Do I need a Life Insurance Trust?

Do I need a Life Insurance Trust?

For higher-net worth individuals and families, life insurance and estate planning are important to consider together. To explain why, let’s revisit another personal finance topic: taxes! Life insurance is usually income tax free. However, life insurance is counted as part of a decedent’s estate and estate taxes are assessed on a decedent’s personal wealth (estate) at the federal level and in many states. Thus, life insurance is potentially subject to estate taxes, assuming someone’s estate exceeds the exemption amounts – unless advance planning is done. An irrevocable life insurance trust (ILIT) is a tool to help protect life insurance proceeds from estate taxes. At the end of this article is an example of how our recent work with an Illinois client could save over $1.0 million in estate taxes.

How does an ILIT work?

As the name would suggest, an attorney creates a trust for someone that holds the life insurance policies. The ILIT can either purchase new policies or receive existing ones (by sale or gift). Both the owner and beneficiary of the policies is the trust, though the insured person remains the same.

The insured person is the grantor of the trust and funds the annual premiums with gifts made to the ILIT. As long as gifted premiums do not exceed the annual exclusion gift amount ($18,000 per beneficiary in 2024), no gift tax return needs to be filed. Because life insurance proceeds are income tax free, the trust doesn’t pay income taxes when it receives the death benefit . And because of the irrevocable nature of the trust, the policy and death benefit proceeds are also excluded from the grantor’s estate. Very complex tax and legal concepts were just summarized in four sentences, but this is an established method of getting life insurance proceeds “outside” of someone’s estate and we’ve utilized it for many clients.

What are the pitfalls?

Aside from added complexity and cost, you should be aware of these two pitfalls when considering this planning technique to reduce or eliminate potential estate taxes.

First, while it is best practice to purchase life insurance directly through the ILIT, it’s often the case that an ILIT is implemented years after someone initially bought some life insurance policies. Whether there’s been a health change or not, it usually makes sense to keep older policies since premiums increase with an insured’s age. Two options are available to get the policies “into” the ILIT: a gift or a sale.

    • A gift is much easier to process, but the insured needs to survive a three-year lookback period – otherwise the IRS deems the death benefit to be included in the decedent’s estate. This is in place to avoid abuse via last-minute ILIT strategies.

    • A sale by the owner/insured to the ILIT is a much more complicated process, but there isn’t a survivorship requirement.

Second, everything must be set up properly for the ILIT to pay premiums, including an annual notice to the trust’s beneficiaries. This notice is called a “Crummey Notice” after the strategy’s creator successfully defended its legality in the 1960’s.

    • Each part of the annual gift, notice, and payment process must be followed to a T and properly documented for the IRS to honor the exclusion of life insurance proceeds from the insured’s estate.

There’s upfront leg work to implement this strategy and annual “maintenance” to successfully keep the life insurance proceeds outside of someone’s estate. To determine whether it’s worth that hassle, we consider our clients’ current wealth, potential life insurance proceeds, and their financial trajectory to see if it’s important to plan around estate taxes.

How much money does someone need for estate taxes to apply?

There are exemption amounts at both the federal and state level before estate taxes apply. In 2024, someone could pass away with $13.61 million without any federal estate taxes (this amount doubles for a married couple). But wealth over that amount is subject to a top tax rate of 40%! Per the 2017 Tax Cuts and Jobs Act (TCJA), the exemption amount is slated to cut in half starting January 1, 2026.

Most states don’t have any estate tax (including Wisconsin). For those that do, both the exemption amount and tax rate vary. Illinois has a $4,000,000 exemption per individual and a top rate of 16% that would apply to wealth above that amount.

Proper estate planning can easily save 6- or 7-figure amounts for high-net worth families. Instead of going to taxes, that wealth passes to the next generation or other beneficiaries.

What’s an example of an ILIT helping reduce taxes?

