HOFFMAN,
WHITE & KAELBER FINANCIAL SERVICES, LLC
Investment
managers & Financial Advisors
November 2, 2004
This is the November 2004 monthly Wealth Management newsletter from Hoffman, White & Kaelber Financial Services, LLC. If you do not wish to be included in our circulation, please reply indicating your desire to be removed and we will be happy to oblige. Alternatively, any of your friends or colleagues may receive this on a regular monthly basis by sending their name and email address to info@hwkfs.com. Feel free to forward this to any of your friends who may find it useful. Thanks for your interest and I hope you enjoy the letter.
Estate planning should not be viewed as being about the dead
and their assets. Rather, it is about
the legacy left for the living where the primary consideration should involve
protecting and preserving the family – a focus that begins with the living, not
the dead. It’s not that tax planning and
asset preservation are unimportant; it just pales in significance to protecting
family. Also, there seems to be a
central truism in the passage of wealth: “Every inheritance (or lack of
inheritance) will effect the recipient” – Warren Buffet. Often this effect will have a longer lasting
impact on the family than ever imagined.
It might not be a surprise to you that most Americans haven’t
made a simple will or given consideration to a comprehensive plan to avoid
probate or to save on estate taxes. So,
why is it that most people don’t consider estate planning as a critical aspect
of their family and financial plans?
This author believes that having to face hard questions and the
potential of having to face emotional complexities far outweigh a family’s
economic reasons. Maybe, also, many just
don’t understand the basic reasons why they should!
This month’s letter will discuss some fundamental estate
planning concepts and considerations for some broad categories of household
status and age. The good news is that
depending on your age, household status, health, wealth and level of caution,
you may not need to do much in the way of estate planning at all. Lastly, and as always, we will finish with an update on our investment activities.
A simple will is a document that designates how you wish
your property to be distributed among your relatives, friends, and favorite
charity. Your will is also the place
where you will identify people for important roles, such as:
·
The guardians for your minor children: who will
care for and raise them.
·
The executor for your estate: who will be
responsible for ensuring that all of your wishes as articulated in the will are
carried out.
·
The trustees: who will manage any property you
wish to be held in a trust vehicle, usually for future use by beneficiaries.
Only a written will can guarantee that your instructions
will be known and followed after your death.
If you do not write a will, state law will determine what happens to
your wealth.
In most states, if you have children but no spouse, the
state will appoint a guardian who will be responsible for attending to their
finances while they are minors. If you
have no spouse or children, if living, your parents will receive the
inheritance. If you have no surviving
relatives, the state receives all of your assets!
This may be a lot to consider, but to ensure the safety and
protection of your loved ones, make your wishes explicit in a written
will. Going without could be extremely
hard on your survivors.
Trust that your most difficult decisions will involve whom
you would like to ask to be the guardian of your children and the executor of
your will.
It turns out that your will can be nullified by most major life changes. In general, a will can be rendered invalid by any of the following events:
·
Getting married
·
Having a child
·
Getting divorced
·
Moving across state lines
When you are married, many states assume that in the event
of your death, you intend for your property to go to your spouse and children,
if you have any. If you wrote your will
before you got married and didn't include your spouse, your will could be made
invalid. The same is true if you bear a
child. If you don't change your will to
acknowledge the child, it could be invalidated.
Codicils are amendments to wills and can be attached
directly to the existing will. So if
you are getting divorced, remarried, are pregnant or moving to a new state
where the laws might be different, you should rewrite or amend your will.
After someone passes away, all of his or her possessions
become part of the estate. The
transferring of the estate’s assets to the beneficiaries is called probate and
is supervised by the probate court.
During this process, the court validates the will and insures that the
assets are distributed in accordance with the will.
Often, probate of a will can take a long time. If there are challenges to the will, the
process can tie matters up in court for months or possibly several years. As a result, probate can be somewhat
costly because of court fees. What’s
more, if you have property in several states, papers must be filed
in each state's probate court. Then when the administration
of the estate is complete, the will becomes a public document.
