June 2023 Newsletter: 7 Steps to Get Your Affairs in Order

By Charles Sherry, MSc

While many find it anxiety-provoking to think about, creating a legally binding plan to distribute your assets after your death ultimately provides you with peace of mind. You can rest easy knowing that your wishes will be carried out as you have requested.

Some folks prefer a DIY, or do-it-yourself approach, but this may not be the best option for everyone. One reason is because each state has its own set of laws and requirements. You can find various templates online, but some of the documents may fall short of their claim to meet your state’s requirements.

It is crucial that your estate plan meets your state’s legal requirements to ensure your final wishes are honored, so expert help is recommended. Consult with an estate planning attorney to ensure that documents are correctly prepared, avoiding costly and time-consuming missteps.

While we encourage you to sit down with a legal professional, we also want to provide some general guidelines you can think through independently. Estate planning is a complex field, but a general outline can clear up some of the mystery.

Estate planning 101

1. What do you want to accomplish?

Will you be providing for children under 18? Or are your beneficiaries young adults, older adults, relatives, or charities? Exactly how might you provide for your children?

Options you may consider include a trust and/or a will.

What is a trust? Trusts provide control over the distribution of assets, privacy, and potential tax advantages. A trust is a fiduciary arrangement that allows a trustee to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways, specifying exactly how and when the assets pass to the heirs.

For example, are you concerned that a young adult might fritter away his or her inheritance? A spendthrift trust might be the answer. Instead of an account that allows immediate access to the assets, the trustee of a spendthrift trust dispenses the assets over time.

Additionally, a spendthrift trust typically protects assets from creditors, bankruptcy, divorce, and lawsuits.

Is there a need to minimize taxes? An irrevocable trust might fit into your plan. By placing assets into an irrevocable trust, the estate’s value is reduced regarding estate taxes. Besides tax considerations, irrevocable trusts also help protect assets in lawsuits.

You may also decide to create a living trust, which transfers your assets to your beneficiaries and avoids probate.

Other trusts that you may find advantageous include charitable trusts, special needs trusts, generation-skipping trusts, and bypass trusts. The latter two offer ways to reduce the estate tax.

You may also consider a will. A will is a legal document that takes effect upon your death. It outlines your wishes, including provisions for guardianship of your minor children.

As I already mentioned, complexities abound. Your financial professional will be happy to answer any inquiries you may have. Again, consulting with an estate planning attorney can help you decide if a trust, a will, or both are best for securing your assets for your heirs.

Don’t wait until it’s too late to secure the future of your loved ones. Take action today.

2. Have you taken stock of your possessions?

It’s important to create an inventory of your assets, such as bank accounts, insurance policies, investment accounts, and personal belongings.

3. Don’t avoid the difficult conversation.

If you were to pass away suddenly, do your loved ones have access to important documents, financial statements, etc.? It is important to inform your loved ones about the location of your will and the legal professionals who will handle the process.

In other words, it’s important to ensure that your heirs won’t be forced to embark on an unexpected scavenger hunt in the event of your unexpected passing.

4. Choose the right executor or trustee.

Select a trustworthy individual or institution to act on your behalf. You need someone dependable, trustworthy, organized, fair, and financially savvy. Identifying the best candidate can be made easier if you focus on these important attributes.

5. Be sure to designate and regularly update your beneficiaries.

It’s common to list a beneficiary or beneficiaries for an IRA and life insurance policy.

However, it’s crucial to ensure that your designated beneficiaries align with your will. For instance, if the will you drafted last year names Bob as the recipient of your IRA at ABC Brokerage, but the beneficiary listed 15 years ago is Sally, Sally will be the recipient of the assets.

6. Prepare for medical decisions.

Estate planning isn’t complete unless you prepare legal documents such as a durable power of attorney for financial matters and a medical power of attorney for medical decisions. It is crucial in the event you are incapacitated.

These documents appoint trusted individuals to make decisions on your behalf when you can’t.

7. Update your estate plan regularly.

Life is full of unexpected turns. Milestone events such as marriage, divorce, births, and deaths can significantly impact your wishes and create gaps in your plan.

In addition, charities that used to hold significance may not have the same impact anymore. Therefore, it is crucial to periodically review and make necessary adjustments to your plan.