As previously stated, life insurance is income tax free but increases the beneficiary’s estate, so there could be estate tax repercussions. Let’s look at an example that’s similar to an Illinois client we recently helped…

Using round numbers, the husband and wife currently have $6,000,000. This is split amongst their retirement accounts, cash, home, etc. – $4.0 million in the husband’s name and $2.0 million in the wife’s name. They both have strong incomes and bright careers ahead of them, so they both have life insurance policies to support the surviving spouse & their three kids, pay for college, pay off the mortgage, sustain the family’s lifestyle, and have funds set aside for retirement. The husband has $3,000,000 in life insurance and the wife is insured for $2,000,000.

  Husband Wife
Current Wealth $4,000,000 $2,000,000
Life Insurance $3,000,000 $2,000,000
Gross Estate (no ILIT) $7,000,000 $4,000,000

If the husband passed away, his estate would have $7.0 million. That’s a far cry from the current federal estate tax exemption amount of $13.61 million (though it would be very close to the post-TJCA exemption of ~$7M that will kick into effect in 2026). However, it is above Illinois’ flat $4.0 million exemption (which doesn’t adjust with inflation). An Illinois tax bill on the excess $3,000,000 would be $565k, but this tax bill is kicked down the road by utilizing a martial deduction.

The wife would now have $7.0 million PLUS her own $4.0 million if she passed away shortly after ($11.0 million in total). The problem with this though, is now there is an (even bigger) $1.058 million Illinois tax bill upon the wife’s passing since Illinois doesn’t recognize portability. Confused? You’re not alone! We suggest getting professionals involved in situations like these.

An ILIT would help to mitigate the risk of estate taxes, so we helped transfer just the husband’s policies into an ILIT and now the situation would play out as follows. The $3.0 million of insurance money ends up “outside” his estate.

  Husband Wife
Current Wealth $4,000,000 $2,000,000
Life Insurance (in ILIT) $3,000,000 (excluded) $2,000,000
Gross Estate $4,000,000 $4,000,000

A good estate plan would utilize the full $4.0 million Illinois exemption upon the husband’s passing (as explained above) and then again on the wife’s passing.

Combined with an Irrevocable Life Insurance Trust (ILIT), no federal or Illinois estate taxes are owed, and the full $11.0 million of wealth & insurance proceeds all go to the couple’s beneficiaries.

The ILIT component would save Illinois estate taxes of $565k (on $3.0 million) and the combined effect of good planning would save over $1.0 million! 

We love helping our clients save both income and potential estate taxes through great financial planning.

Of course, this situation doesn’t apply to all high-net worth clients. But even for folks that seem far away from crossing over federal or estate tax exemption amounts, a robust financial trajectory and/or life insurance proceeds may surprise them down the road. As their wealth continues to grow, the value of their estates will become much larger than currently anticipated. We take a proactive approach to insurance and estate planning to help minimize taxes and transfer as much of our clients’ hard-earned savings to their beneficiaries.

Get the Most Out of Your Employee Benefits

For many, employee benefit elections for 2024 are just around the corner, and it’s important to know what you’re getting into before making any decisions. There will also be higher 2024 maximum contribution limits for workplace retirement plans. To take advantage of that, it may require you to change your contribution rate(s). We are here to help you navigate these decisions with confidence and peace of mind.

Many employers are focused on cost management in this economic environment. Since health benefit costs are expected to jump 5.4% this year, you may see a change towards a high deductible health care plan. This could mean higher out-of-pocket costs despite a lower monthly premium, so let us help you understand the difference compared to regular health insurance. As Brittany wrote about last month, enrolling in a high deductible plan could give you access to a Health Savings Account (HSA) – a fantastic long-term, tax-advantaged growth vehicle.

    • The HSA annual contribution limit in 2024 for self-only coverage is rising to $4,150 from $3,850 in 2023. The cap for family plans is jumping to $8,300 from $7,750. The catch-up contribution remains at $1,000 per spouse aged 50+.

