Preparing Your Adult Children for Inherited Wealth

When it comes to inheritance, it is vital that a parent transfer wisdom before they ever consider transferring wealth.  Most children learn the ins and outs of responsible wealth-building from their parents. And most of this through watching.  But as kids grow, simple conversations about saving and spending often branch out into investing, compounding, and comprehensive Life-Centered Planning. But no matter how many good financial habits your children have learned by adulthood, they could still be unprepared for their role in your legacy plan.

Talking to your adult children about inheriting your wealth might be awkward at first. But if you work through this six-part framework you’ll all feel better about your wishes, your kids’ responsibilities, and your family’s Return on Life.

 

  1. Review your estate plan.

While you’re still around to change it, your estate plan is never set in stone. Every year, sit down with your financial advisor and attorney to make sure you’re still happy with your beneficiaries, your health care directives, and the allocation of your assets. You’re under no obligation to share every aspect of your finances and health with your children. But the more you tell them about your legacy plan now, the easier it will be for them to care for you and settle your affairs when the time comes.

 

  1. Consider the impact on your heirs.

Money impacts different people very differently. Inheriting a portion of your legacy could be life-changing for one of your children. Another might not experience much of a change at all. Encourage your children to put together their own team of financial, tax, and legal professionals who will help them make the best use of their inheritance with the least amount of hassle. If you currently work with our firm, we are always happy to meet with your kids at any point.  When we work with a family, we consider all generations a client of our firm.

 

  1. Promote responsible behavior.

Keep in mind that money is a poor tool to fix problems…it is, however, incredibly efficient at exposing problems that were already there. You may feel like you have no choice but to leave some of your wealth to an adult child who doesn’t have the best financial habits. However, it is possible to establish guardrails, such as a family trust that releases money under certain conditions that you establish in your legacy plan.

Even the most responsible children might not be capable of managing a company, real estate, or an art collection. Talk to your children about how their abilities and goals fit with how you want more complicated assets to be managed.

 
  1. Consider transferring some of your wealth during your lifetime.

Transferring money to the next generation could have a couple of different benefits.  First, when you give funds to your kids during your lifetime, you get the enjoyment of seeing them actually benefit from the gift.  Second, it can be used as a teaching tool.  Learning how to make wise decisions with a smaller amount will prepare your kids for handling a much larger amount in the future.  Better to make mistakes and learn when there are fewer ‘zeros’ involved.

 

  1. Set realistic expectations.

Your children likely have ideas about your wealth and expectations for what they will inherit. Have an honest conversation that will help them recalibrate those expectations properly. You don’t want your kids to plan for a life of luxury that you won’t be leaving to them. But if they’re set to inherit more than they realize, you also don’t want them planning for a too-frugal future lacking certain experiences and comforts.

 

  1. Shore up your plan.

By now you have identified some strengths and weaknesses in both your legacy plan and your children’s financial skills. Use this information to plan for improvements. Talk to your financial team about vehicles that can protect certain assets and encourage responsible stewardship. Assign a professional executor who will oversee your estate. Work with your children on a plan to develop the knowledge and skills they’ll need to manage more complicated assets. Identify potential mentors whom you can trust to guide your children after you’re gone.

 

  1. Clarify your intentions.

Sometimes the assets in an estate plan get in the way of the real purpose of the estate plan. You aren’t just passing on stuff, you’re passing on values, experiences, and the means to do more with money than just have more money.

Tell your children what you hope they’ll do with your legacy, not just to make their own lives better but to make life better for their own families, friends, and communities. If you’ve made choices in your legacy plan that might be difficult for your kids to accept, explain your reasoning and your intentions. If you can’t reach a place of agreement, at least try to reach a place of understanding and mutual respect.

And if you need help facilitating these conversations, consider bringing your children into our office for a family meeting. We’re always happy to help families prepare for legacy events that preserve and respect what matters most.

 

4 Financial Best Practices for Year-End 2023

Scan the financial headlines these days, and you’ll see plenty of potential action items vying for your year-end attention. Some may be particular to 2023. Others are timeless traditions. If your wealth were a garden, which actions would actually deserve your attention? Here are our four favorite items worth tending to as 2024 approaches … plus a thoughtful reflection on how to make the most of the remaining year.  

 

1.     Feed Your Cash Reserves

With basic savings accounts currently offering 5%+ annual interest rates, your fallow cash is finally able to earn a nice little bit while it sits. Sweet! Two thoughts here:

Mind Where You’ve Stashed Your Cash: If your spending money is still sitting in low- or no-interest accounts, consider taking advantage of the attractive rates available in basic money market accounts, or similar savings vehicles such as short-term CDs, or U.S. Series I Saving Bonds (“I Bonds”). Your cash savings typically includes money you intend to spend within the next year or so, as well as your emergency, “rainy day” reserves. (Note: I Bonds require you to hold them for at least a year.)

