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Leaving a Legacy to Your Grandkids

Now is the time to explore the possibilities.

Grandparents Day provides a reminder of the bond between grandparents and grandchildren and the importance of family legacies.

A family legacy can have multiple aspects. It can include much more than heirlooms and appreciated assets. It may also include guidance, even instructions, about what to do with the gifts that are given. It should reflect the values of the giver.

What are your legacy assets? Financially speaking, a legacy asset is something that will outlast you, something capable of producing income or wealth for your descendants. A legacy asset might be a company you have built. It might be a trust that you create. It might be a form of intellectual property or a portfolio of real property. A legacy asset should never be sold – not so long as it generates revenue that could benefit your heirs.

To help these financial legacy assets endure, you need an appropriate legal structure. It could be a trust structure; it could be an LLC or corporate structure. You want a structure that allows for reasonable management of the legacy assets in the future – not just five years from now, but 50 or 75 years from now.1

Think far ahead for a moment. Imagine that forty years from now, you have 12 heirs to the company you founded, the valuable intellectual property you created, or the real estate holdings you amassed. Would you want all 12 of your heirs to manage these assets together?

Probably not. Some of those heirs may not be old enough to handle such responsibility. Others may be reluctant or ill-prepared to take on the role. At some point, your grandkids may decide that only one of them should oversee your legacy assets. They may even ask a trust officer or an investment professional to take on that responsibility. This can be a good thing because sometimes the beneficiaries of legacy assets are not necessarily the best candidates to manage them.

Values are also crucial legacy assets. Early on, you can communicate the importance of honesty, humility, responsibility, compassion, and self-discipline to your grandkids. These virtues can help young adults do the right things in life and guide their financial decisions. Your estate plan can articulate and reinforce these values, and perhaps, link your grandchildren’s inheritance to the expression of these qualities.

You may also make gifts with a grandchild’s education or retirement in mind. For example, you could fully fund a Roth IRA for a grandchild who has earned income or help an adult grandchild fund their Roth 401(k) or Roth IRA with a small outright gift. Custodial accounts represent another option: a grandparent (or parent) can control assets in a 529 plan or UTMA account until the grandchild reaches legal age.3

Make sure to address the basics. Is your will up to date with regard to your grandchildren? How about the beneficiary designations on your IRA or your life insurance policy? Creating a trust may be a smart move. In fact, you can set up a living irrevocable trust fund for your grandkids, which can actually begin distributing assets to them while you are alive. While you no longer own assets you place into an irrevocable trust (which is overseen by a trustee), you may be shielded from estate, gift, and even income taxes related to those assets with appropriate planning.4

This Grandparents Day, think about the legacy you are planning to leave. Your thoughtful actions and guidance could help your grandchildren enter adulthood with good values and a promising financial start.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – forbes.com/sites/danielscott1/2017/09/04/three-common-goals-every-legacy-plan-should-have/ [9/4/17]
2 – wealthmanagement.com/high-net-worth/key-considerations-preparing-family-legacy-plan [3/27/17]
3 – marketwatch.com/story/whats-next-after-planning-your-retirement-help-your-children-and-grandchildren-plan-for-theirs-2017-10-17 [10/17/17]
4 – investopedia.com/articles/pf/12/set-up-a-trust-fund.asp [1/23/18]

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Should You Leave Your IRA to a Child?

What you should know about naming a minor as an IRA beneficiary.

Can a child inherit an IRA? The answer is yes, though they cannot legally own the IRA and its invested assets. Until the child turns 18 (or 21, in some states), the inherited IRA is a custodial account, managed by an adult on behalf of the minor beneficiary.1,2

IRA owners who name minors as beneficiaries may have good intentions. Their goal may be to “stretch” a large Roth or traditional IRA. Distributions from the inherited IRA can be scheduled over the (long) expected lifetime of the young beneficiary.

Those good intentions may be disregarded, however. When minor IRA beneficiaries become legal adults, they have the right to do whatever they want with those IRA assets. If they want to drain the whole IRA to buy a Porsche or fund an ill-conceived start-up, they can.2

How can you have a say in what happens to the IRA assets? You could create a trust to serve as the IRA beneficiary, as an intermediate step before your heir takes possession of those assets as a young adult.

