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Water Cooler Wisdom: The Day Finally Arrived

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Water Cooler Wisdom

The Day Finally Arrived

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. The long-awaited tax legislation includes a wide array of changes, but a few interesting highlights are listed below.

  • Reduces the top corporate tax rate from 35% to 21%.
  • Changes the taxation of multinational companies from a worldwide system with deferral and credit for taxes paid abroad to a territorial system in which only domestic profits would be taxed.
  • Imposes a one-time repatriation tax of 15.5% on cash and 8% on illiquid assets on the more than $2.6 trillion in profits held by their foreign subsidiaries. (See “Overseas Cash Stash”)
    • How will this impact fourth quarter earnings for multinational companies? (See “Corporate Profits”)
    • What will they do with the cash? (See “Use of profits: capex vs. payouts”)

 

Forecasters are projecting long-term benefits for corporations, but it will be interesting to see the similarities and differences in decisions made by management. The C-suite may be criticized by its shareholders when we eventually have 20/20 hindsight on this topic. On a lighter note, below are the predictions from Bob Doll’s crystal ball.

 

Bob Doll’s Predictions for 2018[1]

 

  1. S. real GDP reaches 3% and nominal GDP 5% for the first time in over a decade.
  2. Despite ongoing protectionism, the global expansion continues with the fewest countries in recession in history.
  3. Unemployment falls to the lowest level in nearly 50 years as wage growth is the highest since the Great Recession.
  4. The yield curve flattens (but does not invert) as the 10-year Treasury yield reaches 3% for the first time since 2014.
  5. Stocks enjoy longest bull market in history but experience a 5+% correction after the longest period without one.
  6. S. equity returns lag earnings growth for the first time in six years, the longest streak in decades.
  7. Equities beat bonds for the seventh consecutive year for the first time in nearly a century.
  8. Corporate capital expenditures increase at the expense of share buybacks.
  9. Telecommunication services, information technology and health care outperform utilities, energy and materials.
  10. Republicans lose the House, retain the Senate and further distance themselves from President Trump.

 

2018 is off to a great start. Low inflation, low unemployment, high consumer confidence, global expansion, fiscal stimulus…What more could an investor want? At the time of writing this note the government is only funded until January 19th, but let’s assume a spending bill passed. Let us know your thoughts.

 

Estate Planning 101

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By far, the most common personal financial planning mistake I see is the complete absence of an estate plan.  Do you have a will prepared?  What about a trust?  Have you written advance medical directives or assigned a medical power of attorney?  Have you identified beneficiaries?  For the average person, the answer is, “No.”
The second most common mistake is similar to the first.  A family will pay thousands of dollars to an attorney to draft an estate plan.  However due to miscommunication, misunderstanding or simple lack of follow through, the plan fails miserably.

Why Do I Need an Estate Plan?

A person does not need to be a millionaire to benefit from an estate plan.  Do you own a home, business or other assets?  Do you have children?  Are you going to die someday?  If you answered, “yes” to any of these three questions, you are a candidate for estate planning.  There are several reasons the average person would want an estate plan, namely to:
o Assign powers-of-attorney, which allow your loved ones to protect you during an emergency.
o Inform others which medical procedures are acceptable to you via advance medical directive.
o Protect your family.
o Select the legal guardian of your children if you die prematurely.
o Protect your business if you are self-employed.
o Determine who inherits your property and assets.
o Ensure your money is spent the way you intended after you are gone.
o Donate to your favorite charity.
o Anticipate and correct any potential complications during the transfer of your wealth.
o Avoid common tax mistakes, including unecessary liens.
o Make sure your assets are not intercepted by an adverse party such an ex-spouse.
o Protect your privacy posthumously.
o Avoid unnecessary expenses and delays associated with probate court.
o Make reasonable preparations for your inevitable death, burial and final expenses.

“Our estate plan is already done, right?”  Wrong.

