The notion of “socially responsible investing” first gained widespread attention during the 1970s, when such highly charged political issues as the Vietnam War and apartheid in South Africa led some investors to try to make sure their money didn't support policies that were counter to their belief systems. Since then, a wide variety of investment products, such as socially conscious mutual funds, have been developed to help people invest in ways consistent with a personal philosophy. 

Investing with an eye toward promoting social, political, or environmental concerns (or at least not supporting activities you believe are socially harmful) doesn't mean you have to forgo pursuing a return on your money.  Depending on how you define “socially responsible investing,” I believe that it allows one to further both economic interests and the greater good.  In fact, my firm, RGA Investment Advisors only makes investments after screening for strict moral and socially conscious attributes that we believe are essential identifiers of truly sustainable, scalable, and defensible portfolio company.

There are many approaches to what may also be known as mission investing, socially conscious investing, green investing, sustainable investing, or impact investing.  I wanted to take a moment to discuss how investors can employ these elements to make socially responsible investments for their own portfolio(s).

Screen for the Public Good

Perhaps the best-known aspect of socially responsible investing involves evaluating investments based not only on their fundamentals but also on their social, environmental, and even corporate governance practices. The process eliminates companies from an ‘investible universe’ whose products or actions are deemed contrary to the public good. Examples of companies that are frequently eliminated from these screens are those involved with alcohol, tobacco, gambling, or defense, and those that contribute to environmental pollution or that have significant interests in countries considered to have repressive or racist governments.

However, as interest in socially responsible investing has evolved, the screening process has shifted to identify companies whose practices actively further a particular social good, such as protecting the environment or following a particular set of religious beliefs.

Be an Active Shareholder

Both individual and institutional shareholders have become increasingly willing to pressure corporations to adopt socially responsible practices. In many cases, having a good social record can enhance business, making a company more attractive to investors who might not have previously considered it.  Shareholder advocacy can involve filing shareholder resolutions on such topics as corporate governance, climate change, political contributions, environmental impact, and labor practices. Such activism got a boost when the Securities and Exchange Commission adopted the so-called "say on pay" rule as a result of the Dodd-Frank financial reforms. Companies over a certain size must allow shareholders a vote on executive pay at least once every three years.  Though the vote is nonbinding, it could give institutional investors a stronger hand in advocating for other interests.  

Explore Community Investing

Still another approach involves directing investment capital to communities and projects that may have difficulty getting traditional financing, including nonprofit organizations. Investors provide money that is then used to offer or guarantee loans to organizations that help traditionally underserved populations with challenges such as gaining access to affordable housing, finding jobs, and receiving health care. Community investing often helps not only individuals but also small businesses that may operate in geographic areas that mainstream financial institutions deem too risky or otherwise unsuitable for their investment objectives.

Invest with Impact 

A recent development focuses on measuring and managing performance in terms of social benefit as well as investment returns. So-called "impact investing" aims not only to minimize negative impact and enhance social good, but to do so in a way that maximizes efficient use of the resources involved, using business-world methods such as benchmarking to compare returns and gauge how effectively an investment fulfills its goals. In fact, some have made a case for considering impact investing an emerging alternative asset class. Impact investments are often made directly in an individual company or organization, and may involve direct mentoring of its leaders. As a result, such unique investments may be more similar to venture capital and private equity (where the concept of impact investing originated) and may not be highly correlated with traditional assets such as stocks or bonds.  For many years I had been actively involved with a terrific organization called Echoing Green; a impeccable example of this type of initiative.  Echoing Green has provided nearly 600 promising social entrepreneurs working in over forty countries with $33 million in start-up funding, customized support services, and access to a vast global network of proven business leaders. Entrepreneurs or “fellows” involved in this program have gone on to launch, and now lead, some of today’s most important social enterprises throughout the world.  Please contact me if you'd like more information on this organzation, I'd be more than happy to make an introduction with their leadership.

Focus on the Broader Picture

One of the key questions for anyone interested in socially responsible investing is whether to invest broadly or concentrate on a specific issue or area. A narrow focus could leave you overly exposed to the risks of a single industry or company, while greater diversification could weaken the impact that you might like your money to have. Even if you choose to focus on a single social issue, you may still need to decide whether to invest in a specific company or companies, or invest more broadly through the use of mutual funds whose objective meets your chosen criteria.  These decisions are some of the tougher ones to make.