In other words, you name a trust as the beneficiary of your IRA, and your child or grandchild as a beneficiary of the trust. When you have that trust in place, you have more control over what happens with the inherited IRA assets.2

The trust can dictate the how, what, and when of the income distribution. Perhaps you specify that your heir gets $10,000 annually from the trust beginning at age 30. Or, maybe you include language that mandates that your heir take distributions over their life expectancy. You can even stipulate what the money should be spent on and how it should be spent.2

A trust is not for everyone. The IRA needs to be large to warrant creating one, as the process of trust creation can cost several thousand dollars. No current-year tax break comes your way from implementing a trust, either.2

In lieu of setting up a trust, you could simply name an IRA custodian. In this case, the term “custodian” refers not to a giant investment company, but a person you know and have faith in who you authorize to make investing and distribution decisions for the IRA. One such person could be named as the custodian; another, as a successor custodian.2

What if you designate a minor as the beneficiary of your IRA, but fail to put a custodian in place? If there is no named custodian, or if your named custodian is unable to serve in that role, then a trip to court is in order. A parent of the child, or another party who wants guardianship over the IRA assets, will have to go to court and ask to be appointed as the IRA custodian.2

You should also recognize that the Tax Cuts & Jobs Act reshaped the “kiddie tax.” This is the federal tax on a minor’s net unearned income. Required minimum distributions (RMDs) from inherited IRAs may be subject to this tax. A minor’s net unearned income is now taxed at the same rate as trust income rather than at the parents’ marginal tax rate.3,4

This is a big change. Income tax brackets for a trust or a child under age 19 are now set much lower than the brackets for single or joint filers or heads of household. A 10% rate applies for the first $2,550 of taxable income, but a 24% rate plus $255 of tax applies at $2,551; a 35% rate plus $1,839 of tax, at $9,151; a 37% rate plus $3,011.50 of tax, at $12,501 and up.3,5

While this may be a negative for middle-class families seeking to leave an IRA to a child, it may be a positive for wealthy families: the new kiddie tax rules may reduce the child’s tax liability when compared with the old rules.4

One last note: if you want to leave your IRA to a minor, check to see if the brokerage holding your IRA allows a child or a grandchild as an IRA beneficiary. Some brokerages do, while others do not.1   Due to the complex nature of a trust creation, you should seek the counsel of a legal professional.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.1 – investopedia.com/articles/retirement/09/minor-as-ira-beneficiary.asp [6/19/18]
2 – kiplinger.com/article/retirement/T021-C000-S004-pass-an-ira-to-young-grandkids-with-care.html [5/17]
3 – forbes.com/sites/ashleaebeling/2018/05/08/the-kiddie-tax-grows-up/ [5/8/18]
4 – tinyurl.com/y7bonwzx [5/31/18]
5 – forbes.com/sites/kellyphillipserb/2018/03/07/new-irs-announces-2018-tax-rates-standard-deductions-exemption-amounts-and-more/ [3/7/18]

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The Major 2018 Federal Tax Changes

Comparing the old rules with the new.

The Tax Cuts and Jobs Act made dramatic changes to federal tax law. It is worth reviewing some of these changes as 2019 approaches and households and businesses refine their income tax strategies.

Income tax brackets have changed. The old 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% brackets have been restructured to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These new percentages are slated to apply through 2025. Here are the thresholds for these brackets in 2018.1,2

Bracket          Single Filers                      Married Filing Jointly            Married Filing                 Head of Household

                                                                    or Qualifying Widower        Separately                      

 

10%                $0 – $9,525                        $0 – $19,050                           $0 – $9,525                     $0 – $13,600

12%                $9,525 – $38,700              $19,050 – $77,400                 $9,525 – $38,700           $13,600 – $51,800

22%                $38,700 – $82,500           $77,400 – $165,000               $38,700 – $82,500         $51,800 – $82,500

24%                $82,500 – $157,500         $165,000 – $315,000             $82,500 – $157,500       $82,500 – $157,500

32%                $157,500 – $200,000       $315,000 – $400,000             $157,500 – $200,000    $157,000 – $200,000