There are typically other benefits offered by employers too, including voluntary life insurance benefits. This gives you the option to get additional life insurance without any health underwriting. However, it’s usually more costly than traditional term insurance. We don’t sell insurance but will help you navigate the options. We’ve helped some clients optimize their workplace and private policy mix, saving thousands of dollars in annual premiums. It is one example of many where we’re able to help optimize the additional benefits you’re offered.

Finally, 401(k) and 403(b) contribution maximums for 2024 will be announced next month and it’s widely expected that the maximum will increase to $23,000 from $22,500. Like HSA accounts, retirement plans allow catch-up contributions for those aged 50+. As we wrote about in January, the SECURE Act 2.0 required “high wage earners” – defined as those making $145,000 or more – to only make catch-up contributions with post-tax dollars.

    • Last month, the IRS announced a two-year delay to enable employers more time to add Roth 401(k) features to their plan. So, starting in 2026, high wage earners will need to contribute their $7,500 catch-up to their Roth 401(k).  Your employer plan should handle this for you automatically.

We will advise you to make pre-tax, after-tax, or Roth contributions based on what makes sense for your tax situation. If your compensation has changed, it may also make sense to adjust your contribution rate.

Employee benefit elections for 2024 can be a complex process that requires careful consideration of many different factors. We can help you understand what’s available and guide you towards the best decision for your family.

HSA? More Like HS-YAY!

Brittany Falkner

Brittany Falkner

Wealth Manager

Health Savings Accounts, otherwise known as HSAs or (HS “yay”s if you are a tax nerd like me) are one of the most underutilized account types that I have seen in practice. While these accounts are only available to individuals with high-deductible health plans, I often see clients completely missing the benefits that these accounts can provide. Below, we’ll go over why you should love these accounts and some best practices to make the most of these tax-advantaged accounts.

What is an HSA?

Health Savings Accounts let you set aside money on a pre-tax basis with all withdrawals being tax-free when used for qualified medical expenses .1 This means you can direct a portion of your wages toward this account and never pay tax on these dollars (assuming all withdrawals are for qualified medical expenses). When invested, the growth within the account is also tax-free! There are no other savings vehicles that have such glorious tax benefits, which makes HSAs known as triple tax-advantaged (money goes in tax free, grows tax free, and can come out tax free). To put the cherry on top, these accounts have no income limits, so high income earners are eligible to contribute (many other savings options have income limits, such as an IRA contribution).

You are eligible to contribute to a health savings account if you are enrolled in a high deductible health plan. For 2023, you have a high deductible health plan (HDHP) if your deductible is at least $1,500 single ($3,000 family) and your maximum out-of-pocket is no more than $7,500 single ($15,000 family). If that is true, you are eligible to contribute $3,850 if insured under single coverage ($7,750 family) to an HSA account. If you are over the age of 55, you may contribute an additional $1,000 per year. As a friendly reminder, unfortunately you are not eligible to contribute to an HSA once you are on Medicare.

Be sure to tell your tax preparer about any contribution you make and keep all medical receipts in your records. You may use this account to pay for qualified medical expenses for yourself, your spouse, and any dependent you claim on your tax return.

Best Practices & Hot Tips for HSAs  

The secret sauce to fully utilizing this tax haven of an account would be to contribute the maximum you can each year, invest the dollars, and to let the account grow until retirement or later. Most retirees are hit with the largest healthcare expenses later in life and that is when this account can really come in handy. By delaying the use of these funds, you are also maximizing the amount of tax-free investment growth! If you have been thinking of this account as a medical checking account you aren’t wrong, but I would encourage you to view this account as a retirement savings vehicle that has great tax advantages.  

Another hot tip to consider is that there is no time limit for reimbursing yourself for medical expenses. This means if you save your medical receipts throughout the years, you can reimburse yourself from your HSA account at any future point for past expenses, tax-free. To do so, you will need to keep meticulous records, ensure you were enrolled in a HDHP in the year the expense occurred, and ensure you did not claim a medical deduction for that expense on your tax return. If you are concerned about passing away with this pot of money, the good news is that HSA accounts allow for beneficiary designations. If you pass this account to your spouse after your death, your spouse will receive the same tax benefits, tax-free growth and withdrawals when used for medical.