Unless you're familiar with the science behind a specific company's product or service, you might benefit from casting a wider net or finding a socially responsible investment advisor to help you allocate your resources.  Though diversification can't guarantee a profit or eliminate the possibility of a loss, it can help you manage the amount of risk you face from a single source.  Be careful when investing in mutual funds;  carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund.  Be sure to read the prospectus carefully before investing. Also, make sure your expectations are clear and realistic. Many socially responsible investments achieve solid financial returns; others may not.  Though past performance is no guarantee of future results, you should have a sense of what kind of return you might expect. You shouldn't feel you have to accept mediocrity in order to support your beliefs.  Monitor your investment's performance, and be prepared to look elsewhere if your investment doesn't continue to meet your needs, either financially or philosophically.  The clearer you are about what you hope to achieve with your money, the easier it should be to find a suitable way to invest it.

I hope this information helps you better understand socially responsible investing and further enables you to seek out investments that meet your own socially conscious objectives.  Please do not hesitate to contact me should have any questions about this article or if you are interested in discussing specifics about your portfolio.  

Best regards,
Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: Jason@rgaia.com

I hope this post finds you well, and that you and your families are making the most of these early holiday season days.  I wanted to deviate from my typical investing/financial planning topics to discuss an exciting project that I have been involved with for the better part of 3 years.  I also wanted to take a moment to wish my readers a very happy Thanksgiving and joyful start to the holiday season.  I’m fortunate that so many of you turn to this forum for investing and personal financial guidance, and I’m dually honored that many of you continue to ask me such insightful and though provoking questions.  Thank you for reading my blog posts with such interest, it has been, and continues to be a pleasure to write them for you.

Dear Friends,

My wife, Julie, and I have been as busy as ever – our boys make sure of it.  Both Henry and Logan are growing so quickly now and offering us new surprises every day.  Just a few short weeks ago Henry started to crawl.  Logan has been having a great first year at school, and loves being a big brother to Henry.

It's astounding, sometimes, to look back at life before the growth of our family.  I know I speak for both Julie and myself when I say, we can't imagine a world without our boys.  They have changed our lives in such amazing ways.

Before Logan was born, Julie and I began exploring the option of collecting and storing his umbilical cord blood.  We had heard of the science and knew that cord blood was rich in uncontroversial, life-saving stem cells.  Through research, we discovered that the possibilities of stem cell use were vast.  The science was, and still is, developing rapidly, and new uses for stem cells are discovered every day.  At the time, I became convinced that the possibilities would not only change medicine forever but, because there is no “expiration date” for stored cord blood, these stem cells could provide security for my son years down the road.  As a father, of course, Logan's safety has always been my greatest priority.  Ultimately, Julie and I made the decision to store his cord blood.

Going through the process myself, it became my belief that every family should have access to this potentially life-saving technology.  Unfortunately, because all of this is relatively new, the decision to store cord blood is too often a financial one.  As a financial advisor and young parent, this point really resonated with me.  We chose to store Logan's cord blood with a 'big name' in the industry, and, while I knew I'd made the right decision, I also felt that the cost of this service was prohibitive.  Parents should not be forced to pay the marketing costs of these large companies to keep their children safe.

I founded Genecord (www.genecord.com) in early 2011 in an effort to make private umbilical cord blood storage and processing more accessible and affordable to new parents.  I wanted to take part in the future of regenerative medicine, offering one product at an honest price.  Now, after almost 3 years of arduous work, I am happy to report that Genecord has been successfully running with a team of cryopreservation and tissue banking pioneers, amazing customer support staff and a state of the art cord blood laboratory facility.  We have been processing and storing cord blood units from across the United States, and we've been receiving a great deal of positive feedback from our customers. 

This all started because we wanted to provide the best future for our son.  Now, because of him, I educate new parents-to-be on the importance of stem cells and cord blood storage, and, maybe most importantly, I have proven that this decision doesn't have to be a financial one.  I am very proud of what my team has accomplished so far.