Put Your Cash in Context: While current rates across many savings accounts are appealing, don’t let this distract you from your greater investment goals. Even at today’s higher rates, your cash reserves are eventually expected to lose their spending power in the face of inflation. Today’s rates don’t eliminate this issue … remember, inflation is also on the high side, so that 5% isn’t as amazing as it may seem. Once you’ve got your cash stashed in those high-interest savings accounts, we believe you’re better off allocating your remaining assets into your investment portfolio—and leaving the dollars there for pursuing your long game.  

 

2.     Prune Your Portfolio

While we don’t advocate using your investment reserves to chase money market rates, there are still plenty of other actions you can take to maintain a tidy portfolio mix. For this, it’s prudent to perform an annual review of how your proverbial garden is growing. Year-end is as good a milestone as any for this activity. For example, you can:

Rebalance: In 2023, relatively strong year-to-date stock returns may warrant rebalancing back to plan, especially if you can do so within your tax-sheltered accounts.

Relocate: With your annual earnings coming into focus, you may wish to shift some of your investments from taxable to tax-sheltered accounts, such as traditional or Roth IRAs, HSAs, and 529 College Savings Plans. For many of these, you have until next April 15, 2024 to make your 2023 contributions. But you don’t have to wait if the assets are available today, and it otherwise makes tax-wise sense.

Revise: As you rebalance, relocate, or add new holdings according to plan, you may also be able to take advantage of the latest science-based ETF solutions.  We’re not necessarily suggesting major overhauls, especially where embedded taxable gains may negate the benefits of a new offering. But as you’re reallocating or adding new assets anyway, it’s worth noting there may be new, potentially improved resources available.

Redirect: Year-end can also be a great time to redirect excess wealth toward personal or charitable giving. Whether directly or through a Donor Advised Fund, you can donate highly appreciated investments out of your taxable accounts and into worthy causes. You stand to reduce current and future taxes, and your recipients get to put the assets to work right away. This can be a slam dunk strategy to avoid an embedded capital gain and get a tax deduction for the full value going to the charity of your choice.  If you have appreciated assets, considering gifting these and holding on to your cash.

 

3.     Train Those Taxes

Speaking of taxes, there are always plenty of ways to manage your current and lifetime tax burdens—especially as your financial numbers and various tax-related deadlines come into focus toward year-end. For example:

RMDs and QCDs: Retirees and IRA inheritors should continue making any obligatory Required Minimum Distributions (RMDs) out of their IRAs and similar tax-sheltered accounts. With the 2022 Secure Act 2.0, the penalty for missing an RMD will no longer exceed 25% of any underpayment, rather than the former 50%. But even 25% is a painful penalty if you miss the December 31 deadline. If you’re charitably inclined, you may prefer to make a year-end Qualified Charitable Distribution (QCD), to offset or potentially eliminate your RMD burden.

Harvesting Losses … and Gains: Depending on market conditions and your own portfolio, there may still be opportunities to perform some tax-loss harvesting in 2023, to offset current or future taxable gains from your account. As long as long-term capital gains rates remain in the relatively low range of 0%–20%, tax-gain harvesting might be of interest as well. Work with your tax-planning team to determine what makes sense for you.

Keeping an Eye on the 2025 Sunset: Nobody can predict what the future holds. But if Congress does not act, a number of tax-friendly 2017 Tax Cuts and Jobs Act provisions are set to sunset on December 31, 2025. If they do, we might experience higher ordinary income and capital gains tax rates after that. Let’s be clear: A lot could change before then, so we’re not necessarily suggesting you shape all your plans around this one potential future. However, if it’s in your overall best interests to engage in various taxable transactions anyway, 2023 may be a relatively tax-friendly year in which to complete them. Examples include doing a Roth conversion, harvesting long-term capital gains, taking extra retirement plan withdrawals, exercising taxable stock options, gifting to loved ones, and more.

 

4.     Weed Out Your To-Do List

I love this one…it is at the top of my improvement goals.  Doing less instead of staying busy with more.  This year, we’re intentionally keeping our list of year-end financial best practices on the short side. Not for lack of ideas, mind you; there are plenty more we could cover.

But consider these words of wisdom from Atomic Habits author James Clear:

“Instead of asking yourself, ‘What should I do first?’ Try asking, ‘What should I neglect first?’ Trim, edit, cull. Make space for better performance.”

