Grandparent Owned College Funds

Anyone who has a college aged child knows there were big changes to the FAFSA (Free Application for Federal Student Aid) this year. The rollout has been a little bumpy. Lost amid the complaints is a nuanced change to the optimal way to save for college. The new calculations do not penalize you for distributions from grandparent owned 529 plans (the old rules did). That means it’s now better for grandparents to own the 529 plan account than it is for the parents to own it. Assets in a parent-owned account count against the student in the aid formula. Grandparent-owned plans do not.

Here are my takeaways:

  • If you’re opening a new account for a grandchild, I’d put a grandparent down as their account owner.
  • If you’ve already got 529 plan accounts set up in the parents’ name, it may not make sense to change it. I own my girls’ accounts. I’m in no rush to change this because it’s another 13 years until my oldest hits college. They’re almost certain to change the rules again before then. Plus, my parents will be in their eighties at that point. I should be taking financial tasks off their plate (when they’re interested), not giving them more.
  • If the student is at or near college age, it’s worth considering an owner change. We would need to review the details with you to see if it’s worth changing. There may or may not be a benefit.

Of course, the FAFSA should only be one consideration in how you save for college. In your situation, it may make more sense for the parent(s) to control the account, manage disbursements, etc. Let me know if you want to talk through your options.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Don’t Cheat Me

I met with a long-time friend last week. He’s ready to sign up as a client. Before I left our meeting he said, “Just don’t cheat me.” Okay, I’m paraphrasing. He used more colorful language, but it spoke to the immense trust he’s putting in me. He trusts me to guide him through the major financial decisions that come with his retirement. I was proud to reassure him that I will always act in his best interest.

That got me thinking, if I were going to try to cheat him (overcharge him, neglect his accounts, or otherwise give bad advice), I would have the wrong business model. Neither my wealth management agreement nor the investments I recommend lock my clients’ money up. My quarterly reports show my clients exactly what they pay me every quarter. If they don’t like what I’m doing, they can just walk away at any time. That’s the wrong business model for a cheat.

Incentives matter. Are you working with an advisor who gets paid a big up-front fee (commission) or invests you in products that lock you up (insurance products and annuities, in particular)? I’m not saying your advisor is a cheat, but the incentives aren’t in the right place. Commission-based sales professionals (sometimes still called advisors) are incentivized to give more attention to the next new client or new money because that’s how they get paid. I’m incentivized to keep my clients happy. I like it this way.

About the Author:

 

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Minnesota Estate Taxes

2023 was a great year for investments. It was so good that some people may be surprised to learn they now have a Minnesota estate tax problem. If you die with more than $3 million in Minnesota, the state will tax anything above that amount at 13%-16%. That’s at least $13k of every $100k you pass on to your relatives above the threshold. What can you do to avoid this?

As far as problems go, a Minnesota estate tax problem is a nice problem to have. It means an individual has over $3 million left over at death. I’m not debating the fairness of the state taxing money that’s already been taxed. I’m just saying it means you’re well off. This is also a nice problem because there are some easy solutions.

  1. Give money to charity in life or at death. Both options carve out dollars the state won’t tax.
  2. Give big gifts to relatives today. Minnesota doesn’t count lifetime gifts towards your estate tax exemption, provided you live three years past the date of the gift.
  3. Use your annual gift tax exclusion. You can give $18k to any individual annually without any estate tax consequences.

If you don’t like those options, we can talk about more complex approaches. Reach out if you’re interested.

Happy New Year!

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

QCDs all the Way

Our resident CPA Conner and I talk about charitable giving a lot, especially this time of year. Each time we review strategies, we come back to the same conclusion. Qualified Charitable Distributions (QCDs) are hard to beat. For most people over age 70.5, they give the best tax and investment result.

How do QCDs work? Once you’re old enough, you can give money directly from your IRA to charity. You received a tax deduction when you put the money in, and now you never pay tax on it. It counts towards your required minimum distribution. What’s not to like?

But what about donating appreciated stock? That could make sense if you already itemize deductions. Most people don’t itemize these days. Even if you do, giving through QCDs can be a better tax answer once you’re over age 70.5.

What about a legacy IRA? We’ve seen plenty of flyers and pitches from charitable gift officers touting these. Sure, you can get a nice income stream in return for donating some IRA dollars. You realize this money has to come from somewhere, right? It’s reducing your charitable donation. Conner ran a detailed review on one of these this summer. His conclusion, the plain vanilla QCD is still the most effective way to go. Buy an immediate annuity if you want the guaranteed income stream.

Qualified Charitable Distributions (QCDs) aren’t sexy. We love them because they are simple and effective. That said, they may or may not be the best choice for you. Talk to your advisor to see what they think. Need an advisor? Reach out.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

A Tale of the Bond Market

As Dickens said, “It was the best of times. It was the worst of times.” That’s certainly true for the bond markets today. The Bloomberg US Aggregate Bond Index is close to setting a personal worst – logging three consecutive negative calendar year returns. It lost 2% in 2021. It lost 13% in 2022 (10% worse than its previous worst year ever). It’s down 3% year-to-date in late October. How did this happen? And how is this also the best of times?

The pain in bond market returns was caused by interest rates rising about 5% across the board in under two years. Bonds were coming off very low interest rates and had little income to offset principal losses. My clients fared a bit better than that because we carried less interest rate risk than the benchmark, but that’s another story.

The good news is that you get paid 5.5%-6% on a high-quality bond portfolio today. Conservative savers/investors should be rejoicing. You can earn 6% and take very little risk. Sure, there’s a risk that interest rates will continue to go higher, but now you have high interest payments to offset that if it happens. And there’s a chance that interest rates will top out soon.

With such good returns and very little risk, you might want to review your stock/bond mix. You can set yourself up for good returns by adding more high-quality bonds to your portfolio, if you’re interested. I’ve been talking to a few clients about this lately. I expect to discuss it with many more over the next few months.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.