Both Julie and I love to share our experience with this new science, so, if you know anyone who is expecting, please don't hesitate to ask us for more information.  Our program consists of collection, processing, and 20 years of storage.  Feel free to contact me, and I'd be happy to provide you with all the details.

This has been an amazing journey. Thanks so much to all of you for the support so many of you have shown along the way. 

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-7800
E: Jason@rgaia.com

As the end to 2013 quickly approaches, you’re probably starting to think about how to rebalance your portfolio.  Most individual investors don’t really think about asset allocation when crafting their basket of investible securities.  If you did structure your portfolio with certain objectives in mind, there is no doubt that your allocation now is different from what it was at the beginning of the year.  Market forces, for better or for worse, change the relative weight of assets in a given portfolio.  If equities perform well, you might find yourself too heavily weighted in this particular asset class, with insufficient downside protection or cash flow yield.  If stock prices go down, you might worry that you are no longer able to reach your financial goals in the timeframe you initially set.  

Assuming you created a portfolio with a strategic objective and allocation, have you developed a strategy for dealing with these changes?  You'll probably want to take a look at your individual investments to ascertain whether they still fit your investment philosophy, but you'll also want to think about your asset allocation and how any periodic adjustment of it would help you achieve your investing objectives.

Obviously, simply making no changes would be easiest.  On an emotional level, if you’re happy with your portfolio’s current return profile it may be difficult to make any significant changes.  We are all guilty of subscribing to a “if it ain’t broken, don’t fix it” mentality.  Of course, allowing the status quo to persist may affect how well your investments will continue to match your goals, especially during unexpected (and eventual) turns in the market.  At a minimum, you should periodically review the rational for your investment choices to ensure that they still hold.

Constant Weighting
It might feel counterintuitive, but selling the winners and buying the losers (or other investments in underrepresentitive sectors) can bring your asset allocation back to the original percentages you had initially set.  This ‘constant weighting’ of relative investment types ensures that your portfolio grows at a proportional rate, factoring in all asset classes represented in the portfolio. 

Let's consider a hypothetical example. If your equity allocation in a portfolio that originally represented 50% is now at 70%, rebalancing would involve selling some of the stock and using the proceeds to buy back enough of the other asset classes to bring the portfolio back to 50% in equities.   Similarly, if stocks now represent less of your portfolio than they should; to rebalance, you would invest in stocks until they once again reach an appropriate percentage of your portfolio.  Maintaining relative percentages not only reminds you to take profits when a given asset class is doing well, but it also keeps your portfolio in line with your original risk tolerance.

When should rebalancing take place? One common practice is to rebalance a portfolio whenever a particular investment represents significantly more than it’s intended share of the portfolio (we call this a ‘tolerance band’); say, 5% to 10% of the total portfolio.  One could also set a regular date for rebalancing,  say, tax time or year-end.

Forecast Weighting
You could also adjust the mix of investments to focus on companies and sectors that are expected to do well in the future.  This is obviously a more speculative approach, and one that more active individual investors attempt to employ.  I would not recommend this strategy as a sustainable practice for long-term portfolio growth.

A Hybrid Approach
You could also combine the above two strategies by maintaining a constantly weighted asset allocation with one portion of the portfolio. With another portion of the portfolio, you could try to take advantage of short-term opportunities, or test specific sectors that you believe might benefit from a more active investing approach.  By monitoring your portfolio, you can always return to your original allocation.

A Bottom Line Approach
Another plausible solution is to set a “bottom line” for your portfolio; that is, a minimum dollar amount that the portfolio cannot dip below.  If you wish to be active with your investments, you can do so--as long as your overall portfolio stays above your bottom line.  I do not advocate active management in this fashion, but with this strategy you could theoretically move the portfolio to very conservative allocation (more conservative securities or cash) to protect that baseline amount.   Keep in mind that many speculative investments are illiquid, which presents additional and significant problems when trying to exit losing positions.

