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Why Financial Planning is Important Now

Happy mountain bike couple outdoors have fun together on a summer afternoon sunset.

“I’ll start financially planning next month” is a phrase that’s muttered too often.

At Centura Wealth, there are five steps that make clear how financial planning is key to liberating your wealth.

Knowledge

Knowledge is power, and this rings true especially with financial planning. For some, financial jargon is reason enough to avoid financial planning. The fancy words, however, still fail to cover the truth about financial planning. Wealth has many complexities and responsibilities, but a big part of the burden is simply doing right by your family and your values. In short, grow your knowledge.

Time Management

Life is stressful, and some factors are out of your control. But, if you start financially planning, one element can be in control. Time management plays a major role in creating balanced financial planning.

Statistics show time management is wildly out of control for the general population. Some of these include:

“If you spend 10-12 minutes planning your day, you’ll save up to two hours of time that would have otherwise gone to waste
The average person has tried and/or uses 13 different methods for managing their time
American companies lose roughly $65 billion because their employees are suffering from a lack of sleep”

Time management and financial planning go hand-in-hand. If you can manage your finances, you can manage your time better and prioritize what matters most.

Future Goals

The future matters. If you start financial planning now, however, you’ll be set up for success on all levels of your financial wealth plan. This includes savings, retirement planning, charitable giving, and overall security.

Goals are hard to attain if the planning isn’t present. There is never a better time than now to start financial planning. Feeling overwhelmed with the idea of financial planning? That’s why Centura Wealth Advisory is here.

At Centura Wealth, our approach is to understand your wealth, identify inefficiencies, design new pathways, then liberate and steward your wealth. We achieve this through our unique and comprehensive process: Uncover, Unlock, Design, Liberate, and Steward.

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

July 3, 2021

ESTATE PLANNING, FINANCIAL PLANNING, NEWS, TAX PLANNING

A Brief History of the Estate Tax and Potential Implications for the Upcoming Election

Estate planning sign on a wooden pier with tall buildings in the background

Executive Summary

With a swoop of a pen, could thousands of households suddenly face an Estate Tax? If so, is there anything that can be done about it? Why would someone now face this wealth tax when they haven’t before? How does this relate to the current political election?

In this blog post we explore these ideas, and more. Consider the following:

The upcoming presidential election has the potential to radically change tax laws that govern Estate Planning
Democrats are targeting a repeal of the Tax Cuts and Jobs Act and have proposed lowering the estate tax exemption from its all time current high of $11.58MM today if they win the White House and senate¹
The possibility of repealing and changing current tax law has created a frenzy of estate planning activity as many more families might face the Estate Tax in coming years

This post discusses a brief history of the estate tax and how it works, explores the current exemption level and highlights potential implications associated with the upcoming election. For a more in depth conversation on your plan, contact Centura Wealth Advisory.

What is the Estate Tax

The Estate Tax is a tax on your right to transfer property at your death. Currently, there are very few taxpayers that encounter the Estate Tax and that is because the current exemption level is at an all-time high (see Estate Tax Exemption chart below). A high exemption level ensures that only the wealthiest pay this tax, however a lower exemption level would expose many more American families; and that is the concern as it relates to the upcoming election. To understand the estate tax and how it is used by the federal government, it is important to begin with a historical perspective.

History of the Estate Tax: Prior to 1916

In the United States, the death tax has been used several times to generate revenue in times of war or crisis. In each instance, congress used the death tax as a short term tool to raise funds during times of need and repealed the tax when the need was no longer there. The first example of this was during The Stamp Tax of 1797 when the tax was used to create revenue for an undeclared war with France. The second iteration came with the Revenue Act of 1862, which was used to raise money for troops, ammunitions, and other expenditures during the American Civil War. And finally, when the Federal Legacy tax was created during the Spanish-American War. All these enactments of the death tax were repealed shortly after the wars ended. However, the death tax was once again reintroduced in 1916 during World War I, setting the stage for the Modern Estate Tax.²

History of the Estate Tax: 1916 to present

The Revenue Act of 1916 created the Modern Estate Tax which was a tax on the transfer of wealth from an estate to its beneficiaries. The key caveat here is that this tax was levied on the estate as opposed to an inheritance tax that is levied directly on beneficiaries.

Since inception, the Modern Estate Tax has been amended at least twenty times for various reasons such as, the increase to a $120,000 exemption level at an 18% rate in 1926, and more recently in 2018 when it was amended to an $11.18mm exemption level at a 40% rate due to the Tax Cuts and Jobs Act. Chart 1 shows the Estate Tax Exemption since 1916, adjusted for inflation. As is clear from the chart, the current level of the estate tax exemption (adjusted for inflation) is at an all time high.²

^{Chart 1– Estate Tax Exemption Over Time (inflation adjusted)}

How does the Estate Tax work

There are 2 primary aspects to the Estate Tax: the Exemption Level and the Tax Rate.