To ensure you are maximizing this account, you will want to pay close attention to the HSA contribution limits each year. The contribution limits increase with inflation each year with the most recent increase being an astonishing 7% for 2024. For 2024, the contribution limits increase to $4,150 single ($8,300 family). Further, once you and your spouse are both over the age of 55, you are each eligible to contribute the additional $1,000 contribution. To keep the IRS happy, each spouse would need their own HSA account and the additional $1,000 would need to be deposited into their respective accounts. This provides a fantastic opportunity to super fund these accounts for those nearing retirement.

Lastly, you are eligible to contribute to an HSA account until April 15th of the following year for the current year, assuming you had a HDHP for the entirety of the previous year. This could come in handy if you forgot to max out the account, if you need additional tax savings on your return, or for additional tax planning purposes.

Final Thoughts

At Boardwalk Financial Strategies, we are a team of advisors with extensive tax backgrounds. This allows us to build comprehensive financial plans for our clients utilizing the above tax saving strategy and more. If you would like to learn more about our comprehensive wealth management services, please contact us today.

1 To see the full list of qualified medical expenses, please see the IRS Publication 502.


Three Tips for Your Home, Auto, and Umbrella Insurance

When was the last time you reviewed your auto, home, and umbrella insurance policies? If you haven’t done so recently, it might be prudent to revisit your coverages. For example: when it comes to homeowner’s insurance, you’ll want to make sure that your replacement cost is updated to reflect today’s higher housing prices and construction costs (and all those pandemic updates you made on your home)! Let’s dive a bit more into what replacement coverage means for you and two other quick tips.

Replacement cost coverage:

If your home needs to be partially or fully repaired or rebuilt due to a covered event, the insurance company will pay up to the replacement cost within the policy. It doesn’t matter if the shingles are 10 years old or the porch is brand new, insurance companies will replace your home or home components without considering depreciation. So, it matters what your home would currently cost to rebuild – recently we’ve seen many policies have inadequate coverage because housing costs have risen. We recommend you revisit this with your insurance broker or agent.

When you do, we recommend that you pay attention to how the policy defines replacement. Standard replacement cost replaces your home with fixtures, materials, and function as close as possible to what it’s like now. Functional replacement cost will build you a new home, but it may not be the same value – you’ll save on premiums, but the insurer will only replace your damaged property with something that functions the same way. Guaranteed replacement cost is a step up from the standard: just in case your home actually ends up costing more to rebuild than the policy states, your insurance company will foot the bill. There’s more to these differences, of course, so we suggest you discuss the coverage details with your agent.

Personal property coverage:

Everything from the clothes in your closet to the artwork on the wall and the new couch you just bought falls under the category of personal property within your homeowner’s insurance policy. You’ll want to make sure you have a conservative coverage amount relative to what you think everything is worth (prices aren’t exactly the same as they were even a few years ago). Your insurance company usually caps how much they’ll pay for certain items, like jewelry or valuable artwork, so you may need to list those as personal articles.

If you ever needed to file a claim, here’s one way to know what you owned: each year we suggest that you walk through your home, videoing. Pan over rooms, open drawers, and add commentary as necessary. This will make your side of the claims process way easier than trying to remember things after a very stressful loss. It’s also much faster than categorizing everything you own now on a written list.

Uninsured (and underinsured) motorist coverage:

If you’re in a car accident, this endorsement (extra add-on) will kick in to pay for your bodily injury expenses or vehicle damages if the other driver didn’t have insurance (or had inadequate insurance). Wisconsin requires uninsured motorist coverage (at least $25,000 per person and $50,000 per accident) but some states do not. We not only recommend it on your auto policy but would also recommend adding it to your umbrella (personal liability) policy.