Key Rules for Rebalancing:

1. Be aware of market conditions and how your investments might react to them.  Certain investments counteract the risk of others.  Plan your portfolio with ‘risk’ in mind and rebalance with the same objective.
2. Be disciplined with your strategy and stick to your rebalancing plan.  Do not deviate from it.  
3. Stay true to your investment philosophy and check to ensure that the nature of what you've invested in hasn't changed.  You may own a particular mutual fund that overexposes you to a particular sector or geography.  This kind of “style drift” happens, but as an investor you must remain aware of what you own and why you own it.

Don’t forget about taxes and transaction costs
Frequent rebalancing can trigger tax consequences and expensive transaction costs. Check on whether you’ve held particular securities for over a year. If not, you may want to consider whether the benefits of selling immediately will outweigh the higher tax rate you'll pay on short-term gains.  This doesn't affect qualified accounts such as 401(k)s or IRAs, which are tax deferred. 

I hope this information is helpful to you as you work to rebalance your investments for the year ahead.  Please do not hesitate to contact me should have any questions about this article or if you are interested in discussing specifics about your portfolio.  

Best regards,
Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: Jason@rgaia.com

After the most recent crisis, investors are undoubtedly concerned about potential insolvency issues that may arise with their investment custodian.  Some of my clients have articulated this concern, and have asked whether it makes more sense to consolidate investment assets at one brokerage firm, or segregate accounts by institution as a form of makeshift diversification.  Some articles have been written on the matter, but I find that there is a lack of general understanding in/around the safeguards that have been created specifically to protect investors who hold assets at regulated brokerage firms. 

In arguably all cases, when a brokerage firm ceases to continue as a going-concern, customer assets are safe and able to be transferred to another registered brokerage firm.  Here’s how:

1. Brokerage firms are required to keep customers’ assets (both securities and cash) segregated from their own: the SEC's Rule 15c3-3—the "Customer Protection Rule"—requires customers' cash to be placed in a special, separate "reserve" account. Fully paid customer securities must be kept separate from firm and customer margin securities.
2. Brokerage firms are required to meet net capital requirements to both demonstrate financial worthiness and to reduce the likelihood of insolvency (this allow allows them to be member to the Securities Investor Protection Corp (SIPC): the SEC's Rule 15c3-1—the "Net Capital Rule"—requires brokerage firms to maintain certain levels of their own liquid assets. The minimum net capital a firm must have on hand depends on its size and business.
3. The SIPC protects customer securities accounts up to $500,000, which would come into play in rare cases of where customer assets are missing because of either theft or fraud.

A note on 'clearing' versus 'carrying' firms

It’s helpful to differentiate between clearing and carrying firms.  When you open an account with a carrying brokerage firm, the firm not only handles your orders to buy and sell securities but it also custodies the securities in the account (inclusive of cash).  Because these firms generally hold assets for a a large number of customers, they are required to carry a much higher level of net capital than clearing firms, which limit their activities to clearing and settling trade commitments.

A historical note

Historically, brokerage firms that have faced financial insolvency have handled the calamity in different ways.  Some have been able to find a buyer to stave off indebtedness.  Bear Stearns, for example, was bought by J.P. Morgan in 2008.  Other firms self-liquidate, as did Drexel Burnham Lambert in 1990.  When a brokerage firm self-liquidates, securities regulators, including the SEC and FINRA, work with the firm to make sure that customer accounts are protected and that customer assets are transferred in an orderly fashion to one or more SIPC-protected brokerage firms.

In short, “Is it safer to use multiple brokerage firms to custody my investments?”

No. 

Investors’ assets are separate from the brokerage firm and solely belong to the customer.  A brokerage firm’s failure should not result in loss of customer assets.  If in an extremely unlikely circumstance a client’s assets are lost (i.e., theft or fraud), account holders would be protected by SIPC up to the limits discussed above.  To protect yourself against theft and fraud, choose a well-know brokerage firm that is regulated by the SEC, member to FINRA/SIPC, and that publishes audited financials and statement of Financial Condition by a reputable audit firm.   You may also wish to review FINRA BrokerCheck, a free tool offered to help investors research the background of both FINRA-registered broker-dealers and investment advisor firms.  Lastly, many brokerage firms actually carry  "excess SIPC"  insurance that provide additional protection beyond SIPC's limits through private carriers.  Maximum amounts may vary by firm, but you may wish to seek out a brokerage firm that carries these additional limits. 