Exemption Level – The estate tax exemption level is the threshold at which an estate is subject to estate tax
Tax Rate – The estate tax rate is applied to the amount of the estate above the estate tax exemption level

Through manipulation of the exemption level and/or rate, congress can creatively target revenue (in the form of tax dollars) that would otherwise not exist if the current law of the land were to prevail (i.e., Tax Cuts & Jobs Act).¹

What could it mean for me and my family?

We know that decreases in the exemption level and/or increases in the rate are tools that can be used to target more money from more estates, but at Centura we are increasingly concerned about this wealth transfer risk due to 2 primary factors:

Government Debt: An urgency to raise funds to pay off debt associated with the COVID-19 pandemic as current government debt is at $27 Trillion.³
Revenue Collection Deficit: The current estate tax only affects a small fraction of estates (due to the high exemption level) and raises less than 1% of federal revenue.⁴

With the U.S presidential election less than 30 days away, the Estate tax has been the subject of significant interest among policy makers, researchers, and the general public. Reasons for this interest range from views on the fairness of the tax to interest in the effects of taxing transfers at death on the overall U.S. economy. No matter what the reason is for reformation, we know that this tax rate is volatile and significant to those affected by it.

Scenario Analysis

A great way to illustrate the potential impact of a revised estate tax is to consider one specific estate, and analyze the tax implications under two different death scenarios. These scenarios differ by the year of death (2021 vs 2026), which has an impact on the estate value, exemption level and potential tax liability. Thus, these are for illustrative purposes and are meant to help the reader contextualize the implications of these political decisions. The four scenarios analyzed are:

Scenario 1: (Baseline) Estate value of $5.0M in 2021 (at death)
Scenario 2: Democratic Proposal Retroactive to 01/01/2021
Scenario 3: $5.0M (2021) Estate in 2026 (Sunset Provision, TCJA)
Scenario 4: $5.0M (2021) Estate in 2026 with Democratic Proposal 01/01/2021

Table 1– Scenario Analysis

Illustration of Tax Risk

Scenario 1 in Table 1 represents the estate tax due under the current law (Tax Cuts & Jobs Act) and Scenario 2 shows the estate tax due under the proposed democratic policy. Both Scenarios 1 & 2 depict a 2021 date of death scenario since the democratic policy would likely be retroactive to 01/01/2021.

Alternately, for Scenarios 3 & 4 we selected the year of death as 2026 which is when the exemption level is scheduled to sunset, based on current law (Tax Cuts & Jobs Act).⁵

As is clear from this example, a change in estate tax policy to the democratic proposal could have huge tax ramifications. In addition, these taxes may extend to many more families than they otherwise would at higher exemption levels. Thus, the upcoming election should be of keen interest to families with estates of $3 Million or more.

What can you do?

At Centura, we assist individuals and families with navigating the complicated world of estate planning, specializing in strategies designed to help you efficiently transfer wealth to your loved ones and causes you care about. To help you get started we put together a calculator to help you estimate what your estate tax liability could be.

Depending upon the outcome of the 2020 election, we believe many more estates may be exposed to this long standing tax and we can help in planning to address it. Please contact us to learn more or take advantage of our free calculator.

References:

October 19, 2020

FINANCIAL PLANNING, INSIGHTS, INVESTING, NEWS, PORTFOLIO CONSTRUCTION, RETIREMENT FUNDING

Capital Market Projections & Monte Carlo – Part 2 in series

Executive Summary

Capital Market projections (mean & variance) serve as parameters for Monte Carlo simulation
The Monte Carlo Method is used by Centura for Liberated Wealth planning in order to solve complex problems when other methods fail
Relying on historical data for Monte Carlo simulation may produce misleading results with potentially harmful ramifications (e.g., spending too much, retiring too soon, etc.)
Forward looking capital market projections incorporate structural market changes that are present today and/or are expected to continue in the future
Careful consideration of inputs and related assumptions is paramount when crafting long term financial plans and forecasting portfolio returns & risk; garbage in, garbage out

Introduction

Sophisticated projections are critical to crafting a well-designed financial plan and capital market projections are one of many key inputs that play a vital role in doing that. At Centura Wealth Advisory, we pair forward looking capital market projections with the Monte Carlo Method to estimate:

Probability of a client running out of money before their “end of plan” (i.e., death)
Most likely “end of plan” value (e.g., wealth transfer, charitable giving purposes)
Optimal asset allocation strategy for a given plan

Part 1 of this series introduced capital markets, historical returns and forward-looking return/risk projections. In Part 2, we explore the Monte Carlo Method and evaluate the potential pitfalls of using historical results vs. forward looking projections when conducting experiments/simulations. Part 3 of the series will focus on portfolio construction and strategic asset allocation using mean variance analysis. Readers can take our quick assessment survey provided at the end of this blog or found here.

