), etc.), especially if you’ve experienced any life changes in the past year.
  • Last Call for 401(k), 403(b) & Other retirement Plan Contributions –– Once the calendar turns to 2023, it’s too late to maximize your employer plan contributions. It may not be too late to make sure that you’ve contributed the $20,500 maximum (plus $6,500 for those age 50 and older) to the plan. Review your last pay stub and check with your human resources or retirement plan website to see if you can still increase your current year contributions (don’t forget to reset the percentage in early 2023). Remember, if you’ve worked for more than one employer in 2022, your total contributions via all employers cannot exceed the annual maximum, so you must monitor this. For IRAs, you have until April 18, 2023, to make up to a $6,000 contribution for 2022 (plus a $1,000 catch-up contribution for those age 50 and older)
  • Roth IRA conversions –– Depending on your current year’s highest tax rate, it may be prudent to consider converting part of your traditional IRA to a Roth IRA to lock in lower tax rates on some of your pre-tax retirement accounts. A conversion is nothing more than a taxable distribution from your IRA which is immediately deposited into your Roth IRA (while income taxes apply, no early withdrawal penalty applies). Roth conversions can help reduce future required minimum distributions and help keep future Medicare premiums lower.  The ideal time to consider Roth conversions is after you retire and before you start collecting your pension or social security checks (or whenever your income is much lower in any particular year).
  • Estimated tax payments –– Review your year-to-date withholding and estimated tax payments to assess whether a 4th quarter 2022 estimated tax payment might be required. An easy way to do this is to compare the total tax line on your 2021 income tax return with your total withholding and estimated payments (total payments) made to date. If your total payments made to date are at least 110% of your 2021 total tax, chances are, you are adequately paid in. While you may owe some tax with the filing of your 2022 return (due on April 18, 2023), you likely won’t owe any penalties for underpayment of estimated tax. Similarly, you may not need to pay 110% of last year’s tax if your income has decreased substantially versus the prior year.

Year-End Planning Means Fewer Surprises

Whether it’s working toward a tax-optimized retirement or getting answers to your tax and financial planning questions, we’re here to help. As always, planning can help you anticipate and minimize your tax bill and position your family and you for greater financial success.

If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so are your financial plan and investment objectives.

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Some Cures For Your “Social InSecurity”

July 27, 2022 — Sam H. Fawaz

One of the most common questions I hear from clients and prospects concerns the viability of the social security system and the likelihood it will be solvent enough to pay their benefits when they eventually reach retirement age. Their default instinct is to draw social security at the earliest possible age in case benefits were to run out prematurely. As you’ll read below, the Social Security program has many possible tweaks to help extend the payment of benefits for many decades to come and should help alleviate much of your Social InSecurity.

With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern. According to the Social Security Administration, Social Security isn’t in danger of going broke — it’s financed primarily through payroll taxes — but its financial health is declining, and future benefits may eventually be reduced unless Congress acts.

Each year, the Trustees of the Social Security Trust Funds release a detailed report to Congress that assesses the financial health and outlook of this program. The most recent report, released on June 2, 2022, shows that the effects of the pandemic were not as significant as projected in last year’s report — a bit of good news this year.

Overall, the news is mixed for Social Security

The Social Security program consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay Social Security benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability     Insurance (DI) program. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.

Money that’s not needed in the current year to pay benefits and administrative costs is invested (by law) in special government-guaranteed Treasury bonds that earn interest. Over time, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits, and these reserves are now being drawn down. Due to the aging population and other demographic factors, contributions from workers are no longer enough to fund current benefits.

In the latest report, the Trustees estimate that Social Security will have funds to pay full retirement and survivor benefits until 2034, one year later than in last year’s report. At that point, reserves will be used up, and payroll tax revenue alone would be enough to pay only 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period.

The Disability Insurance Trust Fund is projected to be much healthier over the long term than last year’s report predicted. The Trustees now estimate that it will be able to pay full benefits through the end of 2096. Last year’s report projected that it would be able to pay scheduled benefits only until 2057. Applications for disability benefits have been declining substantially since 2010, and the number of workers receiving disability benefits has been falling since 2014, a trend that continues to affect the long-term outlook.