— JamesClear.com

 

Let’s combine Clear’s tip with sentiments from a Farnam Street piece, “How to Think Better.” Here, a Stanford University study has suggested that multitasking may not only make it harder for us to do our best thinking, it may impair our efforts. 

“The best way to improve your ability to think is to spend large chunks of time thinking. … Good decision-makers understand a simple truth: you can’t make good decisions without good thinking, and good thinking requires time.”

— Farnam Street

 

In short, how do you really want to spend the rest of your year? Instead of trying to tackle everything at once, why not pick your favorite, most applicable best practice out of our short list of favorites? Take the time to think it through. Maybe save the rest for some other time.

Quarterly Letter to Clients

The first three months of the year would not be described as boring by any stretch of the imagination.  With the war in Ukraine continuing to create global uncertainty and the government-assisted closing of two of the largest regional banks in history, there is plenty to capture our short-term focus.  But even with these and other events, many stock indexes are up since early January and bond prices have seen some recovery as interest rate pressure has eased a bit. The point is that sometimes investment returns can tell a different story than does the current headlines.

However, whether the numbers are up or down in any given year, we caution against letting them alter your mood, or as importantly, your portfolio mix. Because, when it comes to future expected returns, short term performance is among the least significant determinants available.

Thumbs Down…Thumbs Up

In the thumbs-down category, U.S. stock market indexes1  turned in annual lows not seen since 2008, with most of the heaviest big tech stocks2 taking a bath. Bonds fared no better, as the U.S. Federal
Reserve raised rates to tamp down inflation. The U.K.’s economic policies3 resulted in Liz Truss becoming its shortest-tenured prime minister ever, while Russia’s invasion of Ukraine and China’s continued COVID woes kept the global economy in a tailspin. Cryptocurrency exchanges like FTX4… well, you know what happened there.

On the plus side, inflation has appeared to be easing slightly, and so far, a recession has yet to materialize. A globally diversified, value-tilted strategy5 has helped protect against some (certainly
not all) of the worst returns. An 8.7% Cost-of-Living Adjustment (COLA)6 for Social Security recipients has helped ease some of the spending sting, as should some of the provisions within the newly enacted SECURE 2.0 Act of 2022.

Recency Bias

Now, how much of this did you see coming last January? Given the unique blend of social, political, and economic news that defined the year, it’s unlikely anything but blind luck could have led to accurate
expectations at the outset.

 In fact, even if you believe you knew we were in for trouble back then, it’s entirely possible you are altering reality, thanks to recency and hindsight bias. The Wall Street Journal’s Jason Zweig7 ran an experiment to demonstrate how our memories can deceive us like that. Last January, he asked readers to send in their market predictions for 2022. Then, toward year-end, he asked them to recall their predictions (without peeking). The conclusion: “[Respondents] remembered being much less bullish than they had been in real time.”

In other words, just after most markets had experienced a banner year of high returns in 2021, many people were predicting more of the same. Then, the reality of a demoralizing year rewrote their memories; they subconsciously overlaid their original optimism with today’s pessimism.

What have we learned?

Where does this leave us? Clearly, there are better ways to prepare for the future than being influenced by current market conditions, and how we’re feeling about them today. Instead, everything we cannot yet know will shape near-term market returns, while everything we’ve learned from decades of disciplined investing should shape our long-range investment plans. 

In other words, stay informed but be careful to not be swayed into a reactive decision. Keep your long-term lenses on and your future self will thank you for it.
 

As we head into a new quarter, always know that we are here to help and are grateful for your
continued trust.

Josh

 

Quarterly Letter to Clients

Well, we made it to 2021 so how are you feeling?  The start of a new year can breed hope for new possibilities.  Even though 2020 was oppressive to most in so many ways, I do think we can still hold hope for the new year.  I have never been one to focus on New Year’s resolutions as they always felt like a recipe for disappointment (I know that is not the case for everyone, though).  What I am striving for this year is not new resolutions, but rather strengthening routines.  Routines feel more in my control, and if 2020 taught anything, it is to control what we can control.  One of these areas for me is to practice gratitude.  I have begun by thinking of 3 things I am grateful for each night before I go to sleep.  It is refreshing and encouraging to think on these things.  When we talk later this year, feel free to check on my progress with this.  This is just one small example, and I am sure that you have others that jump to your mind.  Let me encourage you to pursue practices like this for the sake of your own mental health in 2021.