Monte Carlo Method

The Monte Carlo Method is a risk management tool that allows financial professionals to model and predict the future with varying levels of confidence. This tool is particularly valuable when it comes to retirement planning, which tasks advisors with forecasting a wide range of variables including, but not limited to:

Asset returns
Future income from all sources
Asset distributions (withdrawal rate) to support future income shortfalls
Taxes (based on current law and potential for sunset provision)
Varying inflation rates for different types of expenses (e.g., general vs healthcare)
Other volatile, subjective and potentially unknown factors as well

Problems of this nature are too complicated to solve with one formula, so we must employ an alternate approach.

Enter, the Monte Carlo Method. This method uses scenario modeling to predict a range of future possibilities, all with varying levels of probability (or likeliness to occur). At the upper end of the range are the very best scenarios (90^th percentile), and at the lower end of the range lie the worst (10^th percentile). At the midpoint of this range (50^th percentile) lies the median which represents the most likely end of plan value (best estimate). If all scenarios end in assets at the end of plan above $1, the simulation is considered a success. If assets are exhausted prior to end of plan, it is a failure. The percentage of successful simulations represents the plan’s overall probability of success.

Monte Carlo Experiment: Hypothetical example

To illustrate how the Monte Carlo Method works, we will run a simple Monte Carlo simulation on a $1,000,000 portfolio invested as follows:

We will first conduct this simulation using historical returns & risk (Chart/Table 1) and then we will re-run the simulation using forward looking return & risk estimates (Chart/Table 2). Last, we will compare the results (Table 3) and highlight any key insights garnered.

Monte Carlo Experiment: Historical Returns

In Chart 1– Simulated Portfolio Using Historic Returns, we show a $1,000,000 portfolio simulation run 10,000 times based on historical asset class returns & risk. The different color lines indicate different percentiles of returns and summary statistics for each percentile can be found in Table 1.

In Chart 2– Simulated Returns Using Capital Markets Projections, we show a $1,000,000 portfolio simulation run 10,000 times based on forward looking asset class returns & risk. The different color lines indicate different percentiles of returns and summary statistics for each percentile can be found in Table 2.

Monte Carlo Experiment: Comparing Results

To analyze simulations using historical vs forward looking projections we will select the 10^th percentile (worst) returns and 90^th percentile (best) returns to compare the nominal and inflation adjusted ending portfolio values as well as maximum drawdown and the safe withdrawal rate; see Table 3 – Comparative Results of Simulated Historic versus Projected.

Comparing statistics in Table 3 reveals some key insights:

Using historical returns may significantly overstate future portfolio values
The portfolio’s safe withdrawal rate(s) may be overstated when using historical #’s
Tail risk (max drawdown) is approximately equal, confirming that forward looking risk is commensurate with historical levels if not slightly higher (i.e., lower expected risk adjusted returns; see Part 1 of Capital Markets Blog)

These insights highlight some of the primary reasons why forward-looking capital market projections are preferred to historical numbers when modeling the risk that someone may run out of money before their “end of plan” (i.e., death). But why do they diverge? One of the primary reasons forward looking estimates diverge from historical results are due to what are known as “structural changes” or shifts.

Structural shifts are changes in the overall landscape of a market/economy, and if not handled properly, skew data. For example, a future riddled with tariffs and global tension is much different than the coordinated global easing (QE) that took place in the wake of the Great Recession. Similarly, the high interest rate environment of the 1980’s is materially different than the low interest rate environment of today, and not accounting for such structural components can produce misleading results; as evidenced above. Thus, investors and advisors must be careful when crafting plans and modeling long term risk.

Conclusion

Monte Carlo simulation is a complex, but effective risk management tool used by Centura that pairs asset forecasting with cash-flow modeling, over a long period of time and allows investors to evaluate the impact of different decisions on their long-term financial wellness.

Monte Carlo simulation usefulness is predicated upon the accuracy of input data whereby capital market return and risk forecasts represent the input parameters. You can determine the status of your current Retirement Plan analysis by taking our quick survey here.

In Part 3 of this series, we explore how these same capital market projections are used to construct portfolios and form strategic long-term asset allocation plans using mean variance analysis and optimization.