To avoid this time-consuming hassle, transferring assets to
a trust can bypass probate.
A trust is a legal arrangement whereby any form of property
is transferred to a trustee, who then manages the property for the
beneficiaries of the trust. There are
generally two types of beneficiaries to a trust. An income beneficiary who has rights to the
income that the trust assets generate; and, a remainder beneficiary who has an
interest in the principal assets at termination of the trust. The grantor is the person establishing the
trust and the transferred property is the called the principal. Quite often, the property can remain in a
trust for whatever length of time needed to meet your planning needs.
You don't have to be wealthy to consider establishing a
trust. People of all income brackets can
benefit from transferring property to a trust.
It’s often said that there is a trust for every occasion and
it is very easy to become confused by the jargon estate planning professionals
use to describe them. To help you
through some of this legalese, here are some basic trust types:
·
Revocable trusts can be modified while the grantor is
still alive.
·
Irrevocable trusts cannot be modified while the
grantor is still alive.
·
Testamentary trusts are established as part of a will
and become effective at the time of the grantor's death.
·
Living trusts are established during the grantor's
lifetime and become effective immediately.
While several tax advantages exist that are associated with
certain kinds of trusts, here are some family minded uses for consideration:
·
You want to encourage grandchildren to attend college
by setting up education trusts.
·
You would like your children to have access to their
inheritance as they become mature enough to manage it responsibly, or
·
You use a trust to create incentives and opportunities
for heirs without supporting an unearned lifestyle.
·
You want to protect an inexperienced heir from judgment
errors by arranging an independent financial advisor and trustee.
·
You wish to keep private the contents of your estate
and how your estate is being distributed.
There may be a time in your life when you are unable to make your own financial or healthcare decisions because of extreme illness, disability, incompetence, or even when on extended holiday. At these times, it is important that someone you trust is legally empowered to make these decisions on your behalf.
Power of attorney is a document by which you, as
principal, appoint a person to act as your agent or attorney-in-fact. An agent is one who has authorization to act
for another person. If you have
appointed an agent by a power of attorney, acts of the agent within the
authority spelled out in the power of attorney are legally binding on you, just
as though you performed the acts yourself.
The power of attorney can authorize the attorney-in-fact to perform a single
act or a multitude of acts repeatedly.
You need to pick someone you can trust!
Many people are unaware that an ordinary power of attorney is revoked, and the agent's power to act for the principal automatically stops, if the principal becomes incapacitated. However, in many states, a power of attorney with proper wording may be made "durable." This means that the power of the agent to act on the principal's behalf continues despite the principal's incapacity, whether or not a court decrees the principal to be incapacitated.
It is possible to
create a durable power of attorney so that it will only go into effect when the
principal is incapacitated or when some other stipulated event or condition
occurs. This is ordinarily called a springing
durable power of attorney.
Most states have one set of laws governing financial POAs and second set of laws governing POAs for health care decisions. Therefore, it is the common and recommended practice not to mix the two purposes into one document.
Living Wills and Medical Powers of Attorney serve different but complimentary purposes. A Living Will sets forth the individual's intentions in case of terminal illness or persistent unconsciousness. A Medical Power of Attorney authorizes an agent to make health care decisions for the principal when he or she is no longer capable of making them. Many states allow for a Living Will and a Medical Power of Attorney to be combined into one document.
If you’re single and under 30, I’m very surprised you’ve read this far. Unless you’re uncommonly wealthy, you’re better off concentrating on more enjoyable social happenings. But, if you are financially secure, you might want to write a will so you can leave your possessions to whomever you choose.
If you've got a life partner but no marriage certificate, a
will is almost a must-have document. Without a will, the law in most states
will dictate where your property goes after your death, and unmarried partners
often get nothing.
Having children complicates life -- but then, you already know that. Estate planning is no exception. At a minimum, write a will that leaves your property to whomever you choose and names a guardian for your children. The guardian will take over if both you and the other parent are unavailable. This may be unlikely, but it's worth addressing just in case. If you fail to name a guardian, a court will appoint someone, possibly one of your parents. Also, make sure you have adequate life insurance coverage.
