the INTELLIGENT INVESTOR. FR2013-0320-0029. JERRY A. RASMUSSEN,
CRPC®. Senior Vice President. Financial Planning Specialist. Financial Advisor.
SUMMER 2013
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JERRY A. RASMUSSEN, CRPC® Senior Vice President Financial Planning Specialist Financial Advisor 281-280-3305 LANCE T. HUTCHINS, CPM®, CRPC® Vice President Portfolio Management Director Financial Advisor 281-280-3319
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SIMONE SHAMMAI Portfolio Management Associate KAREN BARRERA Client Service Associate
16055 Space Center Blvd., Suite 100 Houston, Texas 77062 800-451-0467
Estate Planning Considerations for Children
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t takes special care to create an estate plan that efficiently distributes your assets and meets your goals for every person and cause important to you. But no part of the process means more to most people than that which involves their children. After all, for most of us, our children are our most important legacy, and how your estate documents treat them will have an impact long after you’re gone. To help organize this process, it is useful to think of children in three categories: minors, young adults, and fully grown adults with spouses and children of their own.
Minor Children Children from infancy through high school have a different set of needs than children of other ages. One is simply to be able to rely on an
income for daily needs that approximates your income in case you’re no longer there for them. Since the parents of young children usually don’t have large savings or net worth, the challenge is to provide an instant estate, for which life insurance is the best answer.
There are a number of rules of thumb for how much life insurance to buy — from four to 10 times your annual income. The right amount should be the result of a thorough needs analysis of your entire family, which can be accomplished by Continued on page 2
Encourage Estate Planning
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arenting is a never-ending job. Even when your children are grown, there will probably be lessons you’ll want to teach them, such as the need for estate planning. Some items to include in that lesson are: Explain why estate planning is important. Your role is not to dictate what they should do with their estate, just to emphasize the need for estate planning. When your children encounter major life events, such as marriage, divorce, or a child’s birth, remind them to review their estate plans.
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Make sure all important estate-planning documents are in place. At a minimum, every adult should have a will, a durable power of attorney, and a health care proxy. A durable power of attorney designates an individual to control their financial affairs if they become incapacitated, while a health care proxy delegates health care decisions to a third person when they are unable to make those decisions.
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Coordinate estate planning across generations. If you have a substantial estate, you may want to coordinate your estateplanning efforts with those of your children. A coordinated effort can help minimize estate taxes. ✔✔✔
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Estate Planning continued from page 1
asking your spouse and yourself a series of probing questions, including: much do the two of you ✔ How already have saved? Will your spouse be able to ✔ work full- or part-time? If so, what will child care cost? Will your children go to public or private elementary and secondary schools?
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How much will your children need in college funds by the time they’re ready to attend?
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How much will your spouse need for retirement, and how much of that will he/she be able to accumulate on his/her own?
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After you determine how much life insurance to buy, you need to think about who will raise your children if you and your spouse both die before the children are adults. This calls for naming a guardian in both of your wills. If you don’t have a will, a state court will appoint a guardian for you, and it may not be someone you or your spouse would have wanted for this role. In addition, parents might also wish to designate a person to manage the children’s assets, known as a custodian or trustee. It can be the same person as the guardian, but designating an unrelat-
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ed third party, like an attorney, banker, or trust company officer, who can be charged with thinking only of your children’s welfare, appeals to some people. Among the other major decisions you have to make is whether and how to split your assets between your surviving spouse and your children; and if you leave some assets directly to your children, how to determine the split among them. Often, it can make sense to leave all or most of your assets to your spouse and, for assets you bequeath to your children, to divide them evenly. But this might overlook such considerations as children with special medical needs or special abilities.
Young Adults Once children reach the age of majority — which in most states is 18 — a new set of considerations enters the picture. By this age, your children no longer require a guardian and are legally capable of spending their money in any way they want — and therein lies a potential problem. What if you leave $250,000 for college and instead your children decide to waste the money and skip college? One way to control how the inheritance is spent is to establish a trust with a schedule for distributions. One option is to delay a full distribution until they reach a certain age, like 25 or 30. Another choice is to give them a series of partial distributions at ages that make sense to you given what you know about your child. Another strategy that is becoming increasingly popular is the “incentive trust.” This vehicle makes payouts contingent on your child’s achievement of specific accomplishments — like maintaining a certain grade point average; graduating from college, graduate, or professional school; marrying; or buying a home.