According to the Trustees report, the combined reserves (OASDI) will be able to pay scheduled benefits until 2035, one year later than in last year’s report. After that, payroll tax revenue alone should be sufficient to pay 80% of scheduled benefits, declining to 74% by 2096. OASDI projections are hypothetical, because the OASI and DI Trust Funds are separate, and generally one program’s taxes and     reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.

All projections are based on current conditions and best estimates of likely future demographic, economic, and program-specific conditions, and the Trustees acknowledge that the course of the pandemic and future events may affect Social Security’s financial status.

You can view a copy of the 2022 Trustees report at ssa.gov.

Many options for improving the health of Social Security

The last 10 Trustees Reports have projected that the combined OASDI reserves will become depleted between 2033 and 2035. The Trustees continue to urge Congress to address the financial challenges facing these programs so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Many options have been proposed, including the ones listed below. Combining some of these may help soften the impact of any one solution:

  • Raising the current Social Security payroll tax rate (currently 12.4%). Half is currently paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.24 percentage points to 15.64% would be needed to cover the long-range revenue shortfall.
  • Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
  • Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
  • Raising the early retirement age beyond the current age of 62.
  • Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible for benefits in 2022 or later.
  • Changing the benefit formula that is used to calculate benefits.
  • Calculating the annual cost-of-living adjustment (COLA) for benefits differently.

A comprehensive list of potential solutions can be found at ssa.gov.

As for when Congress will act to fix the system, in my opinion, it will probably be at the last minute when it becomes a crisis. But make no mistake-Congress will act, and any rumors or stories that social security won’t be around for the long term are simply false. Any member of Congress who votes against fixing and extending the system’s heath won’t be re-elected, and therefore you know they eventually will.

As for when you should consider drawing your own social security benefits, the unsatisfying answer is: it depends. Whether you should draw benefits at your early retirement age (usually 62), full retirement age (usually 67) or latest retirement age (70), depends on your financial situation, your spending needs, expected longevity and other factors. Only working with a financial planner or a comprehensive social security optimizer can help you figure out the optimal timeframe to claim social security. The right or wrong decision can increase or decrease your lifetime benefits by five or six zeroes—it’s worth the time and effort to do the analysis. We can, of course, help.

If you would like to review your current investment portfolio or discuss your social security benefits, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Posted in Elder Care, estate planning, Financial Planning, General, retirement, retirement planning, Social Security Benefits. Leave a Comment »

Love, Marriage and Finances

January 28, 2015 — Sam H. Fawaz

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. There are, however, two important caveats. First, same-sex marriages are recognized for federal income and estate tax reporting purposes. However, each state determines its own rules for state taxes, inheritance rights, and probate, so the legal standing of same-sex couples in financial planning issues may still vary from state to state. Second, a prenuptial agreement, a legal document, can permit a couple to keep their finances separate, protect each other from debts, and take other actions that could limit the rights of either partner.

Building Wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans and each contributes $18,000 a year, as a couple you are contributing $36,000, twice the maximum annual contribution for an individual ($18,000 for 2015). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which could make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement Benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

Estate Planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax Planning

When filing federal income taxes, filing jointly may result in lower tax payments when compared with filing separately.

Debt Management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement.

Family Matters

Marriage may enhance a partner’s ability to collect financial support, such as alimony, should the relationship dissolve. Although single people do adopt, many adoption agencies show preference for households that include a marital relationship.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your beloved before tying the knot.

If you would like to discuss financial planning related to your upcoming or existing marriage or any other investment portfolio management matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

 

Posted in estate planning, Fee-only, Financial Planning, General, retirement, retirement planning, tax planning. Tags: , , . Leave a Comment »

2014 Investment Report: Dare to Believe?

January 4, 2015 — Sam H. Fawaz

Looking back on 2014, people are going to say it was a great year to be an investor. They won’t remember how uncertain the journey felt right up to the last day of a year that saw the S&P 500 close at a record level on 53 different days. Think back over a good year in the market. Was there ever a time when you felt confidently bullish that the markets were taking off and delivering double-digit returns? I know I didn’t.

The Wilshire 5000–the broadest measure of U.S. stocks and bonds—finished the year up 13.14%, on the basis of a strong 5.88% return in the final three months of the year. The comparable Russell 3000 index will go into the history books gaining 12.56% in 2014.

