October, 2020 | Shah & Associates, P.C. Estate Planning & Elder Law Blog
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Merging Two Families? Don’t Forget Your Finances

October 20, 2020

Filed under: Blended Families — Laura Pennington @ 2:47 pm

Becoming a blended family presents unique opportunities and some challenges with regard to your financial and estate planning. In 40% of all new marriages in the United States, at least one of the spouses was previously married. There are unique financial and estate planning dynamics that can come from merging families, especially as it relates to financial values, existing documents, money philosophies and even your spending habits.

There’s a good chance that the way you talk to your individual children about finances is different too. From savings plans to allowances, it’s important for you and your new spouse to get on the same page. In these circumstances, it’s a good idea to look at existing documents that both of you are bringing into the marriage.

Estate planning must be tackled together with your new family in order to ensure that your estate planning documents and strategies accomplish your goals. Once you’re married, your blended family should quickly reevaluate existing estate planning processes.

It’s important to think about how you will care for your children from your previous marriage and ensure that they are not accidentally excluded from your estate planning that you update across the board to reflect your new family arrangements. In addition to making sure that your new spouse is taken care of, you’ll want to talk with an estate planning lawyer to verify whether or not your existing estate planning documents protect your children from a previous marriage the way that you intended.

For further information about this process, schedule a time to talk with a dedicated estate planning lawyer.

Since blended families have so much to think about, you need dedicated advocates in your corner to help you.

A Plan for an Intentional Retirement

October 19, 2020

Filed under: Asset Protection — Laura Pennington @ 9:20 pm

Those approaching retirement today and looking forward to it in the next couple of years have likely navigated their entire life with a sense of purpose, and exiting the work market full time doesn’t mean you give up this purpose. A recent survey of retirees found that 55% of them said that retirement was viewed by them as a new chapter in their life.

That same study identified that over 95% of retirees felt that it was important to continue growing and learning at every age. In order to accomplish retirement goals and continue driving forward with a sense of purpose you need to be financially prepared.

Asking yourself some of the tough questions and engaging the right team of professionals can help you navigate this new process. This includes asking yourself questions, such as:

  • Will I still be able to retire at the age that I intended to?
  • How will retiring at different ages impact my Social Security benefits?
  • Will I need to prioritize some of my goals because I don’t have the security that I anticipated as I get closer to retirement?
  • How will I incorporate estate planning intentions into my existing financial strategy and retirement options?
  • What role, if any, does philanthropy and charity play in my overall financial strategy?

It can be very rewarding to approach and live through your retirement purposefully but it is hard to do it alone. Having the support of a dedicated team of estate planning professionals and financial experts can help provide important questions and insight as you navigate this process.

Our NJ estate planning law office is here to help you no matter what questions you have on the process.

 

Untangling Intangibles

October 16, 2020

Filed under: Estate Planning — Raymund Rasco @ 3:28 pm

Many companies use intangible assets such as patents, licenses, computer software, branding, and reputation to earn revenues. These intangible assets have always been part of the economic landscape. We study the impact of intangibles on our ability to identify differences in expected stock returns and find no tangible performance benefit from adjusting for intangibles.

It is important to begin by distinguishing between two types of intangible assets. Under US generally accepted accounting principles (GAAP), externally acquired intangibles are reported on the balance sheet. They currently represent about a quarter of the reported value of assets for the average US company. These assets are accounted for when computing book equity. Internally developed intangibles, on the other hand, are generally not capitalized on the balance sheet. Instead, they are expensed and thus reflected on the income statement. The difference in accounting treatment is primarily due to the higher uncertainty around the potential of internally developed intangibles to provide future benefits and the difficulty to identify and objectively measure such benefits.1 After all, internally developed intangibles do not go through a market assessment, while externally acquired intangibles get evaluated in the competitive market for mergers and acquisitions, and at that time, they might already be generating tangible benefits for the company that developed them. For example, Disney bought the Star Wars franchise, an externally acquired intangible, in 2012, many years after the franchise began generating economic benefits for Lucasfilm.

Some argue that to more effectively infer differences in expected returns across firms sourcing most of their intangibles externally and firms sourcing them mostly internally, we should capitalize internally developed intangibles. Several academic studies do that by accumulating the historical spending on research and development (to capture the development of “knowledge capital”) and selling, general, and administrative (SG&A) expenses (to capture the development of “organizational capital”). In the present study, we follow the approach suggested by Peters and Taylor (2017)2 and find that while intangible assets comprise more of companies’ assets over time, this stems mainly from growth in externally acquired intangibles. Estimated internally developed intangibles have not meaningfully increased as a proportion of total assets (see Exhibit 1).