Speaking of control…

You likely have heard us say in the past that market performance is not an area that any of us have control.  Because of this, it is wasted energy to focus and worry about market movements.  You should spend that energy doing things you can control: spend less than what you make, avoid debt, build cash reserves, plan your generosity and plan your future – practical principals that have an outsized impact on your life.

Small, quiet acts

Whether the temptation is to abandon a free-falling market (like the one we encountered less than a year ago), or chase after winning streaks, an investor’s best move remains the same.  Concentrated bets on hot hands generate erratic outcomes, which makes them far closer to being dicey gambles than sturdy investments.  Trust instead in the durability of your carefully planned investment portfolio. Focus instead on small, quiet acts.  That is what we are here for, for example, to:  
  • – Remind you that your globally diversified portfolio already holds an appropriate allocation to Tesla stock (which may be a lot, a little, or none, depending on your financial goals.
 
  • – Guide you in rebalancing your portfolio if recent gains have overexposed it to market risks.
 
  • – Help you interpret the 5,600 pages of the newly passed Consolidated Appropriations Act, 2021, so you can manage your next financial moves accordingly.
 
  • – Assess potential ramifications of the Biden tax proposals and advise you on any additional defensive tax planning that may be warranted for you in the years ahead.
 
  •  -Remain by your side as you encounter whatever other challenges and opportunities 2021 has in store for you and your family.
  These are not loud acts that you will read about in the paper, but they are the stuff financial dreams are made of.  2021 will be interesting to say the least, but let’s hold onto the hope and possibility that a new year brings.  Stay healthy, stay grateful and know that we are here to help.   Josh, Mike, Matt and Sandra  

Fee Reductions

Happy New Year!  I hope this message finds you well after enjoying the holidays.  I just have a quick note to share to start off our new year.  A longer post will be coming later this week as our quarterly letter to clients.

2020 was a tough year on many fronts, but one thing it taught us is that market performance in the short term is wildly unpredictable.  In addition, short-term performance will likely have a small impact, if any, on your probability of success with your own financial goals.  So it is really not worth your mental energy to ever spend a moment worrying about your short term investment performance.   Plus, none of us really have any control over investment performance.

What do we have control over?  From a planning and investment standpoint, we discuss fees quite often, and look to reduce this financial headwind where possible because this is something we can control.  Most of our clients have Dimensional Funds as core holdings in their portfolio, so we were happy to hear this fall that they announced that fees would be reduced across a broad range of their equity funds effective February 2021, representing an approximate 15% reduction on an asset-weighted basis.  They were already significantly lower than the average mutual fund expense ratio, so this is a great move in the right direction.  It is exciting because it means that, all else equal, our clients will get to keep more of the investment’s returns which will have a compounding effect on wealth over the years.

Reducing fees is only one way to increase your wealth over time.  Let us know if you would like to discuss the other planning tools that can be used to increase wealth as well.

Watch out for scams!

Most North Carolinian’s are working hard to take care of their families and help their neighbors in the current crisis.  Nevertheless, criminals seek to exploit the Covid-19 pandemic to further their scams.

We received the notice below from the North Carolina Secretary of State warning residents to be wary, and we want to share it with you.  If you or someone you care about comes across something questionable related to investing or charitable activities, please don’t hesitate to call. We can help you check it out.  PLC Wealth is here to help you and answer any questions you have.

Take care, and thank you for your business with PLC Wealth.”

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NC Secretary of State Offers Tips to Avoid COVID-19 Related Investment Scams

NC Secretary of State Elaine Marshall is cautioning investors that the ongoing Coronavirus pandemic will likely spark a surge of investment fraud.

 

“Sadly, scam artists will seek to exploit rising concerns about COVID-19 to draw people into investment traps,” warned Marshall. “Fraudsters often use the day’s headlines in their pitches, so expect to see them prey on the fear surrounding the unfolding Coronavirus pandemic and recent economic developments to promote sham investments.”

 

The North American Securities Administrators Association (NASAA), of which the NC Secretary of State’s Office is a member, is joining state regulators in offering tips to keep investors safe in these uncertain times.

 

Bad actors may develop schemes falsely purporting to raise capital for companies manufacturing surgical masks and gowns, producing ventilators, distributing small-molecule drugs and other preventative pharmaceuticals, or manufacturing vaccines and miracle cures.

 

Scammers also will seek to take advantage of concerns with the volatility in the securities markets to promote “safe” investments with “guaranteed returns” including investments tied to gold, silver and other commodities; oil and gas; and real estate. Investors also can expect to see schemes touting quickly earned guaranteed returns targeting seniors worried about economic disruptions and losses to their retirement portfolios.