The Wilshire U.S. Large Cap index gained 14.62% in 2014, with 6.06% of that coming in the final quarter. The Russell 1000 large-cap index gained 13.24%, while the widely-quoted S&P 500 index of large company stocks posted a gain of 4.39% in the final quarter of the year, to finish up 11.39%. The index completed its sixth consecutive year in positive territory, although this was the second-weakest yearly gain since the 2008 market meltdown.

The Wilshire U.S. Mid-Cap index gained a flat 10% in 2014, with a 5.77% return in the final quarter of the year. The Russell Midcap Index gained 13.22% in 2014.

Small company stocks, as measured by the Wilshire U.S. Small-Cap, gave investors a 7.66% return, all of it (and more) coming from a strong 8.57% gain in the final three months of the year. The comparable Russell 2000 Small-Cap Index was up 4.89% for the year. Meanwhile, the technology-heavy Nasdaq Composite Index gained 14.39% for the year.

While the U.S. economy and markets were delivering double-digit returns, the international markets were more subdued. The broad-based EAFE index of companies in developed economies lost 7.35% in dollar terms in 2014, in large part because European stocks declined 9.55%. Emerging markets stocks of less developed countries, as represented by the EAFE EM index, fared better, but still lost 4.63% for the year. Outside the U.S., the countries that saw the largest stock market rises included Argentina (up 57%), China (up 52%), India (up 29.8%) and Japan (up 7.1%).

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, was up a robust 33.95% for the year, with 17.03% gains in the final quarter alone. Commodities, as measured by the S&P GSCI index, proved to be an enormous drag on investment portfolios, losing 33.06% of their value, largely because of steep recent drops in gold and oil prices.

Part of the reason that U.S. stocks performed so well when investors seemed to be constantly looking over their shoulders is interest rates—specifically, the fact that interest rates remained stubbornly low, aided, in no small part, by a Federal Reserve that seems determined not to let the markets dictate bond yields until the economy is firmly and definitively on its feet. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 3.13%, giving its investors a windfall return of 7.27% for the year due to falling bond rates. 30-year Treasuries are yielding 2.75%, and 10-year Treasuries currently yield 2.17%. At the low end, 3-month T-bills are still yielding a miniscule 0.04%; 6-month bills are only slightly more generous, at 0.12%.

Normally when the U.S. investment markets have posted six consecutive years of gains, five of them in double-digit territory, you would expect to see a kind of euphoria sweep through the ranks of investors. But for most of 2014, investors in aggregate seemed to vacillate between caution and fear, hanging on every economic and jobs report, paying close attention to the Federal Reserve Board’s pronouncements, seemingly trying to find the bad news in the long, steady economic recovery.

One of the most interesting aspects of 2014—and, indeed, the entire U.S. bull market period since 2009—is that so many people think portfolio diversification was a bad thing for their wealth. When global stocks are down compared with the U.S. markets, U.S. investors tend to look at their statements and wonder why they’re lagging the S&P index that they see on the nightly news. This year, commodity-related investments were also down significantly, producing even more drag during what was otherwise a good investment year.

But that’s the point of diversification: when the year began, none of us knew whether the U.S., Europe, both or neither would finish the year in positive territory. Holding some of each is a prudent strategy, yet the eye inevitably turns to the declining investment which, in hindsight, pulled the overall returns down a bit. At the end of next year, we may be looking at U.S. stocks with the same gimlet eye and feeling grateful that we were invested in global stocks as a way to contain the damage; there’s no way to know in advance. Indeed, we increased our allocations to overseas markets in 2014 as a matter of prudent re-balancing.  For 2014, that proved to be a tad early, providing a bit of a headwind.

Is a decline in U.S. stocks likely? One can never predict these things in advance, but the usual recipe for a terrible market year is a period right beforehand when investors finally throw caution to the winds, and those who never joined the bull market run decide it’s time to crash the party. The markets have a habit of punishing overconfidence and latecomers, but we don’t seem to be seeing that quite yet.

What we ARE seeing is kind of boring: a long, slow economic recovery in the U.S., a slow housing recovery, healthy but not spectacular job creation in the U.S., stagnation and fears of another Greek default in Europe, stocks trading at values slightly higher than historical norms and a Fed policy that seems to be waiting for certainty or a sign from above that the recovery will survive a return to normal interest rates.