Adult Children Many of the same kinds of considerations that apply to minors and young adults can also influence your decisions on how much money to leave to your adult children. Do they, their spouses, or their children have special needs? Have your adult children fallen on hard times or are they irresponsible with money and would only waste it? How many children do they have and how much help will they need for their educations? Another consideration has as much to with your own objectives for minimizing estate taxes. If your estate is much larger than you and your spouse’s combined estate tax exemptions, you might want to shrink it with an aggressive campaign of gifts to your children and grandchildren. On the other hand, any funds you leave to your children might encumber them with estates equally as large as yours or larger, with the same tax challenges. In this case, you might want to transfer some of your assets to a generationskipping trust, which bypasses your children and names your grandchildren as the beneficiaries. Don’t go it alone when mulling over these decisions. Most important, you need to reach a meeting of the minds with your spouse and even your children, especially if they are adults. One thing you don’t want to do is create bad feelings after you’re gone, either toward you or among your survivors. Please call if you’d like to discuss this in more detail. ✔✔✔ FR2013-0320-0029
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Long-Term Portfolio Management
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re you an investor or a trader? If you’re a trader looking to build your wealth through a long series of profitable short-term transactions, then knowing what the indicators are showing month-to-month is critical. On the other hand, if you’re in the markets for the long haul and looking to capture the benefits of long-term trends in the markets, you should focus on the tools that maximize your long-term rate of return while managing risks. The following basic tools for long-term portfolio management minimize information overload while resting on some simple but effective concepts that could potentially boost returns while controlling risk:
Asset allocation. A long-term asset allocation strategy aims at determining an optimal mix of stocks, bonds, and cash equivalents in your portfolio to suit how much risk you’re willing to take for the potential rate of return you want and need to meet your objectives. The benefit of investing in all three asset classes is diversification — spreading investments among assets that have different cycles of return. Portfolio rebalancing. This may be the most overlooked technique for potentially boosting returns and controlling risk. Yet the technique is relatively simple: once a year (or some other predetermined time period), compare the percentage of your assets in each class to your strategy. Then sell some assets from the categories that are larger than your strategy calls for and use the proceeds to buy more of the assets that decreased in value. The principle is that rebalancing forces you to sell high and buy low.
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Dollar cost averaging. This technique actually puts market downturns to work in your favor. The method is to invest a set amount of money on a recurring basis in the same investment. By continuing to make purchases when prices decline, you buy more shares than you do when prices are high. (Keep in mind that dollar cost averaging neither guarantees a profit nor protects against loss in a prolonged declining market. Because dollar cost averaging involves continuous investment, investors should consider their financial ability to continue investment through periods of low prices.)
strictly for the long term is a technique called “tactical asset allocation.” This involves moving significant chunks of your portfolio from one asset class to another, depending upon your reading of the changing prospects for risk and reward.
Between the strategies of trading actively and managing your portfolio
To determine the approach that’s right for you, please call. ✔✔✔
Trading involves market timing, which in turn, depends on reading market and economic indicators with precision. It can be thrilling, but it’s also very difficult to do well. Is watching the indicators for the right moment to move in a new direction the right approach for you? Perhaps it is, at least with some of your portfolio.
Dealing with a Spouse’s Credit Issues
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ombining your finances with your spouse’s finances may also include combining your credit histories. When you apply jointly for debt, both your credit histories will be evaluated. Thus, if one of you has outstanding credit and the other has credit problems, it can affect the approval process and the cost of your debt. Some tips to consider include:
Don’t apply for joint credit. If your spouse’s credit history is very bad, it may pay to leave him/her off the credit application. However, that means your spouse’s income won’t be considered.