While there's no way to completely remove institutional risk from your investment portfolio, I believe that the benefits that arise from account consolidation should outweigh fears of broker malfeasance; especially when you have hired an investment advisor to craft, implement, and manage a comprehensive investment strategy across your varied investment accounts.

I hope this information was helpful.  Please do not hesitate to let me know if you have any questions.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: Jason@rgaia.com

Why understand investing styles?
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task. Many investors feel it's useful to have a system for finding stocks that are worth buying, deciding what price to pay, and realizing when a stock should be sold.  Bull markets, periods in which prices as a group tend to rise, and bear markets, periods of declining prices, can lead investors to make irrational choices. Having objective criteria for buying and selling can help you avoid emotional decision-making.   We discuss the perils of emotional decision-making in many of our RGA monthly investment commentaries.   Even if you don't want to select stocks yourself, it can be helpful to understand the strategies to which professionals adhere in evaluating and buying investments.  If you align with a given investment strategy, you may be better prepared to hire an investment manager who shares a similar investment philosophy. 

There are generally two schools of thought about how to choose stocks that are worth investing in.  Value investors focus on buying stocks that appear to be bargains relative to the company's intrinsic worth.  Growth investors prefer companies that are growing quickly, and are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price.  Either approach can help you better understand just what you're buying—and why--when you choose a stock for your portfolio. 

Value investing
Value investors look for stocks with share prices that don't fully reflect the value of the companies, and that are effectively trading at a discount to their true worth.

A stock can have a low valuation for many reasons.  The company may be struggling with business challenges such as legal problems, management difficulties, or tough competition. It may be in an industry that is currently out of favor with investors. It may be having difficulty expanding. It may have fallen on hard times.  Or it may simply have been overlooked by other investors.

A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock's fair value. Value investing takes into account a company's prospects, but is equally focused on whether it's a good buy. A stock's price-earnings (P/E) ratio--its share price divided by its earnings per share--is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.

Value-oriented data
Here are some of the questions a value investor might ask about a company:

• What would the company be worth if all its assets were sold?
• Does the company have hidden assets the market is ignoring?
• What would the business be worth if another company acquired it?
• Does the company have intangible assets, such as a high level of brand-name recognition, strong new management, or dominance in its industry?
• Is the company on the verge of a turnaround?

Contrarians: 
A contrarian investor is perhaps the ultimate example of a value investor. Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.

The challenge for any value investor, of course, is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason.   Value investors who do their own stock research comb the company's financial reports, looking for clues about the company's management, operations, products, and services.

Growth investing
A growth-oriented investor looks for companies that are expanding rapidly. Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved. A growth investor would give more weight to increases in a stock's sales per share or earnings per share (EPS) than to its P/E ratio, which may be irrelevant for a company that has yet to produce any meaningful profits. However, some growth investors are more sensitive to a stock's valuation and look for what's called "Growth At a Reasonable Price" (GARP). A growth investor's challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.

Growth-oriented data

• A growth investor might ask some of these questions about a stock:
• Has the stock's price been rising recently?
• Is the stock reaching new highs?
• Are sales and earnings per share accelerating from quarter to quarter and year to year?
• Is the volume of trading in the stock rising or falling?
• Is there a recent or impending announcement from or about the company that might generate investor interest?
• Is the industry going up as a whole?

Momentum investing: 
A momentum investor looks not just for growth but for accelerating growth that is attracting a lot of investors and causing the share price to rise. Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up. They often buy even when a stock is richly valued, assuming that the stock's price will go even higher. If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, then buy more of what's working.  The most extreme momentum investors are day traders, who may hold a stock for only a few minutes or hours then sell before the market closes that day.  Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, however. A momentum strategy is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.

At RGA Investment Advisors, we think that value and growth are not mutually exclusive.  We seek investments with an identifiable margin of safety, a true underlying value, and a cost lower than the asset’s fundamental worth.   We use a metric of financial and performance screens to identify investment opportunities, and we follow a watch-list of competitive companies with long-lasting, measurable advantages.  We further perform comprehensive financial analysis paired with deep company diligence in order to develop the necessary conviction.  We only buy investments within an opportune price range, and we practice patience and diligence when making purchases in client accounts.  (Read more about our investment approach here).