On the plus side, we also saw a 46% decline in crude oil prices, saving U.S. drivers approximately $14 billion this year. On the minus side, investments in the energy sector during 2014 proved be a downer to portfolios. Oil, like most commodities, tends to be cyclical, and should turn back upward should the rest of the world find its footing and show healthier signs of growth. Should crude continue to slide, we may see collateral damage in the form of lost jobs, shuttered drilling projects and loan defaults by independent, not so well capitalized producers. This would be your classic case of “too much of a good thing.”

The Fed has signaled that it plans to take its foot off of interest rates sometime in the middle of 2015. The questions that nobody can answer are important ones: Will the recovery gain steam and make stocks more valuable in the year ahead? Will Europe stabilize and ultimately recover, raising the value of European stocks? Will oil prices stabilize and remain low, giving a continuing boost to the economy? Or will, contrary to long history, the markets flop without any kind of a euphoric top?

We can’t answer any of these questions, of course. What we do know is that since 1958, the U.S. markets, as measured by the S&P 500 index, have been up 53% of all trading days, 58% of all months, 63% of all quarters and 72% of the years. Over 10-year rolling time periods, the markets have been up 88% of the time. These figures do not include the value of the dividends that investors were paid for hanging onto their stock investments during each of the time periods.

Yet since 1875, the S&P 500 has never risen for seven calendar years in a row. Could 2015 break that streak? Stay tuned.

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

http://money.cnn.com/2014/09/30/investing/stocks-market-september-slump/index.html

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

http://blogs.marketwatch.com/thetell/2014/06/30/one-chart-explains-the-unexpected-first-half-treasury-rally/

Aggregate corporate bond rates: https://indices.barcap.com/show?url=Benchmark_Indices/Aggregate/Bond_Indices

Aggregate corporate bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

http://www.reuters.com/article/2014/12/31/us-usa-markets-2015-analysis-idUSKBN0K908820141231

http://moneyover55.about.com/od/howtoinvest/a/bearmarkets.htm?utm_term=historical%20performance%20of%20s&p%20500&utm_content=p1-main-7-title&utm_medium=sem&utm_source=msn&utm_campaign=adid-ac372107-3fb5-4c61-a1f3-6ab4e1340551-0-ab_msb_ocode-28813&ad=semD&an=msn_s&am=broad&q=historical%20performance%20of%20s&p%20500&dqi=S%2526P%2520500%2520yearly%2520performance&o=28813&l=sem&qsrc=999&askid=ac372107-3fb5-4c61-a1f3-6ab4e1340551-0-ab_msb

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Providing for Pets

December 7, 2014 — Sam H. Fawaz

This past summer, the entertainment world lost one of its most prominent and popular figures: Joan Rivers. When her estate planning documents were unveiled, it became clear that she was a careful planner of her legacy–and also a devoted pet owner. One of the most interesting details of her estate plan was the careful provisions Rivers made for her pets.

Rivers left the bulk of her estate to her daughter Melissa and her grandson Cooper–an estimated $150 million in total value. The two rescue dogs who shared her New York residence, and two other dogs who lived at her home in California, were beneficiaries of pet trusts, which included an undisclosed amount of money set aside for their ongoing care, and carefully written provisions that described the standard of living that Rivers expected them to receive for the remainder of their lives.

Traditional pet trusts are honored in most U.S. states, as are statutory pet trusts, which are simpler. In a traditional trust, the owner lists the duties and responsibilities of the designated new owner of the pets, while the statutory trusts incorporate basic default provisions that give caregivers broad discretion to use their judgment to care for the animals. Typical provisions include the type of food the animal enjoys, taking the dog for daily walks, plus regular veterinary visits and care if the pet becomes ill or injured. The most important provision in your pet trust, according to the American Society for the Prevention of Cruelty to Animals, is to select a person who loves animals and, ideally, loves your pets.

The trust document will often name a trustee who will oversee the level of care, and a different person will be named as the actual caregiver. In all cases, the trusts terminate upon the death of the last surviving animal beneficiary, and the owner should choose who will receive those residual assets.

Some states have different laws that require different arrangements. Idaho allows for the creation of a purpose trust, and Wisconsin’s statute provides for an “honorary trust” arrangement. There are no pet trust provisions on the legal books in Kentucky, Louisiana, Minnesota and Mississippi, but pet owners living there can create a living trust for their pets or put a provision in their will which specifies the care for pets. A popular (and relatively simple) alternative is to set aside an amount of money in the will to go to the selected caregiver, with a request that the money be used on behalf of the pet’s ongoing care.