Moreover, the estimation approach for internally developed intangibles has several important caveats in addition to the lack of market valuations. First, the estimation of internally developed intangibles assumes that the development of intangible capital can be captured fully through spending reported on the income statement. Second, the approach is critically dependent upon the availability of reliable and comprehensive R&D and SG&A data. However, we observe R&D data for about half of the US market even today. As a result, the estimated knowledge capital is zero for about half of the US market. Thus, we would adjust the value and profitability metrics of half of the market for knowledge capital and leave the rest unadjusted, potentially making firms in the adjusted and unadjusted groups less comparable, not more, after the adjustments. Further, while SG&A data are available for most US companies since the 1960s, the breakdown of operating expenses into cost of goods sold and SG&A varies often across companies and data sources, which might add noise to the estimation of organizational capital. The estimation approach can also produce noisy results because it applies constant amortization rates through time and does not allow for impairments. As a result, a company can be approaching bankruptcy and still appear to have billions of dollars’ worth of internally developed intangibles.

Because of all those different sources of noise, capitalizing estimated internally developed intangibles might not be helpful in identifying differences in expected stock returns. Our empirical research lends support to this expectation. Estimated internally developed intangibles contain little additional information about future firm cash flows beyond what is contained in current firm cash flows. Moreover, we do not find compelling evidence that capitalizing estimated internally developed intangibles yields consistently higher value and profitability premiums.

Given the large challenges with estimating internally developed intangibles, an alternative approach to infer more effectively differences in expected returns among
firms with different sources of intangibles might be to strip out externally acquired intangibles from the balance sheet. Our empirical analysis shows no compelling performance benefit of excluding externally acquired intangibles from fundamentals. Historically, the exclusion of externally acquired intangibles would not have generated higher value or profitability premiums. Therefore, we believe investors are better off continuing to incorporate externally acquired intangibles reported on the balance sheet and not adding noisy estimates of internally developed intangibles to value and profitability metrics.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Advanced Estate Plan Strategies Aligned with Low Interest Rates

October 14, 2020

Filed under: Asset Protection — Laura Pennington @ 3:21 pm

The current environment of your state and the federal economy and relevant laws can help you to determine whether or not your estate plan meets your goals or needs to be adapted. The Federal Reserve’s decision to keep interest rates very low has made a good environment for you to leverage advanced estate planning tools such as a grantor retained annuity trust or a charitable need annuity trust.

These are two techniques that allow for the transfer of wealth to occur at a reduced gift tax expense and provide that the future appreciation of any individual assets inside of them move on to the new beneficiary without exposure to the estate tax of the individual. A CLAT pays a fixed sum to a determined charity for a certain number of years after which point the remainder will pass to the creator of the trust’s family.

The GRAT pays a set sum back to the creator of the trust for a fixed number of years, then allowing the remainder to pass on to the family. Both of these advanced estate planning strategies can be most effective when you move an asset that has significant appreciation potential, such as a closely held business that you anticipate a successful sale of in the future. Given volatile capital markets currently and low interest rates, this is a good opportunity to evaluate these advanced strategies with your lawyer.

 

Investing in FAANG Stocks: Should You Expect Unexpected Returns?

October 7, 2020

Filed under: Estate Planning — Raymund Rasco @ 3:58 pm

Investment returns have two parts: the expected return and the unexpected return. The expected return is the best guess of what will happen based on all the information currently available. The unexpected return is the surprise, the difference between what does happen and what was expected. Investors should base their portfolio decisions on expected future returns, not recent realized returns, and the two can differ by a lot.

Look at the returns on the so-called FAANG stocks–Facebook, Amazon, Apple, Netflix, and Google’s parent company, Alphabet. Over the 10 years from September 2010 to August 2020, a portfolio of the five stocks held in proportion to their market caps would have delivered an average annual return of 34.25% per year. That means on average, the value of the portfolio doubled about every 2.5 years.

Given their great returns over the last 10 years, what is our best guess of how the FAANG stocks will do over the next decade? Should we expect an average annual return of almost 35% again? Absolutely not. Who wouldn’t buy these stocks if their expected returns were 35%? But buyers need sellers. The demand driven by such high expected returns would simply push prices up and drive expected returns down to a more
reasonable level. For the same reason, I’m confident that if we could go back to August 2010, we would find few investors predicting the FAANG stocks would do as well as they did from 2010 to 2020.

So what does explain the FAANG stocks’ high realized returns? Their unexpected returns. Things turned out much better for them than investors expected. The companies’ cash flows over the last 10 years were much higher than investors expected 10 years ago, and their prospects looking forward from today are almost certainly better than investors expected they would be 10 years ago.