Please do not hesitate to let me know if you have any questions on this post or my own investment philosophy.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: Jason@rgaia.com

An Introduction to Estate Planning

By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust.

To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek the advice of your financial advisor and personal finance team to help implement the right plan for you.

If you’re over 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

• A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
• An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

If you’re young and single

If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

If you’re unmarried but committed 

You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you might consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

If you’re married 

For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. A new law passed in 2010 allows the executor of a deceased spouse's estate to transfer any unused estate tax exclusion amount to the surviving spouse without such planning. This provision is effective for estates of decedents dying in 2011 and later years.

You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die's estate tax exemption, and a credit shelter trust created at the first spouse's death may still be advantageous for several reasons:

1. Portability may be lost if the surviving spouse remarries and is later widowed again
2. The trust can protect any appreciation of assets from estate tax at the second spouse's death
3. The trust can provide protection of assets from the reach of the surviving spouse's creditor
4. Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouse

Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $143,000 annual exclusion, for 2013, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

If you’re married with children

If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them. You may also want to consult an attorney about establishing a trust to manage your children's assets.  You will likely also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

If you’re financially comfortable and looking towards retirement

You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).  You may even consider speaking with your financial advisor about converting some IRA assets to a Roth IRA.

If you’re wealthy but worried about estate taxes

Depending on the size of your estate, you may need to be concerned about estate taxes.  If this sounds like you, I certainly recommend conferring with a seasoned financial advisor. 

For 2013, $5,250,000 is effectively exempt from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.  Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth that are made to grandchildren (and lower generations). For 2013, the GST tax exemption is $5,250,000 and the GST tax rate is 40 percent.  Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.  

If you’re elderly or ill

If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them. 

Advantages of Trusts

Why you might consider discussing trusts with your attorney

• Trusts may be used to minimize estate taxes for married individuals with substantial assets
• Trusts provide management assistance for your heirs.
• Contingent trusts for minors (which take effect in the event that both parents die) may be used to avoid the costs of having a court-appointed guardian to manage your children's assets
• Properly funded trusts avoid many of the administrative costs of probate (e.g., attorney fees, document filing fees).
• Generally, revocable living trusts will keep the distribution of your estate private.
• Trusts can be used to dispense income to intermediate beneficiaries (e.g., children, elderly parents) before final property distribution.  This is particularly important for minors and incapacitated adults who may need support, maintenance, and/or education over a long period of time, or for adults who have difficulty managing money.
• Trusts can ensure that assets go to your intended beneficiaries. For example, if you have children from a prior marriage you can make sure that they, as well as a current spouse, are provided for.
• Trusts can minimize income taxes by allowing the shifting of income among beneficiaries.
• Properly structured irrevocable life insurance trusts can provide liquidity for estate settlement needs while removing the policy proceeds from estate taxation at the death of the insured.

Conducting a Periodic Review of Your Estate Plan

With your estate plan successfully implemented, one final but critical step remains: carrying out a periodic review and update.

Imagine this: since you implemented your estate plan five years ago, you got divorced and remarried, sold your house and bought a boat to live on, sold your legal practice and invested the money that provides you with enough income so you no longer have to work, and reconciled with your estranged daughter. This scenario may look more like fantasy than reality, but imagine how these major changes over a five-year period may affect your estate. And that's without considering changes in tax laws, the stock market, the economic climate, or other external factors. After all, if the only constant is change, it isn't unreasonable to speculate that your wishes have changed, the advantages you sought have eroded or vanished, or even that new opportunities now exist that could offer a better value for your estate. A periodic review can give you peace of mind.amount, whichever is smaller) should review your plan annually or at certain life events that are suggested in the following paragraphs. Not a year goes by without significant changes in the tax laws. You need to stay on top of these to get the best results.

Every five years for small estates: Those of you with smaller estates (under the applicable exclusion amount) need only review every five years or following changes in your life events. Your estate will not be as affected by economic factors and changes in the tax laws as a larger estate might be. However, your personal situation is bound to change, and reviewing every five years will bring your plan up to date with your current situation

Upon changes in estate valuation: If the value of your estate has changed more than 20 percent over the last two years, you may need to update your estate plan.