Disclosures

Centura Wealth Advisory (“Centura”) is an SEC registered investment adviser located in San Diego, California. This brochure is limited to the dissemination of general information pertaining to Centura’s investment advisory services. The statistical projections contained herein are provided only as an example to illustrate how the choice of methodology impacts those projections. Historical performance is no guarantee of future results and may have been impacted by market events and economic conditions that will not prevail in the future. Investing involves risk, including risk of loss.

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

May 31, 2019

NEWS

Financial and Estate Planning for Women

Portrait of smiling casual businesswoman in front of her colleague in the office

Ladies, in today’s world we are exposed to all kinds of sound bites, headlines and political propaganda….. “the war on women,” “wage inequality,” and other such catch phrases designed to incite feelings of helplessness, fear, betrayal and injustice.

What can you, as an individual woman, do about it? Instead of trying to figure out this Rubik’s Cube of global and national women’s issues, how about taking a look at your own personal situation first?

How educated are you on finances and estate planning? As women, we are most profoundly affected by financial and estate planning, or in most cases, the lack thereof. This article will identify the leading causes for financial strain and lack of planning among women, and how you can take control of your financial and estate well-being.

Let’s begin by looking at the facts.

Women control 75% of the financial wealth in the United States.
Only 35% of women who are offered retirement guidance through their employer take advantage of it.
77% of women are comfortable discussing medical issues with a doctor, but only 47% of women are comfortable discussing money and investing with a financial professional.
84% of custodial parents are women.
The average age of widowhood in the US is 55 years old.
Women are three times as likely as men to be widowed.
40% of surviving widows fall below the poverty line within a year of their husbands’ deaths.
Less than 1% of a widow’s income come from employment.

So those are the facts, but what do they mean? Regardless of age, women need to play an active role in their own financial and estate planning, as well as that of their families.

Understanding your assets, debts and expenditures is step one. On average, women tend to live 5 to 7 years longer than men. Couple that with the fact that women tend to marry older men, and it’s no wonder that women are the ones left alone and in control of how the family’s assets will ultimately be distributed. With this control comes great responsibility.

It is important for women to assume an active role in managing their finances. There is a common misconception that you must have a certain net-worth before you should start making plans. This could not be further from the truth. It’s difficult to implement a plan if you do not understand where you are starting and where you want to finish.

Make a list of your assets (real estate, vehicles, bank accounts, investment accounts, life insurance, 401K accounts, retirement accounts, and any other valuable assets and/or collectibles).
Make a list of your debts (mortgages, car loans, student loans, credit card debt, personal loans, tax loans, etc.).
Make a list of where your money goes each month – be sure to include all expenditures, including going out to eat, movies, gas, Starbucks, etc.

Going through this exercise is an eye-opener for many people. When you detail on paper how much money you are spending and where its being spent, it becomes much easier to identify areas in which you can cut spending and add to your overall savings and investible assets. Finding these “pockets” of money is critical for women, as we tend to have fewer assets in general than men. There are many reasons for this disparity between men and women, but typically it is due to the fact that women generally earn less money (per hour) than men, spend less time in the work-force (due to caring for children and/or ailing spouses and parents), and are generally more uncomfortable or uncertain about how money works and how to save and invest.

Make sure you understand how your assets are managed today so that you can plan for how they will be managed in the future for your own benefit and for the benefit of your loved ones.

Protecting your assets is step two. It is vitally important for women to seek the advice of professionals when it comes financial and estate planning. Learn to overcome your fear of speaking about personal matters with such professional advisors. The sooner you plan, the better off you will be in your later years.

Make sure your plan includes adequate life insurance coverage for both you and your spouse, to help support your needs after the first death and to support your surviving beneficiaries at the second of your deaths. Life insurance can be used to pay final debts and expenses, taxes (income taxes as well as estate and inheritance tax), as well as to continue the life styles of your surviving beneficiaries.

If you have recently married, divorced or have been widowed, have you updated your beneficiary designations on your life insurance and retirement accounts? Remember that the current designations on those accounts control the distribution of those assets – even if you have updated your Will.

If you are a recent widow, have you met with an attorney to discuss electing portability of your deceased husband’s unused federal estate tax exemption? Currently, (in 2018) every individual can exempt almost $11.2 million in assets from federal estate/gift taxes (during life or at death). The unused exemption of a deceased spouse can be passed to a surviving spouse, but only by making an election and filing an estate tax return in a timely manner (within 9 months from date of death), regardless of whether any taxes are due.

Finally, protecting your wealth and your health is step three. Once you build the wealth, make sure you are taking steps to protect it!