It happens time and time again.  People recognize they have estate planning needs.  Therefore, they pay a local attorney handsomely to set up a Revocable Living Trust.   The happy couple believes their estate plan is now done.  Unfortunately, they could not be more wrong.  The creation of a trust is not the end of the estate plan.  It is only the beginning.  Why?  An empty trust is a lot like an empty fire extinguisher.  It looks cool, but what good will it really do?  The conundrum is simple.  For assets to be legally protected by a trust, the assets must first be transferred to the trust.  This process can be confusing and very time consuming.  A professional with the necessary expertise can and should do this for the client.

The Glass Wall

There is a glass wall set up by regulators that generally prohibits attorneys from giving investment advice.  Likewise, investment advisors are prohibited from practicing law.  These regulations are intended to protect consumers and rightfully so, but they also leave clients in an odd conundrum.  Who funds the trust?  Most attorneys are unfamiliar with the financial services landscape.  Likewise, most investment advisors do not comprehend estate plans.  A communication breakdown is almost inevitable.

 

Often the task of funding a trust is therefore left to the clients.  The clients are written given instructions by their attorney.  Everyone smiles and nods.  They sign a few papers and shake hands.  The clients usually go home happy and put their new estate plan on the shelf where it collects dust.  When they die, their heirs are surprised to learn nothing was placed in the trust.  So, it provides almost no benefit.

A Delay of Game Penalty

It is tempting to delay estate planning.  One of my favorite stories involves the owner of the Los Angeles Rams. A full explanation of what transpired is beyond the scope of this article, but I will attempt to summarize.  Carroll Rosenbloom was the majority owner of the Los Angeles Rams.  He had children by his first wife, but eventually divorced.  His second marriage was to a woman name Georgia Frontiere.  It was, coincidentally, her sixth marriage.  For the full story, I refer you to the NFL.  For the purposes of this article, Mr. Rosenbloom died in a swimming accident at age 72.  Sources say he intended to leave the team to his son, Steve.  However, Carroll just never got around to updating his estate plan.  The version of his will that would have left the team to his son was never properly executed.  Therefore, for what many believe to be tax purposes, Rosenbloom allowed his second wife to inherit the team.  He trusted her to “do the right thing.”  Many believe that in his mind, that meant to let his son, Steve, run and eventually inherit the team.  Instead Georgia promptly fired her step-son and assumed control of the team.  To her credit, the Rams won a Super Bowl.  Eventually she also died at the age of 80.  She had children of her own from previous marriages to worry about.  Steve was left out of the equation.  To make a long story short, the Rams were acquired by strangers.  Rosenbloom’s son never legally inherited the team.  To put that in perspective, Forbes valued the Rams at $2.9 billion in 2017.  Not everyone is lucky enough to own an NFL team, but hopefully everyone can profit from this lesson.  For the sake of those you love, do not neglect your estate plan.  Fund it properly.  Review it annually.  Update it as necessary.

We Can Help Fund Your Trust

Castle Rock Investment Company is a Registered Investment Advisor.  We are not attorneys, do not give legal advice or draft legal documents.  However, our firm can help you pick up where your attorney left off.  We can assist you with the critical task of funding your trust.  Members of our firm have experience and expertise in this area.  In order to enjoy the full legal benefits of the trust, assets must be transferred and retitled appropriately.  We can help.  Please contact us for a free consultation.

 

Written by Michael Angell, CFP®, EA
Castle Rock Investment Company
303.719.7523
Michael@CastleRockInvesting.Com
Copyright 2017

Water Cooler Wisdom:
Breathe. Repeat.

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As you can tell from the title, this quarterly opinion letter should be the “fluff” part of your ad hoc reading list. Otherwise, buyer beware.

Last quarter we talked about the “Trump bump” and I’m delighted that most of the U.S. equity gains have remained and the larger growth stocks have risen to match the “bump” seen by smaller value companies last quarter. Now the current price-to-earnings ratios (“P/E”) as a percentage of the 15-year average P/E range from 112.5% to 123.6% (see “Returns and Valuations by Style”). In short, everything is overpriced now.