Estate planning is a personalized process, and I want to emphasize that the above-mentioned steps are merely an outline.

Your financial professional’s objective is to initiate a dialogue and assist you in developing a plan or motivate you to revise an existing one. They are always available to address any questions you may have.

Recession aversion

A quote I mentioned in last month’s summary is worth repeating:

“Usually, recessions sneak up on us. CEOs never talk about recessions,” said economist Mark Zandi at the end of 2022. “Now it seems CEOs are falling over themselves to say we’re falling into a recession. …Every person on TV says recession. Every economist says recession. I’ve never seen anything like it.”

Last August, the highly respected Conference Board, which compiles the Leading Economic Index, believed the U.S. economy would not expand in the third quarter of 2022 and “could tip into a short but mild recession by the end of the year or early 2023.”

The Conference Board doubled down last month, forecasting that “a contraction of economic activity” will begin in Q2 and lead to a mild recession by mid-2023.

Nonetheless, the economy expanded at an annualized pace of 3.2% in Q3 2022 and added another 2.6% in Q4 before slowing to 1.3% in Q1 2023, according to the U.S. Bureau of Economic Statistics.

Since January, the economy has added 1.6 million net new jobs, according to U.S. Bureau of Labor Statistics data, including 339,000 new jobs in May.

Neither metric is consistent with the traditional definition of a recession.

Although the year is not yet over, it serves as a reminder that the brightest minds cannot accurately foretell and time future events.

Still, is the jump in the unemployment rate from 3.4% in April to 3.7% in May a concern?

It’s worth pointing out that the unemployment rate is measured by a survey called the household survey. Employment, reported as nonfarm payrolls each month, is calculated via a survey of businesses called the establishment survey.

The U.S. BLS says the household survey includes “self-employed workers whose businesses are unincorporated.” The establishment survey does not.

Self-employed workers whose businesses are unincorporated declined by 369,000 in May. It’s possible that anomalies in the data accounted for the sharp decline and subsequent rise in the jobless rate. June’s unemployment rate should provide additional clarity.

Investor’s corner

What does this mean for investors? Well, the resilient labor market and the Fed’s war on inflation should all but guarantee a rate increase at the Fed’s June 14th meeting. Yet, following 10-straight rate hikes, the Fed has hinted that it will take a break in June and forgo a hike in interest rates.

Its gentler approach this year, coupled with talk of a pause this month, has supported the major index this year.

Please note, however, that the S&P 500 Index has been aided by the outperformance of a few mega-cap tech stocks. The Dow and the Russell 2000 Index, which measure the performance of small stocks, have lagged.

Source: Wall Street Journal, MSCI.com, MarketWatch, Bloomberg
MTD returns: April 28, 2023–May 31, 2023
YTD returns: December 30, 2022–May 31, 2023
*in US dollars

Debt ceiling drama

According to popular belief, if a frog is thrown into boiling water, it will immediately jump out. However, if placed in warm water and the temperature gradually increases, it will eventually perish.

We’ve never tested the hypothesis (nor do we plan to), but it can be used as a metaphor.

The federal deficit is continuously expanding, i.e., the temperature of the water is slowly rising, without any clear indication of when it may pose a threat to financial stability.

However, a hard cap on the total deficit via a decision not to raise the debt ceiling would have had serious consequences. Market reaction would have been swift and dramatic.

Politicians will always posture, but behind closed doors, they recognized the need to strike a deal, however imperfect such a deal might be, and the debt ceiling was raised. Crisis averted.

Your financial professional’s role involves evaluating the market through the narrow lens of an investor’s perspective. You see, the investor assesses the economic fundamentals over a period of roughly six to nine months.

If the U.S. were to default on its debt (T-bills set to mature), it would lead to unpaid bills, a credit downgrade, and severe consequences in both U.S. and global financial markets.

Such consequences would likely lead to economic instability, higher borrowing costs for the U.S. Treasury, a weaker dollar, and a loss of confidence in the U.S. government’s ability to manage its finances.

None of these outcomes are desirable for investors.

I trust you found this review informative. If you have any inquiries or wish to discuss any concerns, please don’t hesitate to contact me or any member of my team.

It’s always a privilege and a humbling experience for me to be chosen as your financial professional. Thank you for your trust and confidence in our services.