A Last Will and Testament is a document that directs the distribution of your financial and physical assets to whom you wish and in what manner. Dying without a Will is known as dying “intestate”. Without a Will, your assets will be distributed according to your state’s intestate succession laws. This is true even if you are married. These laws vary from state to state, so be sure you understand the intestate laws of your state. Another very important reason to have a Will is if you have young children. Your Will is the document that is legally recognized by courts, in which you name guardianship for your minor children. If you do not create a Will and name a guardian for your young children, a judge will name one for you. This can lead to turmoil between families and can potentially land your child in foster care until guardianship can be worked out.

A Revocable Living Trust is a document that can be used to avoid probate upon your death. This type of Trust is often designed to work with your Will, but unlike Wills, a Revocable Living Trust is a private document, not subject to probate and court jurisdiction. The terms of the trust, the assets owned by the trust, and to whom and how those assets are distributed all remain private. By having this Trust in place and retitling your assets into the name of the trust during your lifetime, your estate can avoid the probate process, thereby saving your surviving beneficiaries time and money. Properly drafted Trusts are also a great way to protect your assets for future generations, keeping those assets in your bloodline to benefit your family.

Many individuals may believe they do not need a Will or a Trust. Perhaps they are young and are just starting to accumulate assets, or maybe older with modest wealth. If either is true, there are still reasons to plan today. What are you doing to protect your rights with regard to controlling your healthcare? What would happen if you were to have a health-related event that left you incapable of managing your finances or unable to make your own healthcare decisions? Who would care for you and would that person truly know your wishes?

A Financial Durable Power of Attorney gives you the ability to name someone as your “attorney-in-fact” or “agent.” Your agent will have the ability to manage your finances, pay bills, buy and/or sell assets, vote stock, file your tax returns, pay your taxes, etc.

A Medical Power of Attorney (also referred to as a Healthcare Surrogate Designation), is a document in which you name someone to make your medical decisions for you when you are unable to do so for yourself. This document would be used in a situation when you cannot speak or otherwise communicate for yourself. With this power, your agent can make decisions such as consenting to treatment or moving you to a different facility for more specialized care.

A Living Will Declaration (also referred to as an Advance Directive) is the document that controls end-of-life decisions, such as the administration of or the withdrawal of artificial nutrition, hydration and respiration. In this document you declare your wishes regarding being allowed to die naturally without artificial intervention, or otherwise.

The HIPAA Authorization is the federal document in which you authorize individuals (including the agent under your Medical Power of Attorney) to have access to your private medical information. Such information may include current and past medical and psychiatric conditions, treatment options, and empowers the individuals named the ability to speak freely with your physicians and medical care providers.

If you have a health event without these documents in place, someone will have to petition the court to be appointed as your legal guardian, giving them the power to handle your finances and healthcare. I don’t know about you, but personally, I know who I would and who I would not want taking care of me. Unfortunately, a judge does not know your wishes and it will be a judge that will appoint a guardian for you if you do not have these documents in place.

Once you have completed your plan, you may want to consider sharing your wishes with your family and loved ones. Its also a good idea to review your plan with your financial and legal professionals at least every couple of years.

As women, it’s critical that we take an active role in managing our finances, planning for our financial future, protecting our assets during our lifetimes, maintaining control of our healthcare decisions, and having a clear plan for the management and distribution of those assets in the future.

Plan for tomorrow today!

Sources:

2015 Fidelity Investments Money FIT Women Study

US Census Bureau

http://medicine.jrank.org/pages/1843/Widowhood-Economic-Issues-Economic-effects-widowhood.html”>Widowhood: Economic Issues – Economic Effects Of Widowhood

August 16, 2018

Why Financial Planning is Important Now

Knowledge

Time Management

Future Goals

A Brief History of the Estate Tax and Potential Implications for the Upcoming Election

Executive Summary

What is the Estate Tax

History of the Estate Tax: Prior to 1916

History of the Estate Tax: 1916 to present

How does the Estate Tax work

What could it mean for me and my family?

Scenario Analysis

Illustration of Tax Risk

What can you do?

Capital Market Projections & Monte Carlo – Part 2 in series

Financial and Estate Planning for Women

Feeling Trapped by Your Real Estate Investments?

The Liberated Wealth Blog

Active Management and Risk Adjusted Returns

Charitable Giving: Breaking Down the 60% Deduction

Capital Market Projections for Asset Allocation and Portfolio Construction – Part 3 in series

Capital Market Projections & Monte Carlo – Part 2 in series

Capital Market Projections

Your Teen is off to College!

Financial and Estate Planning for Women

We’d love to hear from you.