This endorsement will step in for expenses beyond the underlying auto policy limits. Your medical insurance could be adequate for some scenarios, but the umbrella policy endorsement would provide other benefits that health insurance won’t, such as lost wages or payments for pain & suffering. The cost for this endorsement is usually an extra $100-200 per $1M of umbrella coverage and we recommend at least getting a quote to see whether that’s worth the peace of mind.

We hope you found these tips helpful. We don’t sell insurance, but we’re happy to work with our clients’ brokers and agents to find what’s right for their situation. At Boardwalk, property and casualty insurance is reviewed for our clients every two years – even if nothing obvious has changed. Whether it’s saving on insurance premiums, helping update coverages, or just confirming that everything looks good, our clients have peace of mind knowing they are well protected.

Sequels are Never As Good – Are They?

Sequels are never as good – are they? Well, that may just hold to movies. There’s plenty of new tax & retirement planning implications from SECURE Act 2.0, passed Dec. 29, 2022.

The original 2020 act had many impactful provisions, but we’ll remind everyone of one very significant change: money in retirement plans that is inherited by non-spouse beneficiaries generally must be taken out (and taxed) within 10 years. Previously, tax law allowed distributions from inherited retirement money to be stretched over the course of the beneficiary’s lifetime.

The retirement and tax planning implications from the SECURE Act 2.0 are far broader – there are over 100 provisions – but no single change is as impactful as the elimination of the stretch IRA in the first bill. Given the breadth of provisions, we’ll focus on three of the most important areas for our clients and their families.

Required Minimum Distributions:

The first Secure Act pushed the required age at which distributions must be taken from retirement plans back from age 70.5 to 72. If you were was born before 1951, there’s no change since you’re already taking distributions. For those born between 1951 and 1959, RMDs now begin at age 73. If you were born after 1960, the first RMD has been pushed back to age 75.

What’s the impact on me?

  • For those who started taking RMDs in 2022 and prior, there’s no impact.
  • For everyone else, there will be a longer gap of time between retirement and your RMD age. The potential for lower income during that “gap” allows for additional tax planning – such as Roth conversions, taking capital gains at 0% or 15%, and even taking a distribution from a retirement plan voluntarily while in a low tax bracket. It also means your tax rate on distributions from age 73/75 through the end of your life could be higher, since there will be more income those years.

There are a number of other provisions relating to distributions as well – two of which we discuss below.

  • For those that are charitably inclined: there’s no impact to the age at which a “qualified charitable distribution” (QCD) can be made (age 70.5). However, the wider gap between when someone may take RMDs and their age 70.5 opens the door to more tax planning opportunities.
    • There are several other provisions related to QCDs that don’t apply to many retired givers, such as an inflation-indexed maximum and a one-time ability to fund a split-interest entity (e.g., a Charitable Remainder Annuity Trust).
  • Lastly, we’ll note that there’s a provision allowing a spouse to elect to take RMDs as if he/she was the original IRA’s owner. It gets complicated, but this could make sense for the older spouse to elect before a younger spouse passes away so that the older, surviving spouse can use the decedent’s life expectancy to delay and stretch out required distributions.

Next up: there were many provisions related to Roth contributions. Notably, this bill did not close the ability to make “back-door Roth IRA” contributions. Rather than restricting Roth access, the bill’s various provisions expand access to or in some cases even require Roth contributions instead of the traditional “pre-tax” contributions. The idea behind why Congress is expanding Roth features is straightforward: it benefits the government via higher current tax revenue, and it helps savers via additional opportunities to grow tax-free wealth. Here are some details on two of the more interesting provisions:

Catch-up Contributions:

Effective in 2024 and for plans offering a Roth option, high wage earners will be required to contribute after-tax money via the Roth option of a retirement plan for any catch-up contributions. High wage earners are defined as making at least $145,000 from the employer whose plan the catch-up contributions are being made into. Catch-up contributions are allowed for employees age 50+. For 2023, after contributing the regular maximum of $22,500 into a retirement plan, employees age 50+ can still make their optional catch-up contributions of $7,500 with pre-tax money.