 

“From guarantees of high returns without risk to promises of a miracle cures, if it sounds too good to be true, it probably is,” warned Secretary Marshall. “I urge North Carolinians to follow these tips to help protect your financial and physical health as you navigate these uncertain times.”

 

Investors are encouraged to call the NC Investor Hotline at (800) 688-4507 or email us at before signing over money in any investment opportunity. If you suspect an investment opportunity is fraudulent, you may report it at www.sosnc.gov. You can also find a wealth of investor education material at www.sosnc.gov/divisions/securities.

 

Schemes to Watch for: 

 

Private placements and off-market securities. Scammers will take advantage of concerns with the regulated securities market to promote off-market private deals. These schemes pose a threat to retail investors because private securities transactions are not subject to review by federal or state regulators. Retail investors must continue to investigate before they invest in private offerings and independently verify the facts for themselves.

 

Gold, silver and other commodities. Scammers may also take advantage of the decline in the public securities markets by selling fraudulent investments in gold, silver and other commodities not tied to the stock market. These assets are often promoted as “safe” or “guaranteed” means of hedging against inflation and mitigating systematic risks. However, scammers may conceal hidden fees and mark-ups, and the illiquidity of the assets that may prevent retail investors from selling the assets for fair market value. There are no “can’t miss” opportunities.

 

Recovery schemes. Retail investors should be wary of buy-low sell-high recovery schemes. For example, scammers will begin promoting investments tied to oil and gas, encouraging investors to purchase working or direct interests now so they can recognize significant gains after the price of oil recovers. Scammers will also begin selling equity at a discount, promising the value of the investments will significantly increase when the markets strengthen. Never lose sight of the risks associated with any prediction of future performance and remember that market gains may not correlate with the profitability of their investments.

 

Get-rich-quick schemes. Scammers will capitalize on the increased unemployment rate with false promises of quick guaranteed returns that can be used to pay for rent, utilities or other living expenses.

 

Replacement and swap schemes. Investors should be wary of any unlicensed person encouraging them to liquidate their investments and use the proceeds to invest in more stable, more profitable products. Investors may pay considerable fees when liquidating investments, and the new products often fail to provide the promised stability or profitability. Advisors may need to be registered before promoting these transactions and legally required to disclose hidden fees, mark-ups and other costs.

 

Real estate schemes. Real estate investments may be appealing because the real estate market has been strong and low interest rates have increased demand. Scammers often promote these schemes as safe and secure, claiming real estate can be sold and the proceeds can be used to cover any losses. However, real estate investments present significant risks, and changes to the economy and the real estate market may negatively impact the performance of these products.

 

How to Protect Yourself:

 

The NC Secretary of State’s Securities Division offers this guidance to help investors avoid investment scams:

 

Ask before you invest. Investors in North Carolina should call the NC Investor Hotline at (800) 688-4507 or email us at to find out if the salesperson and the investment opportunity itself are properly registered. Investors also can check the SEC’s Investment Adviser Public Disclosure database and FINRA’s BrokerCheck. Avoid doing business with anyone who is not properly licensed. If you suspect fraud, please report it to us at www.sosnc.gov.

 

Don’t get hooked by a phishing scam. Phishing scams may be perpetrated by those claiming an association with the Centers for Disease Control and Prevention, the World Health Organization, or by individuals claiming to offer medical advice or services. Watch out for con artists offering “opportunities” in research and development. These scams may even be perpetrated by people impersonating government personnel, spoofing their email addresses and encouraging victims to click links or open malicious attachments. These emails may look real and sound good, but any unsolicited emails with attachments and web links may be directing you to dangerous websites and malicious attachments that can steal information from your computer, lock it up for ransom, or steal your identity. When in doubt, don’t click.

 

There are no miracle cures. Scientists and medical professionals have yet to discover a medical breakthrough or develop a vaccine or cure for COVID-19. Don’t fall for online pharmacies claiming to offer vaccines and don’t send money to anyone claiming they can prevent COVID-19, through a vaccine or other preventive medicine.

 

Avoid fraudulent charity schemes. White-collar criminals may pose as charities soliciting money for those affected by COVID-19. Fake charities will frequently use sound alike names that mimic established charities. Rather than clicking on the links or responding to the email addresses or phone numbers provided in a text, email or social media post, do an internet search to find the charity’s website and reach out to them directly. A link in an unsolicited email could send you to an impostor site. Give generously but wisely to make sure your help is going to those who need it.