It should be noted that a pet trust is not designed to pass on great amounts of wealth into the total net worth of the animal kingdom. The poster child of an extravagant settlement is Leona Helmsley’s bequest of $12 million to her White Maltese, instantly putting the dog, named “trouble,” into the ranks of America’s one-percenters. Rather than confer a financial legacy on an animal, the goal should be to ease any financial burdens the successor owner might incur when caring properly for your loved animals for the remainder of their lives, including food and veterinary bills.

How long should you plan for the funding to last? Cats and dogs typically live 10-14 years, but some cats have lived to age 30, and some dogs can survive to see their 24th birthday. Interestingly, estate planners are starting to see some pet trusts extend out for rather lengthy periods of time, as owners buy pets that have longer lifespans. For example, if an elderly person has a Macaw parrot as a companion, the animal could easily outlive several successor owners, with a lifespan of 80-100 years. Horse owners should plan for a life expectancy of 25-30 years, and, since horses tend to be expensive to care for, the trust will almost certainly require greater levels of funding. On the extreme end, if you know anyone who happens to have a cuddly Galapagos giant tortoise contentedly roaming their backyard, let them know that their pet trust would need to be set up for an average 190-year lifespan.

If you would like to discuss your estate planning or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:
http://www.dailyfinance.com/2014/09/11/what-joan-rivers-just-taught-pet-lovers-about-estate-planning/
http://www.dailyfinance.com/2014/08/14/robin-williams-estate-plan-spares-his-heirs-drama/
http://www.1800petmeds.com/education/life-expectancy-dog-cat-40.htm
http://abcnews.go.com/US/leona-helmsleys-dog-trouble-richest-world-dies-12/story?id=13810168
http://www.aspca.org/pet-care/planning-for-your-pets-future/pet-trust-primer

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Massive withdrawals from 401(k)s thwart Americans’ retirement planning efforts

December 3, 2014 — Sam H. Fawaz

As the IRS released the 401(k) contribution limits for 2015, attention turned, as it has in prior years, to the large number of plan participants who come nowhere close to contributing these amounts. In contrast, many individuals use their 401(k) accounts as a means to pay off loans and other current expenses.

The amounts withdrawn are not negligible. According to a recent study by Vanguard, the average withdrawal represents one-third of the participant’s account balance. Additionally, most withdrawals are not for hardship — non-hardship withdrawals outnumber hardship withdrawals 2-to-1, and the rate of new non-hardship withdrawals doubled between 2004 and 20131.

So, why are so many withdrawals occurring? One reason is to pay off debt, including student loans. Another may be to help make ends meet when people are between jobs. Fidelity reported earlier this year that 35% of participants took all or part of their 401(k) savings when leaving a job2.

No matter the reason, the long-term implications of early 401(k) withdrawals can be considerable. In withdrawing from the account, plan participants will miss out on tax-deferred compounding of that money, which can add up over time.

Alternatives to Raiding Your 401(k)

Withdrawing from a tax-deferred retirement plan to meet short-term needs should be a last resort. Before doing so, consider alternatives such as the following:

  • Savings accounts or other liquid investments, including money market accounts. With short-term investment rates at historically low levels, the opportunity cost for using these funds is relatively low.
  • Home equity loans or lines of credit. Not only do they offer comparatively low interest rates, but interest payments are generally tax deductible.
  • Roth IRA contributions. If there is no other choice but to withdraw a portion of retirement savings, consider starting with a Roth IRA. Amounts contributed to a Roth IRA can be withdrawn tax and penalty free if certain qualifications are met. See IRS Publication 590 for more information.

If withdrawing from a 401(k) is absolutely necessary, consider rolling it over to an IRA first and then withdrawing only what is needed. According to the Vanguard study, fewer than 10% of withdrawals were rolled into an IRA; more than 90% were taken in cash1, which typically generates withholding taxes and IRS penalties.

If you would like to discuss your retirement investments or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:
1Vanguard Investment Group, How America Saves 2014, June 2014.
2The New York Times, “Combating a Flood of Early 401(k) Withdrawals,” October 24, 2014.

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