All this unexpected good news produced high unexpected stock returns over the last decade. It would be wrong, however, to expect high unexpected returns to persist. After all, it doesn’t make sense to count on good luck. The expected value of the unexpected returns must be zero.

In short, the past decade of extraordinary realized returns tells us little about the FAANG stocks’ future expected returns. And unfortunately, this is a general result. For most investments and most investment horizons—a month, a year, five years, even ten years—the realized return is driven far more by the unexpected return than the expected return.

–  Kenneth French, PhD
Director and Consultant

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Checking Out of a Relationship or Home? Time for a Checkup!

October 6, 2020

Filed under: Estate Planning — Laura Pennington @ 11:32 am

In normal times and especially in a pandemic, many people use natural pause points to take stock of their lives and determine their next moves. For you, this might look like moving out of a home that was big enough to raise your kids in but too big to justify alone or with a spouse. It could include leaving a first or second marriage or trying to relocate to a new state where the conditions are more favorable to you financially.

No matter what moves you’re making in your life or you have on your horizon in the near future, it’s time for a checkup on your financial and estate plans. Your current plans might work for the conditions you’re in now, but making big changes means you need a step back to determine how your new life fits into the fold.

From thinking about your long term care plan to physically updating your will or beneficiary forms, there are a few tasks on this to-do list to consider when you’re “checking out” of your current conditions. It’s easy to miss some of these details, but they are important aspects of your life and plan. It’s best to partner with a dedicated estate planning lawyer to work through all the details and get the confidence that comes from having a comprehensive estate plan in place.

Are you concerned about how you move forward with your life in a way that protects your personal interests and your loved ones? You’re not alone. Estate planning lawyers in NJ can assist you with reviewing your current plan and making the necessary updates so that you have a future that’s bright for yourself and enables your loved ones to have an easier time moving your estate through the administration phase when it comes time to do that.

How Much Impact Does the President Have on Stocks?

October 2, 2020

Filed under: Estate Planning — Raymund Rasco @ 4:21 pm

The anticipation building up to elections often brings with it questions about how financial markets will respond. But the outcome of an election is only one of many inputs to the market. Our interactive exhibit examines market and economic data for nearly 100 years of US presidential terms and shows a consistent upward march for US equities regardless of the administration in place. This is an important lesson on the benefits of a long-term investment approach.

NOTES AND DATA SOURCES

• This material is in relation to the US market and contains analysis specific to the US.

• In US dollars. Stock returns represented by Fama/French Total US Market Research Index, provided by Ken French and available at http://mba.tuck.dartmouth.edu/ pages/
faculty/ken.french/data_library.html. This value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available
outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return.
Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

• Growth of wealth shows the growth of a hypothetical investment of $100 in the securities in the Fama/French US Total Market Research Index. Growth of wealth for the full
sample from March 4, 1929, through June 30, 2020. Growth of wealth for each presidential term starts on the election day of each president up to but not including the
election day of a successor. For presidents who are not initially elected, the growth of wealth period starts from the day of inauguration up to but not including the successor’s
election day.

• Federal surplus or deficit as a percentage of gross domestic product, inflation, and unemployment data from Federal Reserve Bank of St. Louis (FRED). GDP Growth is annual
real GDP Growth, using constant 2012 dollars, as provided by the US Bureau of Economic Analysis. Unemployment data not reported prior to April 1929. Federal surplus or
deficit as a percentage of gross domestic product data is cumulative.

• US Government Presidential and Congressional data obtained from the History, Art & Archives of the United States House of Representatives. US Senate data is from the
Art & History records of the United States Senate.

• For Herbert Hoover, the federal budget is calculated from 1929 to 1932. Annual real GDP growth is calculated from 1930 to 1932; GDP data not available prior to 1930.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

What History Tells Us About US Presidential Elections and the Market

October 1, 2020

Filed under: Estate Planning — Raymund Rasco @ 3:57 pm

It’s natural for investors to look for a connection between who
wins the White House and which way stocks will go. But as
nearly a century of returns shows, stocks have trended upward
across administrations from both parties.

• Shareholders are investing in companies, not a political
party. And companies focus on serving their customers
and growing their businesses, regardless of who is in the
White House.

• US presidents may have an impact on market returns,
but so do hundreds, if not thousands, of other factors—the
actions of foreign leaders, a global pandemic, interest rate
changes, rising and falling oil prices, and technological
advances, just to name a few.

Stocks have rewarded disciplined investors for decades,
through Democratic and Republican presidencies.
It’s an important lesson on the benefits of a long-term
investment approach.

Sources: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.