 

Be wary of schemes tied to government assistance or economic relief. The federal government may send checks to the public as part of an economic stimulus effort. It will not, however, require the prepayment of fees, taxes on the income, the advance payment of a processing fee or any other type of charge. Anyone who demands prepayment will almost certainly steal your money. And don’t give out or verify any personal information. Government officials already have your information. No federal or state government agency will call you and ask for personal

Cash is King + Mortgage Forbearance Options in the CARES Act

Photo by Thgusstavo Santana from Pexels

April 6th 2020

By Matt Miner

First, I hope you and the people you love are well as we slog though the Covid-19 pandemic. Here at our house, we’re trying to embrace the good parts about being together, get lots of exercise outside, and make progress on our daily work, yard, and house.

On Friday I released a video about conserving cash if your income is under pressure. It arose because of client inquiries, as well as Wall Street Journal reportage. This is the companion article.

Now is a good time to accumulate some cash. If your income is not reduced, cash should be accumulating automatically because there’s almost nothing you can go spend money on! This is why the economy is shrinking rapidly.

If you anticipate reduced income, here are some tactics to accumulate even more cash.

For federal student loan borrowers, take advantage of the government-offered deferral on your student loans until your earning situation becomes clear. Contact your loan servicer to exercise this option.

If you have debts you’re paying extra on, now might be a good time to press pause on those extra payments.

If you don’t forfeit an employer match, you might consider stopping contributions to your 401(k) or other retirement plan. You can always “make up” these contributions later in 2020 and still get the tax benefit. If ceasing contributions results in losing matching dollars entirely, you need to weight this carefully. Match dollars are compensation and losing comp is never fun!

This article was prompted specifically by client inquiries regarding mortgage relief in the CARES Act and two WSJ articles (paywall alert): “Struggling Borrowers Want To Pause Their Mortgage Payments. It Hasn’t Been Easy” and “How to Suspend Your Mortgage Payments During Coronavirus Turmoil“.

If you read those articles, you’ll see that even the people charged with implementing this legislation (FHA along with Fannie & Freddy) are going about it in different ways!

What we know:

The CARES Act seeks to provide relief for the 70% borrowers with mortgages owned or insured by the federal government or a federal agency if these debtors experience financial hardship because of the pandemic.

If your mortgage is eligible – a Federally Backed Mortgage under CARES Act (call your servicer and ask), you must make the request before the President rescinds the National Emergency declared on March 13th, 2020. Your servicer should have more information for you.

What we don’t know:

We don’t know how your lender will treat the payments. Will they be put on the end of the loan or will you owe a lump-sum payment at the end of the forbearance period? Different servicers answer this question differently. In the first case, you’re extending the time you pay your mortgage loan. In the second case, you’ll need to come up with a large sum of cash when the forbearance ends.

It is unclear whether you be subject to compound interest – interest on interest. Your servicer may tell you how they are handling this. When I reviewed the legislation, I could not find a clear answer to this question.

Here’s a quote in the WSJ from David Stevens, a former head of the Federal Housing Administration. “The messaging has not matched what’s established in policy yet. The confusion level is extremely high.” No surprise then that the rest of us are still figuring this out!

The article continues, “The Department of Housing and Urban Development sought to clear up some of the confusion this week, telling servicers they can compile the missed payments into a second, interest-free home loan for the borrower to pay off after the original mortgage. The guidelines apply to FHA insured mortgages, which make up about 15% of all active mortgages in the U.S. The federal regulator for Fannie Mae and Freddie Mac, the mortgage finance companies that back about half of the U.S. mortgage market, has instructed servicers to work with borrowers and to consider letting them tack their missed payments on to the end of their loan.”

Servicers Will Struggle to Help

As a savvy planner, you should know that mortgage forbearance sets up an existential conflict between mortgage debtors and mortgage servicers. Mortgage servicers are middlemen who handle payment processing, account reporting, and customer service for the owners of the mortgage. Servicers are required to keep making payments to the mortgage owners – even though their debtors are permitted to stop making payments to the servicer! This conflict means I don’t expect servicers to move especially fast to implement this relief – since it may doom their businesses!

Until the servicers can get their hands in the government cookie jar too….er, receive some relief from congress, my expectation is that they will slow-walk this process because the CARES legislation puts them in a completely untenable position from a cash standpoint.

My general financial planning recommendation about the mortgage relief provision in the CARES act is to steer clear unless your circumstances are dire. Here’s why:

1. You’ll spend time dealing with the mortgage company, and need to jump through whatever hoops are necessary

2. I am concerned they will mess it up, resulting in damage to your credit report. You will be able to repair these problems, but this result will require further effort on your part. I’m not saying this will happen. I’m just saying I don’t have confidence that it won’t happen.