  • Further, catch-up contributions for participants aged 60-63 will be bumped up to a maximum of 150% of the regular catch-up amount. Though this provision takes effect in 2025, if it did apply to 2023 contributions, the “bumped up” maximum would be $11,250. Keep in mind that all this would have to be after-tax wages going into the Roth portion of the plan starting next year.

529-to-Roth Transfers

Starting in 2024, it will now be possible to transfer money leftover in a 529 plan to a Roth IRA for the beneficiary. In the past it usually didn’t make sense to fully fund a 529 plan since earnings on non-qualified withdrawals are subject to taxes and a 10% penalty. But now that there’s a release hatch for excess dollars, there will be more client situations where attempting to fully fund college with 529 plans will make sense. There is still some cloudiness that the IRS will clarify but as the law is written this release hatch is here to stay. Here are some major restrictions on this new ability:

  • The transfer must be a direct rollover into the Roth IRA of the 529 plan’s beneficiary. It can’t go to the owner’s Roth IRA.
  • The beneficiary must have earned income during the year of the rollover. However, the income limit that normally applies for Roth IRA contribution eligibility will not apply for these rollovers.
  • The IRA contribution limit still caps the total amount that can go into the Roth IRA each year ($6,500 in 2023). The maximum applies to the combined total of contributions and rollovers from a 529 plan – no doubling up!
  • The 529 plan must have been maintained for at least 15 years and money contributed within the last 5 years cannot be moved into the Roth IRA.
  • A lifetime transfer maximum of $35,000 applies to each beneficiary.

As you can see, these limitations mean that 529 plans should still be used with education funding as the intent. But this provision will provide flexibility to fund a 529 plan more aggressively if considered along with cash flow, retirement plan strength, and estate planning considerations.

There are over 100 provisions in the SECURE Act 2.0 – so we’ve only scratched the surface when it comes to the breadth of new changes. However, these are some of the most applicable changes for Boardwalk clients. Please let us know if you’re interested in learning more about the SECURE Act 2.0 and how it applies to your situation. But rest assured, we will be bringing planning considerations to you as we meet – including any financial planning recommendations based on the other provisions not outlined here.

Six Financial Best Practices for Year-End 2022

Mike Rodenbaugh

Mike Rodenbaugh

Founder

To say the least, there’s been plenty of political, financial, and economic action this year—from rising interest rates, to elevated inflation, to ongoing market turmoil.

How will all the excitement translate into annual performance in our investment portfolios? Markets often deliver their best returns just when we’re most discouraged. So, who knows!

Over the past few weeks, we have taken these six action steps on behalf of our clients. However, if you are not a client of Boardwalk Financial Strategies, now is a good time to take action before 2022 is a wrap.

1. Revisit Your Cash Reserves

Where is your cash stashed these days? After years of offering essentially zero interest in money markets, savings accounts, and similar platforms, some banks are now offering higher interest rates to savers. Others are not. Plus, some money market funds may have quietly resumed charging underlying management fees they had waived during low-rate times.

It might pay to …

Shop around: If you have significant cash reserves, now may be a good time to compare rates and fees among local institutions, virtual banks, and/or online services that shift your money around depending on best available offers (for a fee). Double check fees; make sure your money remains FDIC-insured; and remember, if it sounds too amazing to be true, it probably is.

2. Put Your Money to Work

If you’re sitting on excess cash, you may be able to put it to even better use under current conditions.

Here are three possibilities:

Rebalance: You can use cash reserves to top off investments that may be underweight in your portfolio. Many stock market prices have been depressed as well, so this may be an opportune time to “buy low,” if it makes sense within your investment plans.

Lighten your debt load: Carrying high-interest debt is a threat to your financial well-being, especially in times of rising rates. Consider paying off credit card balances, or at least avoid adding to them during the holiday season.

Buy some I bonds: For cash you won’t need for a year or more, Treasury Series I bonds may still be a good deal, as described in this Humble Dollar post.