If you've made it to a comfortable time in life, you will
probably want to take some time to reflect on what you will eventually leave
behind. But given that you may well live
another 30 or 40 years, there is no need to obsess about it. Chances are your conclusions will be
different in ten or twenty years, and your estate plan will change
accordingly. Review again what I’ve
written above and consider saving your family the cost (and hassles) of
probate. If you have enough property to
worry about estate taxes, think about tax avoidance as well.
If you are elderly or ill, now is the time to take concrete
steps to establish an estate plan.
First, consider a probate-avoidance living trust and, if you're
concerned about estate taxes, a tax-saving trust. Also, write a will, or update an old
one. Then, although no one wants to do
it, take a minute to think about the possibility that at some time, you might
become unable to handle day-to-day financial matters or make healthcare
decisions. If you don't do anything to
prepare for this unpleasant possibility, a judge may have to appoint someone to
make these decisions for you. No one
wants a court's intervention in such personal matters, but someone must have
legal authority to act on your behalf.
We’re At
Your Service
Whether you’re an estate planning professional or a client undergoing the process, we’re happy to help. When going through the process, we can help you through some of the hard decisions that will confront client participants. And, when there is a need for money management, we are unbiased decision-makers most appreciated by trustees and beneficiaries with moderate to low tolerances for risk taking. As well, our accounting firm affiliate is more than capable to assist with you tax and administration needs. We’re at your service!
Hoffman, White & Kaelber Financial Services Investment
Performance Update
All investing is a tradeoff between the risks you take and
the returns you can hope to earn. There are
some dangers that you can anticipate -- at least to a certain extent. And then, sometimes you recognize a trend
can't continue because the economic fundamentals won't sustain it. For example, it was clear that the Internet
boom couldn't go on forever because many of the companies were spending
investment capital they had raised rather than cash flow generated by their
businesses. Sooner or later, the
investment capital had to run out and the boom had to end. It did, and scores of investors were hurt
when it did. I start with this because it now
seems timely to reinforce the concept that there is more to managing investment
risk than simple diversification.
Due to our view of growth and inflation rates in the
For the month ended October 31, 2004, our one-month
performance is up 0.23%, our three-month return is up 0.25%, our one-year
return is up 2.81%, and our average annualized return since inception is up
9.94%. While volatility (risk) continues
to increase in most market sectors, our
(since inception) risk profile has edged downward further to +/- 6.69%. This risk level
remains conservatively low and is consistent with our strategy. With our expectation that this statistic
gains increasing importance, our Sharpe Ratio remains a very respectable 1.32.
Investment pros borrow a tool from the
statisticians—standard deviation—to measure investment risk. It shows the range of returns that investments are likely to earn
over a given period of time and it has two sides, the out-performance and the
under-performance of an average rate of return.
The Sharpe Ratio is a commonly used measure of portfolio earnings quality. In short, the Sharpe Ratio is a measure of return achieved per risk taken. Sharpe ratios can be better than just looking at performance because it incorporates the issue of risk. Some would say it is a measure of a manager’s ability to perform consistently. The number by itself, however, is hard for many to understand without comparing it to something.
Let’s take a look at the S&P 500 Index for a quick
comparison. The Standard & Poor's
500 Index is usually considered the benchmark for
Are you familiar with Morningstar, Inc.? They are a Chicago-based, global investment research firm, providing information, data, and analysis on the mutual fund industry. They say that a Sharpe Ratio of over 1.0 is "pretty good" and outstanding funds achieve something over 2.0. Using this “yardstick”, we are more than pleased with our accomplishment to date.
For most
investors, the Sharpe makes good intuitive sense because they not only hate to
lose money but they often compare the returns to risk free investing. You owe it to yourself to understand and
consider this measure when making investment decisions.
Is a comfortable retirement or preservation of wealth important to
you?
Want better long-term results from your investments?
Choose Us As Your Investment Manager!
Research us on the web at www.hwkfs.com