Upon economic changes: You need to review your estate plan if there has been a change in the value of your assets or your income level or requirements, or if you are retiring.

Upon changes in occupation or employment: If you or your spouse changed jobs, you may need to make revisions in your estate plan.

Upon changes in family situations: You need to update your plan if: (1) your (or your children's or grandchildren's) marital status has changed, (2) a child (or grandchild) has been born or adopted, (3) your spouse, child, or grandchild has died, (4) you or a close family member has become ill or incapacitated, or (5) other individuals (e.g., your parents) have become dependent on you.

Upon changes in your closely held business interest: A review is in order if you have: (1) formed, purchased, or sold a closely held business, (2) reorganized or liquidated a closely held business, (3) instituted a pension plan, (4) executed a buy-sell agreement, (5) deferred compensation, or (6) changed employee benefits.

Upon changes in the estate plan: Of course, if you make a change in part of your estate plan (e.g., create a trust, execute a codicil, etc.), you should review the estate plan as a whole to ensure that it remains cohesive and effective.

Upon major transactions: Be sure to check your plan if you have: (1)received a sizable inheritance, bequest, or similar disposition, (2) made or received substantial gifts, (3) borrowed or lent substantial amounts of money, (4) purchased, leased, or sold material assets or investments, (5) changed residences, (6) changed significant property ownership, or (7) become involved in a lawsuit.

Upon changes in insurance coverage: Making changes in your insurance coverage may change your estate planning needs or may make changes necessary. Therefore, inform your estate planning advisor if you make any change to life insurance, health insurance, disability insurance, medical insurance, liability insurance, or beneficiary designations.

Upon death of trustee/executor/guardian: If a designated trustee, executor, or guardian dies or changes his or her mind about serving, you need to revise the parts of your estate plan affected (e.g., the trust agreement and your will) to replace that individual.

Upon other important changes: None of us has a crystal ball. We can't think of all the conditions that should prompt us to review and revise our estate plans. Use your common sense. Have your feelings about charity changed? Has your son finally become financially responsible? Has your spouse's health been declining? Are your children through college now? All you need to do is give it a little thought from time to time, and take action when necessary. 

As always, please do not hesitate to contact me with any questions pertaining to this article or your own financial planning needs. 

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

According to the College Board, the cost of higher education has been steadily increasing by a rate of 6% annually.  Have you considered what the college cost for you child or children might be?  There are various college costing calculators online, I like using both the US News Net Price calculator as well as the savingforcollege.com online college cost calculator.  Both will give you a quick general sense of what you can expect to shell out for your child's college education.  Let's do a quick analysis using my oldest son as an example.   

The calculator asks for my son's age, 2.  It asks for the current price of tuition at my selected school, 39,122 (I'm using the current out of state tuition cost from my alma mater, the University of Michigan - Ann Arbor).  You can use the following link to look up a specific school and find a breakdown of relevant tuition costs.  It also asks how long my child will be attending, 4 years, and on a full time basis.  

There are some other inputs this particular calculator asks, and for this example, I'm going to assume that I wish to cover 100% of the total college cost by the time my son finishes school, that I have $0 currently saved for this goal, that college costs will continue to rise at 6% annually, and that I am able to earn a 6% after-tax per year.

The result: my oldest son's college education will cost $434,765.  Quite the expense!

So what is a 529 and does it make sense for me?

A 529 plan is a tax advantaged investment vehicle in the United States, operated by a state or educational institution, and designed to encourage and help families set aside funds for future college costs.  It is named after Section 529 of the Internal Revenue Code, which created these types of savings plans in 1996.  There are two types of 529 plans, prepaid and savings plan. The prepaid plans allow you to pay tuition at the current price and attend in the future. The saving plans invest in stock and bond funds.  The big flaw with the pre-paid plan is that one never truly knows what school their child will attend.  By contrast, the savings plan is far more flexible.

What are the key 529 benefits?