3. Replenish Your Cash Reserves

Not everybody has extra money sitting around in their savings accounts. Here are a couple ways to rebuild your reserves.

Earning more? Save more: To offset inflation, Social Security recipients are set to receive among the biggest Cost-of-Living Adjustments (COLAs) ever. Or, if you’re still employed, you may have received a raise or bonus at work for similar reasons. Rather than simply spending these or other new-found assets, consider channeling a prescribed percentage of them to saving or investing activities, as described above. If you repurpose extra money as soon as it comes in, you’re less likely to miss it.

Tap Required Minimum Distributions (RMDs): If you need to take required minimum distributions (RMDs) from your own or inherited retirement accounts, that’s a must-do before year-end. Set aside enough to cover the taxes, but the rest could be used for any of the aforementioned activities. Another option during down markets is to make “in-kind” distributions: Instead of converting to cash, you simply distribute holdings as is from a tax-sheltered to a taxable account. Or, to avoid being taxed on the distribution, you also could donate the assets through a Qualified Charitable Distribution to your favorite non-profit organization.

4. Make Some Smooth Tax-Planning Moves

Another way to save more money is to pay less tax. Here are a couple of year-end ideas for that.

It’s still harvest season: Market downturns often present opportunities to engage in tax-loss harvesting by selling taxable shares at a loss, and promptly reinvesting the proceeds in a similar (but not identical) fund. You can then use the losses to offset taxable gains, without significantly altering your investment mix. When appropriate, we’ve been helping [firm name] clients harvest tax losses throughout 2022. There still may be opportunities before year-end, especially if you’ve not yet harvested losses year to date. We encourage you to consult with a tax professional first; tax-loss harvesting isn’t for everyone, and must be carefully managed.

Watch out for dividend distributions: Whether a fund’s share price has gone up, down, or sideways, its managers typically make capital gain distributions in early December, based on the fund’s underlying year-to-date trading activities through October. In your taxable accounts, if you don’t have compelling reasons to buy into a fund just before its distribution date, you may want to wait until afterward. On the flip side, if you are planning to sell a taxable fund anyway—or you were planning to donate a highly appreciated fund to charity—doing so prior to its distribution date might spare you some taxable gains.

5. Check Up on Your Healthcare Coverage

As year-end approaches, make sure you and your family have made the most of your healthcare coverage.

Examine all your benefits: For example, if you have a Health Savings Account (HSA), have you funded it for the year? If you have a Flexible Spending Account (FSA), have you spent any balance you cannot carry forward? If you’ve already met your annual deductible, are there additional covered expenses worth incurring before 2023 re-sets the meter? If you’re eligible for free annual wellness exams or other benefits, have you used them?   

6. Get Set for 2023

Why wait for 2023 to start anew? Year-end can be an ideal time to take stock of where you stand, and what you’d like to achieve in the year ahead. 

Audit your household interests: What’s changed, and what hasn’t? Have you welcomed new family members or bid others farewell? Changed careers or decided to retire? Received financial windfalls or incurred capital losses? Added new hobbies or encountered personal setbacks? How might these and other significant life events alter your ideal investment allocations, cash-flow requirements, insurance coverage, estate plans, and more? Take an hour or so to list key updates in your life, so you can hit the ground running in 2023.

How We Help?

At Boardwalk Financial Strategies, we do all of this and more for our clients. We are with them through every transition and help them navigate life’s changes. We ensure every component that contributes to their financial well-being is well positioned—today, and throughout the years ahead.

How Much Does Your Attention Impact Your Finances?

Many of the most recent breakthroughs in financial research have been discovered by psychologists rather than economists or investment researchers.  The branch of study they’ve pioneered is known as “behavioral finance.”  This was evidenced in 2002, when the Nobel Prize in Economics was given to psychologist Daniel Kahneman.  The insights gained from research in behavioral finance reveal how our brains process decision making and how this can heavily impact our finances – in both helpful and harmful ways.  Of the many behavioral biases that we can have, many are rooted in how we apply our attention.