35%                $200,000 – $500,000       $400,000 – $600,000             $200,000 – $300,000    $200,000 – $500,000

37%                $500,000 and up              $600,000 and up                    $300,000 and up            $500,000 and up

 

The standard deduction has nearly doubled. This compensates for the disappearance of the personal exemption, and it may reduce a taxpayer’s incentive to itemize. The new standard deductions, per filing status:

*Single filer: $12,000 (instead of $6,500)

*Married couples filing separately: $12,000 (instead of $6,500)

*Head of household: $18,000 (instead of $9,350)

*Married couples filing jointly & surviving spouses: $24,000 (instead of $13,000)

The additional standard deduction remains in place. Single filers who are blind, disabled, or aged 65 or older can claim an additional standard deduction of $1,600 this year. Married joint filers are allowed to claim additional standard deductions of $1,300 each for a total additional standard deduction of $2,600 for 2018.2,3

The state and local tax (SALT) deduction now has a $10,000 ceiling. If you live in a state that levies no income tax, or a state with high income tax, this is not a good development. You can now only deduct up to $10,000 of some combination of a) state and local property taxes or b) state and local income taxes or sales taxes per year. Taxes paid or accumulated as a result of business or trade activity are exempt from the $10,000 limit. Incidentally, the SALT deduction limit is just $5,000 for married taxpayers filing separately.1,4 

The estate tax exemption is twice what it was. Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%.2,4

More taxpayers may find themselves exempt from Alternative Minimum Tax (AMT). The Alternative Minimum Tax was never intended to apply to the middle class – but because it went decades without inflation adjustments, it sometimes did. Thanks to the tax reforms, the AMT exemption amounts are now permanently subject to inflation indexing.

AMT exemption amounts have risen considerably in 2018:

*Single filer or head of household: $70,300 (was $54,300 in 2017)

*Married couples filing separately: $54,700 (was $42,250 in 2017)

*Married couples filing jointly & surviving spouses: $109,400 (was $84,500 in 2017)

These increases are certainly sizable, yet they pale in proportion to the increase in the phase-out thresholds. They are now at $500,000 for individuals and $1 million for joint filers as opposed to respective, prior thresholds of $120,700 and $160,900.2

The Child Tax Credit is now $2,000. This year, as much as $1,400 of it is refundable. Phase-out thresholds for the credit have risen substantially. They are now set at the following modified adjusted gross income (MAGI) levels:

*Single filer or head of household: $200,000 (was $75,000 in 2017)

*Married couples filing separately: $400,000 (was $110,000 in 2017)2

Some itemized deductions are history. The list of disappeared deductions is long and includes the following tax breaks:

*Home equity loan interest deduction

*Moving expenses deduction

*Casualty and theft losses deduction (for most taxpayers)

*Unreimbursed employee expenses deduction

*Subsidized employee parking and transit deduction

*Tax preparation fees deduction

*Investment fees and expenses deduction

*IRA trustee fees (if paid separately)

*Convenience fees for debit and credit card use for federal tax payments

*Home office deduction

*Unreimbursed travel and mileage deduction

Under the conditions set by the reforms, many of these deductions could be absent through 2025.5,6

Many small businesses have the ability to deduct 20% of their earnings. Some fine print accompanies this change. The basic benefit is that business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income*, promoting reduced tax liability. (Trusts, estates, and cooperatives are also eligible for the 20% pass-through deduction.)4,7

Not every pass-through business entity will qualify for this tax break in full, though. Doctors, lawyers, consultants, and owners of other types of professional services businesses meeting the definition of a specified service business* may make enough to enter the phase-out range for the deduction; it starts above $157,500 for single filers and above $315,000 for joint filers.  Above these business income thresholds, the deduction for a business other than a specified service business* is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger.4,7

* See H.R. 1 – The Tax Cuts and Jobs Act, Part II—Deduction for Qualified Business Income of Pass-Thru Entities

We now have a 21% flat tax for corporations. Last year, the corporate tax rate was marginally structured with a maximum rate of 35%. While corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate, more profitable corporations faced a rate of at least 34%. The new 21% flat rate aligns U.S. corporate taxation with the corporate tax treatment in numerous other countries. Only corporations with annual profits of less than $50,000 will see their taxes go up this year, as their rate will move north from 15% to 21%.2,4