1. State tax benefit:  Many states offer tax deductions for 529 contributions, you can see what your state offers here.  In New York, where I reside, contributions to a New York 529 plan of up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible in computing New York taxable income. 
2. Federal tax benefit: The actual distribution of funds to pay for college costs are tax-free.  This assumes that the government will keep it this way.
3. Transferability: If your child declines to go to college, the fund can be transferred to other qualified members in your family, even to the parents.
4. Estate planning considerations:  Grandparents looking to contribute to their grandchildren's education can contribute up to $14,000 ($28,000 for married couples) per child, tax free, every year.  Additionally, a grandparent can contribute a lump sum in one year and elect to treat the contributions as if they were made ratably over five years instead of all in one year.  This strategy enables the contributed money to benefit from additional years of compounding.
5. Financial aid calculation benefits:  A 529 saving accounts held in the child's name is treated as the parent’s asset, similar to the way a custodial account is treated.  Since only 5.6 percent (or less) of the 529 is used in the expected contribution calculation used in financial aid decisions, this is particularly good news for families seeking financial aid.
6. Automatic investment options: This is actually a pro and a con.  You can set up automatic contributions and investments so you don’t have to worry about them annually, but they are often paired with sub-par age-based funds.  This feature provides added convenience, but at the cost of higher fees and inferior performance. 

What are the problems with 529 plans?

1. Limits on reallocations: You are only allowed to reallocate funds once per year in a 529 plan.  While this may not be a huge problem for individuals with long-term horizons, it does present limitations in active management of these funds.
2. Limited investment options:  Depending on your state, you may be limited to only a few investment choices in the particular 529 plan, including age-based or target-date funds.
3. Restrictions and penalties for improper withdrawal:  The earning portion of money withdrawn from the 529 that is not spent on college expenses will be taxed at ordinary  income rates, an additional 10% federal tax penalty will be assessed, and there may be the possible recapture of any state tax deduction at the time of withdrawal. 
4. Suitability: Depending on your financial circumstance, you and your advisor may have other and often more sophisticated planning tactics in mind.  A 529 plan is not a one-size fits all answer to college savings.  

Be sure to speak with your financial advisor about whether a 529 would be suitable for you.  In general, I recommend that individuals max out their retirement contributions first before contributing money to a 529 plan.  I also suggest that these plans tend to get the "most bang for the buck," when large initial deposits are made to the account (ex: a grandparent makes a lump sum deposit as party of their estate planning).  This front-loaded outlay enables the 529 account to benefit from maximum compounded interest, as discussed above.

I hope this information is helpful to you.  Please contact me with any questions or to discuss how a 529 plan might fit into your own financial plan.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

For those unfamiliar, these products aim to provide a low-maintaince and singular retirement plan option.  These funds, which are also referred to as life-cycle or age-baed funds, crossed the $500 billion threshold in 2013 as reported by Morningstar (Reference).  They are designed, through the rebalancing of its asset-allocation, to become more conservative as the target date (usually retirement) approaches.  The demand for these products appears to remain strong.  In fact, Casey Quirk (an asset management consulting firm), predicts that target-date funds will account for nearly half of all U.S. defined contribution plan assets by 2020 (Reference).

While these retirement plan options do indeed make long-term investing easy, I do caution my clients that these funds are anything but simple, and my not really serve the purpose to which they are intended.  Here's why:

1. They are exceptionally complex products.  Each target-date fund comes with its own set of fees, risks, and mix of assets.  Comparing funds against one another is cumbersome task that requires a full understanding of each differentiating factor.  Measuring performance between funds is even harder.  
2. They are typically too generic to meet your needs.  Because these funds do not account for risk tolerances, they typically do not reflect the optimal asset mix.  Because they lack flexibility, these funds tend to underperform more constructive and customized retirement portfolios crafted to meet your unique needs.
3. They are expensive.  With an average target-date fund expense ratio of 0.70 percent (Reference), investors should seriously consider return erosion, or the impact that fees have on returns.  As noted above, many of these funds will lag the long-term results that can be achieved with a more individualized portfolio.  The added fees of these funds widen the gap.

Most investors select these target-date funds through their employer-sponsored 401(k) plan without ever considering the points noted above.  Be sure to do your diligence and resist selecting a life-cycle fund just because it's easy.

If you need any help analyzing your options, feel free to contact me.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com