3. No matter how the lender handles the missed payment, taking this route represent cash-flow relief at the expense of your wealth, since you’ll pay more interest over time – it amounts to increasing borrowing on your home. Mortgage forbearance may be better than credit cards or a family loan. But debt is my least favorite way to raise cash.

Pursuing the Mortgage Forbearance Option

If the mortgage forbearance provisions of the CARES act may still help your family, here is a potential tactic. Arrange a six month forbearance, and then at around the four-month mark, refinance your entire mortgage into a new note. This could buy you some time for your income to return to a more normal state. I don’t prefer this approach because it is contingent on three things you cannot directly control.

First, the mortgage you want will have to be available; if that caveat sounds dire, look at the economic carnage we’re experiencing right now.

Second, you need to have adequate income to acquire the new mortgage.

Third, you need to have adequate credit to qualify for the new mortgage.

Because no one knows the future and none of these things are directly under your control, in poker terms, this is a planning tactic for betting on the come. It’s not the type of conservative advice I prefer.

Finally, all this highlights the importance of your hefty-duty emergency fund. Warren Buffet has a gift for memorable language. He says, “When the tide goes out, you can tell who was skinny dipping.”

If this crisis exposed the need for more cash in your life, decide now that that will never happen again.

April 2020 – Quarterly Update: Covid-19 Edition

This will be the quarter that we look back on and never forget.  It was the time that a virus spread with a silent vengeance, and the world came to a screeching halt.  You may be feeling quite disoriented, fearful or even anxious as you read this note since ‘normal’ for all of us has been shaken to its core due to Covid-19. You are likely hunkering down at home, which is what you should do, with little of your regular activities to keep you busy.  If you are like me, it literally feels like the earth has stopped spinning on its axis.  Up is down, and right is left.  Trust me when I say that it is completely normal to feel this way in the context of what we are dealing with as a human species.

I do not come to you with answers or any conclusions that will change the world…there are people that are much smarter than me working on that now, and I have confidence that they will figure it out.  But I can bring some encouragement and suggest some small actions that might, just maybe, help us feel like planet earth is starting to rotate once again.

What can you do?

The spread of Covid-19 has impacted the global economy with a speed and impact that is unlike anything seen in our lifetime.  This does not mean that happiness and contentment are totally out of your control, however.  Mindset is key…start by realizing that the sun still rises every morning like the picture at the top of the article.  There is new hope with each new day.  I am sure you have found, as have I, that there is now more time to watch movies, read a book, take a distance-appropriate walk to enjoy the spring weather or call someone (yes, actually call them rather than text) to see how they are doing.

If you are sheltering at home with loved ones, you have probably seen them more in the last two weeks than you have for months.  We should all continue to do more of these things, and the more we do, the more connected we will stay.  I am not a loquacious extrovert, but I have thoroughly enjoyed being around and talking with the ones I care most about.  And the more connected we stay, the more human we will feel.  This is where happiness and contentment hide, not in your investment portfolio or the latest round of news.

What are we doing?

Actions taken during times of fear in the markets will have implications for years to come.  The question is whether they will be positive or negative.  For the long-term investors, which are clients that we serve, volatility creates opportunity.  We have taken advantage of this opportunity by tax loss harvesting, which allows us to realize the losses for tax savings, but then invest the proceeds right back in something else so the money is never out of the market.  The tax savings for our clients this year will be significant.  We have also looked to strategically rebalance portfolios.  Because some of the fixed income assets have gains over the last year, we have sold those gains to go buy equity funds that are now at a discount.  It rebalances the ship and holds to the strategy of selling high and buying low.

What is next?

The fact is, I don’t know.  No one does, but that’s OK.  We are still waiting on the details of the massive Stimulus bill that was signed into law on March 27th.  There are too many details for me to summarize here.  If you want a deep dive in to the details, you can find that here.  I plan to write more on this soon, but if you have any questions about this, please do not hesitate to call our office.  We are all working remotely, but the extensions still ring right to us.  Know that we are here to help in this time of uncertainty.  Your well-being is of greatest concern to us, and not just financially.  Be safe, be smart, and be part of the global solution for everyone by staying home.