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a parent or relative to ✔ Ask co-sign a major loan, such as a mortgage. Before asking, keep in mind that you are asking that person to take responsibility for the entire loan. Or, if you are late making payments, that will be reflected on the co-signer’s credit history also.
Instead of applying for joint ✔ credit cards, list your spouse as an authorized user of your cards. While an authorized user can charge on your credit card, you are responsible for paying the bills. If the account is paid promptly, it will be reported on both credit histories, helping to improve your spouse’s credit history. However, if you make delinquent payments, only your credit history suffers, since your spouse can ask to be removed from the card and have the negative information removed from his/her credit history. Use other strategies to ✔ improve your spouse’s credit history. Ensure that your spouse makes all payments on a timely basis. Try to pay down as many of his/her credit balances as possible. If your spouse has difficulty obtaining credit, have him/her apply for a secured credit card. ✔✔✔
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From the Desk of: L.T. Hutchins Group Distributing Personal Possessions Organizing and planning an estate is not a simple process. After deciding who should receive major assets, you may need to use a variety of vehicles to distribute
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Market Data
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MONTH END % CHANGE STOCKS: JUN 13 MAY 13 APR 13 YTD 12 MON. Dow Jones Ind. 14909.60 15115.57 14839.80 13.8% 15.8% S&P 500 1606.28 1630.74 1597.57 12.6 17.9 Nasdaq Comp. 3403.25 3455.91 3328.79 12.7 16.0 Wilshire 5000 16771.31 17014.54 16654.16 12.1 18.0 PRECIOUS METALS: Gold 1192.00 1394.50 1469.00 -28.3 -25.4 Silver 19.42 22.26 24.15 -35.2 -29.3 INTEREST RATES: JUN 13 MAY 13 APR 13 DEC 12 JUN 12 Prime rate 3.25 3.25 3.25 3.25 3.25 Money market rate 0.45 0.46 0.47 0.51 0.50 3-month T-bill rate 0.06 0.05 0.05 0.09 0.10 20-year T-bond rate 3.11 2.80 2.51 2.56 2.32 Dow Jones Corp. 3.18 2.67 2.44 2.70 3.14 Bond Buyer Muni 4.77 4.26 4.05 4.11 4.38 Sources: Barron’s, Wall Street Journal. An investor may not invest directly in an index.
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those assets. Dealing with major assets may be so timeconsuming that you don’t even think about your personal possessions. But disputes over personal possessions are more apt to cause conflict among heirs than disputes over money. Some items to consider include: Take time to think about who should receive treasured personal possessions. You might want to detail your wishes in a separate letter to your heirs to prevent disagreements. Ask your heirs what possessions are important to them. Otherwise, you may inadvertently give a treasured possession to one child without realizing its importance to another. Don’t distribute assets based on arbitrary criteria. You don’t necessarily have to give your jewelry to your daughter or your tools to your son. Likewise, don’t give your most valued possessions to your oldest child without considering younger siblings. Devise a method for heirs to distribute personal possessions. You probably won’t want to decide how every personal possession should be distributed, so detail a method for heirs to distribute the rest of your possessions. It can be as simple as having heirs take turns selecting items or flipping a coin if more than one person is interested in an item. ✔✔✔
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This newsletter was produced by Integrated Concepts Group, Inc. on behalf of Morgan Stanley Financial Advisors Lance T. Hutchins, CPM®, CRPC® and Jerry A. Rasmussen, CRPC®. The opinions expressed in this newsletter are solely those of the author and do not necessarily reflect those of Morgan Stanley. Morgan Stanley can offer no assurance as to its accuracy or completeness and the giving of the same is not deemed an offer or solicitation on Morgan Stanley’s part with respect to the sale or purchase of any securities or commodities. Tax laws are complex and subject to change. This information is based on current federal tax laws in effect at the time this was written. Morgan Stanley, its affiliates, and Morgan Stanley Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Individuals should consult their personal tax advisor for matters involving taxation and tax planning and their attorney for matters involving personal trusts, estate planning, and other legal matters. Investments and services offered by Morgan Stanley Smith Barney LLC, Member SIPC.
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