The next six months in the U.S. stock market look rocky as the new administration struggles to fulfill their campaign “promises” and we try to sort fact from fiction daily. The consensus is that any change is going to take longer than expected and obfuscation is the norm. On the positive side of the ledger, consumer confidence is high, and Americans are hard-working and hopeful. Confidence is a lagging indicator but I’m still part of the hopeful bunch.

On a drearier topic, the growth in the working-age population (see “Long-term drivers of economic growth”) is a topic of concern. You should not hear Americans complain that an illegal immigrant stole their job because the labor force isn’t growing fast enough to fill the current jobs and growth is projected to drop by another 50% in the next decade. What does that mean for our GDP? Not good. If there is no growth in workers we are all going to have to be a bit more productive. That might push me out of the hopeful bunch.

Yet there is a drearier topic (see “Federal finances”). The Congressional Budget Office forecast an increase in the Federal net debt from 77.5% to 88.9% by 2027 due, mostly, to our aging population. “In particular, spending as a share of GDP increases for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt.”1

At this point you must wonder who is going to build the wall and pay for it. Perhaps the millennials will move out of the basement, build it, and pay for it. Go Texas, Arizona, California, and New Mexico. There is lots of potential population growth in the border towns. It’s going to be bigly.

Then there is one topic that doesn’t show up in the charts that I’ll end with. Love. We don’t measure it, nor its impact, but we know it exists.

In Paul’s words. “4 Love is patient, love is kind and is not jealous; love does not brag and is not arrogant, 5 does not act unbecomingly; it does not seek its own, is not provoked, does not take into account a wrong suffered, 6 does not rejoice in unrighteousness, but rejoices with the truth; 7 bears all things, believes all things, hopes all things, endures all things.”2

Love does, in fact, endure all things and that keeps me in the hopeful bunch.

1 httpss://www.cbo.gov/publication/52480
2 I Corinthians 13:4-7 (New American Standard Bible)

©2017 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Info@CastleRockInvesting.com

A 60 Day Delay?! Oh, Good Grief!

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Since the announcement from the DOL that the Fiduciary Rule would be delayed by 60 days, we’ve felt just like Charlie Brown screaming in frustration!

We were SO CLOSE! At Castle Rock Investment Company, we’ve been eagerly awaiting this day and fighting for its arrival for 10 years now. We made it within 4 days of retirement advice becoming conflict free in America. FOUR DAYS!

Not only is the administration favor of the delay, they provided an out for advisers who weren’t prepared for the rule to become applicable. As they were determining whether or not to delay the rule, they announced that businesses would not be penalized for not being prepared if the rule ended up not being delayed.

Companies were able to discontinue preparation as there would be no penalty had the rule not been delayed and they still were not prepared.

But no matter. It is delayed. 60 more days of consumers having no legal recourse if their retirement adviser chooses not to put their clients first. 60 more days of the government placing a stamp of approval on American’s losing $17 Billion a year due to conflicted advice. That’s $279,452,954 we stand to lose.

We’re still thinking positively. We’re still assuming the Fiduciary Rule will become law once those 60 days are up. In the meantime, we’re going to stay focused and encouraged because consumers are becoming more savvy and ensuring their adviser is a Fiduciary. We’ll remain encouraged that several large companies are making changes to their structure and becoming fiduciaries even though it’s not legally required. We’ll continue fighting for all investment advisers to be legally required to be fiduciaries.

However, for now we feel like this:

Plan Sponsor of the Year Awards Dinner

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Michele Suriano and Ian Bird from Wheelabrator Group

We had the fantastic opportunity to join one of our clients, Wheelabrator Group, at the Plan Sponsor of the Year Awards dinner in New York this last weekend. It was great to be surrounded by so many people who obviously care a great deal about their employees.