The Section 179 deduction and the bonus depreciation allowance have doubled. Business owners who want to deduct the whole cost of an asset in its first year of use will appreciate the new $1 million cap on the Section 179 deduction. In addition, the phaseout threshold rises by $500,000 this year to $2.5 million. The first-year “bonus depreciation deduction” is now set at 100% with a 5-year limit, so a company in 2018 can now write off 100% of qualified property costs through 2022 rather than through a longer period. Please note that bonus depreciation now applies for used equipment as well as new equipment.1,7

Like-kind exchanges are now restricted to real property. Before 2018, 1031 exchanges of capital equipment, patents, domain names, private income contracts, ships, planes, and other miscellaneous forms of personal property were permitted under the Internal Revenue Code. Now, only like-kind exchanges of real property are permitted.7

This may be the final year for the individual health insurance requirement. The Affordable Care Act instituted tax penalties for individual taxpayers who went without health coverage. As a condition of the 2018 tax reforms, no taxpayer will be penalized for a lack of health insurance next year. Adults who do not have qualifying health coverage will face an unchanged I.R.S. individual penalty of $695 this year.1,8

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions [12/22/17]

2 – fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx [12/30/17]

3 – cnbc.com/2017/12/22/the-gop-tax-overhaul-kept-this-1300-tax-break-for-seniors.html [12/26/17]

4 – investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]

5 – tinyurl.com/ycqrqwy7/ [12/26/17]

6 – forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ [12/20/17]

7 – americanagriculturist.com/farm-policy/10-agricultural-improvements-new-tax-reform-bill [11/14/17]

8 – irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged [10/19/17]

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LPL Ranks #1 in Customer Loyalty in 2018

The most meaningful measure of how well we’re serving our clients is whether we exceed their expectations in delivering the value and commitment they need to pursue their life and financial goals.

That’s why I wanted to share with you the news that LPL and its affiliated advisors, including Cornerstone Wealth Management, were recently ranked No. 1 in customer loyalty among 21 leading financial distributor firms. It means a great deal for us to be part of a network that’s a recognized industry leader in providing quality personal service—and it’s an even greater honor that LPL has risen in these rankings in each of the past three years.

The rankings were among the findings in Investor Brand BuilderTM, a Cogent ReportsTM study released by Market Strategies International, in which 4,408 affluent investors nationwide were surveyed.*

The study explored the key aspects of client experience that drive investor loyalty. On each of the top 5 drivers of investor loyalty, LPL earned No. 1 rankings by exceeding client expectations in the following areas:

  • Quality of investment advice
  • Financial stability
  • Easy to do business with
  • Range of investment products and services
  • Retirement planning services

In addition, LPL ranked No. 1 in the likelihood of its investors recommending the firm and its advisors to their friends, families, and colleagues.

As an advisors affiliated with LPL Financial, I we are proud of this recognition by investors of the value of the objective financial advice we offer to help clients pursue their goals, and of the innovative products and services our affiliation with LPL allows us to provide access to.

I appreciate the opportunity to partner with you, and I look forward to our continued work together. Thank you for your business.

This letter was prepared by LPL Financial LLC. This is not a recommendation to purchase, or an endorsement of, LPL Financial stock. LPL Financial and Cogent are unaffiliated entities.

*Market Strategies International, Cogent Wealth Reports, “Investor Brand Builder™: Maximize Purchase Intent Among Investors and Expand Client Relationships,” November 2017.

ABOUT THE REPORT: Market Strategies International’s Cogent Wealth Reports: Investor Brand Builder™ provides a holistic view of key trends affecting the affluent investor marketplace. The November 2017 report is based on a web survey of over 4,000 affluent investors, who hold $100,000 or more in investable assets. A total of n=82 LPL advisor clients were represented in the study. Customer Loyalty is based on how likely the participant would recommend each of their investment account companies to friends, family, or colleagues. Participants also evaluate their investment account companies using a 5-point rating scale across 10 aspects of client experience.