We will see you soon,

 

Josh, Mike, Matt and Sandra

A Covid-19 update from your PLC Wealth team

To say the last couple of weeks have been unexpected, unparalleled and dizzying would still be understating exactly what we have lived through in the last few weeks.  Based on further news today (specifically, the Stay at Home Orders issued by Wake County, NC for our local clients), most of us will be sheltering in place for the coming weeks, as we should.  I have listened intently, as I am sure you have, to all sides of the discussion that has carried on since the beginning of the outbreak.  At this point, the experts are making the case for the seriousness of the virus as it spreads exponentially, and that it is likely that the healthy and optimistic among us could be putting our most vulnerable at risk.  Slowing down our movement even further, whether by choice or by requirement, seems to be inevitable for a while longer to give us all the best opportunity to get through this.  While we do not know how long this Covid-19 virus will last, I want to take a few moments to speak to you directly about what we are doing as a firm and how you can continue to reach us during these times.

We have implemented many changes in the last couple of weeks as part of our Business Continuity Plan due to Covid-19.  Thankfully, we were prepared for a remote working environment, and hopefully you have seen no interruption in the normal service from our team.  We have all set up our home workspace.  This give us access to our email, phone calls, and client files just as easily as we have them in the office.  Our phone service is fully digital which means we can take it with us wherever we go.  If you call the office and dial my extension, it will ring my mobile phone.  If I call you from my mobile phone, I will be doing so from my office line.  We also have a fully digital and secure document management system for our firm which means we can safely access all your files at any time of day from any location in the world.  Additionally, all our portfolio management, financial planning and client relationship software is cloud-based and accessible from any location.  Believe it or not, it really did not take much time for PLC Wealth to convert to a virtual firm with the same capabilities as when physically in the office.

Now, obviously, there are some challenges.  It is impossible to fully replace the face-to-face relationship, both for our internal operations and for our client relationships.  We are utilizing a secure and compliant messaging tool for internal communications.   While there may be times that we need to access the office, we are attempting to have only a 1-person max in the office at any time.  We will also plan to continue with client meetings moving forward through virtual meeting technologies such as Zoom.  If you do not have access to a computer for such a meeting, we can still have a conversation the old school way…over the phone…in order to make sure that we do not fall behind in our relationship with each of you.  Again, if you need us in the meantime, we are an email or phone call away, just as we have always been.

There are a few logistical items to cover: First, mail will be checked regularly, but maybe not every day.  Additionally, we have always made the effort to suggest linking your personal bank account to your brokerage accounts to allow for quick money movements back and forth, should they be necessary.  Since we are no longer at the office, a time like this makes it necessary.  So, if you need to make an IRA contribution or want to add funds to your brokerage account, we can still do that by an electronic transfer.  Getting money from your accounts is just as easy, or we can have a check mailed to you.  The bottom line is that getting money from your accounts or to your accounts is just as easy as always.  Finally, if you have actual stock certificates, those must be mailed directly to TD for deposit in your account, so just let us know if you need the mailing address.

Unfortunately, times of crisis create opportunities for bad actors.  There are already stories of scams coming to the surface, so be prepared and know what to look for:

 

  1. – There are no miracle drugs or remedies for Covid-19 at this time so don’t fall for this one.  And do not click on any links that may be in an email stating such things, as the link may be another way to inject a virus on your computer.
  2. – Be very skeptical of any investment ‘opportunities’ with research claims that are no supportable.  People will make wild claims to prey on other’s hopes and inability to use the rational brain in times of stress.
  3. – Never, never, never disclose your social security number, account numbers, or any other piece of Personally Identifiable Information (PII).  There are rumors that spam calls and emails are already going out claiming that thsi information is needed to get your piece of the Stimulus bill or a tax refund.  Hold on to your PII like you (financial) life depends on it.
  4. – Generally, just be skeptical in these times of anything that seems too good to be true.  If you are not sure, get in touch with us to talk through it.

 

Let me leave you with a little encouragement in the midst of Covid-19 .  Take this time to do something that many of us no longer do naturally on our own…slow down, exercise (by yourself), rest, re-energize, call someone you haven’t spoken with in a while, or binge watch movies with your family that you never have the time for…but mostly, just look around you to see all of the blessings that you inevitably still enjoy.  Sometimes, when we are not able or willing to do that which is in our best interest, it is necessary for it to be forced upon us.  We find ourselves in one of those times in history.  We are a creative and adaptive species so I look forward to hearing about some of the ways that you will get through this…because you will get through this.  I will leave you with three pieces of advice that I am confident will be good for you in the long run…Wash your hands, don’t touch your face, and don’t touch your stocks.  Know that we are committed to continuing to serve you and your family. We will strive to provide you with an even higher level of service than that which you have come to expect from us.  If you need anything at all, even if it is just to have a conversation about the events of the day, please let us know.  We are here to help.

Carpe diem,

Josh and the PLC Wealth Team