As humans, we tend to avoid “headline” risks (like those on the front page of the newspaper or widely discussed in public).  While this seems appropriate, this tendency often causes us to take on larger but lesser known risks.  A good example of this occurred in the aftermath of September 11, 2001.  Due to the “headline risk” of flying, more people opted to drive instead of fly even though air travel is much safer than driving – especially over long distances.  Professor Gerd Gigerenzer, the director of the Harding Center for Risk Literacy in Berlin, estimates that an extra 1,595 Americans died in car accidents in the year after the attacks due to this tendency.  Because of our poor understanding of danger, the maxim “out of the frying pan into the fire” often applies to our behavior.  This holds true in our financial decisions.  If the stock market crashes, it is understandable that many people don’t want their portfolios to suffer the same fate.  Avoiding this risk by holding excess bonds or cash in advance may accomplish that, but at a near certain risk of their portfolio failing to generate sufficient inflation-adjusted returns.  Even more, deciding amid a downturn to offload risk by selling stocks in favor of bonds or cash poses an even more significant risk to the portfolio’s recovery.  It matters where we focus our attention – are we just “seeing” headline risks or are we focused on our exposure to real risks and actively working on what we can control?

Just how it’s easy to focus on “headline” risks, we also tend to commit our attention to seeking complex solutions rather than embracing simple, powerful ones.  As a derivative of this behavioral bias, we often try to “outsmart” the system.  A study, “The Left Hemisphere’s Role in Hypothesis Formation,” published by The Journal of Neuroscience in 2000, examined how humans and animals “guess” when certain probabilities are in place.  In one experiment, 80% of the time a light would appear on the right.  The remainder of the time it was on the left, but the sequence was random.  Prior to each trial, the subject would predict which side the light would be on.  Rats, discovering that the light on the right would appear most times, continually selected that side.  On the other hand, humans tried to use frequency matching to guess when the left light would appear – with minimal success!   Human subjects chose a less optimal strategy than rats because of our desire to find patterns and outsmart the system.  Like in this study, we tend to overlook the simple solutions to investing intelligently.  Instead, we attempt to beat the rest of the market with exotic or complex solutions.

The simple but powerful index fund doesn’t have all the bells and whistles that actively managed mutual funds tout, but they have outperformed most active managers over the past decade.  According to S&P Dow Jones’s 2017 SPIVA (“S&P Indexes Vs. Active”) scorecard, 63.43% of actively managed funds invested in U.S. stocks underperformed their benchmark in 2017 – over a three-year period the number of underperforming funds jumps to 83.40% and at 10 years reaches 86.65%.  In some categories, like funds invested in U.S. “small-cap” stocks, less than 5% of actively managed funds outperform their benchmark over a period of 10 years.  Despite not offering all the expertise of fund managers and their bold predictions, a simple strategy for diversification – the index fund – almost always wins out.  Our human desire for complexities is seen even more in the appeal of hedge funds and the way pensions and endowment funds typically invest.  As a testimony to simple, powerful investing solutions, my alma mater, Carthage College, was featured in numerous articles for having better returns than Harvard’s $37 billion endowment fund over the 10-year period leading up to June 30, 2017.  When asked why reliance on indexing isn’t more common among the nation’s endowments, Carthage’s endowment manager replied, “Maybe it’s too simple.” 

At Boardwalk Financial Strategies, one of our goals is to help you focus your attention on the important things and not let behavioral biases negatively impact your wealth.  Where we focus attention often gets the better of us: humans focus on avoiding “headline risks” (even if we take on larger but lesser known risks) and overlook simple, powerful solutions because of our desire for complex solutions.  It can be hard at times to not let our impulses dictate how we invest money or handle financial decisions.  But we believe focusing our attention on the things we can control – like financial planning – and utilizing an academic, data-driven (though simple) investment philosophy are ways we can help you build wealth, remove financial stress, and find the time and peace to enjoy what matters most to you in life.