Wheelabrator made several changes to their retirement plan that showed an obvious dedication to their employees and addressed their specific needs. One of the most powerful changes they made was to shift to auto enrollment (and reenrollment of nonparticipating employees). There was a paradigm shift when the employer assumed participation rather than non-participation. By changing the default to assuming enrollment and requiring an opt-out rather than an opt-in, enrollment increased from 71% to 94%. .

In addition to this change, Wheelabrator provided a holistic financial education for their employees. 12% of the employees are Spanish speaking, so they relied on the help of Vanguard to provide Spanish education. Many of their employees felt like they couldn’t take the hit on their paycheck that saving would cause, so the education focused on budgeting and creating an overall financial strategy. Additionally, a 1% auto increase was added up to a 10% ceiling. Due to the education and the auto increase the average employee deferral rate increased from 6.6% to 8.8%.

You can read more about all the changes Wheelabrator Group made here.

We are so proud of our client for being a finalist, and the hard work they put into implementing a plan that benefits their employees.

What to Collect When Processing a Hardship Distribution

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The following is a list of specific documents that the employer must collect based on each type of hardship. The employee must keep these documents available for the employer at all times.

To read a general overview of the employer’s responsibilities during a request for a hardship distribution, click here.

I. Notifications that the Employer/Administrator Must Provide to the Employee

  • The hardship distribution is taxable and additional taxes could apply.
  • The amount of the distribution cannot exceed the immediate and heavy financial need.
  • Hardship distributions cannot be made from earnings on elective contributions or from QNEC or QMAC accounts, if applicable.
  • The recipient agrees to preserve source documents and to make them available at anytime, upon request, to the employer or administrator.

II. General Information for All Hardship Requests

  • Participant’s name
  • Total cost of the event causing hardship (for example, total cost of medical care, total cost of funeral/burial expenses, payment needed to avoid foreclosure or eviction)
  • Amount of distribution requested
  • Certification by the participant that the information provided is true and accurate

III. Specific Information on Deemed Hardships

A. Medical Care

  •  Who incurred the medical expenses (name)?
  • What is the relationship to the participant (self, spouse, dependent, or primary beneficiary under the plan)?
  • What was the purpose of the medical care (not the actual condition but the general category of expense, for example, diagnosis, treatment, prevention, associated transportation, long-term care)?
  • Name and address of the service provider (hospital, doctor/dentist/chiropractor/other, pharmacy)
  • Amount of medical expenses not covered by insurance

B. Purchase of Principal Residence

  • Will this be the participant’s principal residence?
  • Address of the residence
  • Purchase price of the principal residence
  • Types of costs and expenses covered (down-payment, closing costs and/or title fees)
  • Name and address of the lender
  • Date of the purchase/sale agreement
  • Expected date of closing

C. Educational Payments 

  • Who are the educational payments for (name)?
  • What is the relationship to the participant (self, spouse, child, dependent, or primary beneficiary under the plan)?
  • Name and address of the educational institution
  • Categories of educational payments involved (post-high school tuition, related fees, room and board)
  • Period covered by the educational payments (beginning/end dates of up to 12 months)

D. Foreclosure/Eviction from Your Principal Residence

  • Is this the participant’s principal residence?
  • Address of the residence
  • Type of event (foreclosure or eviction)
  • Name and address of the party that issued the foreclosure or eviction notice
  • Date of the notice of foreclosure or eviction
  • Due date of the payment to avoid foreclosure or eviction

E. Funeral and Burial Expenses

  • Name of the deceased
  • Relationship to the participant (parent, spouse, child, dependent, or primary beneficiary under the plan)
  • Date of death
  • Name and address of the service provider (cemetery, funeral home, etc.)

F. Repairs for Damage to Principal Residence 

  • Is this the participant’s principal residence?
  • Address of the residence that sustained damage
  • Briefly describe the cause of the casualty loss (fire, flooding, type of weather-related damage, etc.), including the date of the casualty loss
  • Briefly describe the repairs, including the date(s) of repair (in process or completed)