Financial Planning

We are nearing the peak of the baby boom inheritance cycle where one of the most common assets being left is IRAs or other retirement accounts. Due to the advantageous tax deferral nature of such accounts, these investments were usually the last ones utilized to support the older generation. Due to the deferred income obligation associated with these accounts, thorough and well advised planning is critical due to varied potential income tax outcomes based on to whom and how such accounts are transferred. The named beneficiary designation on the account is what controls the disposition of these assets, versus what one’s will or trust documents say. Thus it is critical that beneficiary designations are reviewed regularly to insure they are consistent with one’s wishes and the overall estate and income tax plan of the owner.

Inherited IRA rules vary based on who is the named beneficiary and the age of the account owner at death, however there are three basic options and each has special rules and timing requirements.

1. Assets can be transferred to an “Inherited IRA” where depending on the facts the assets can be drawn down immediately without a penalty; deferred and withdrawn systematically over a specified time period; or possibly required to be withdrawn in total by the end of the fifth year.

2. If you are the spouse of the plan owner you can roll the assets into your own IRA and have them treated as if they are your own IRA assets subject to the same rules and restrictions as other assets in your own IRA or leave the assets in an inherited IRA.3.

3. One can take a lump sum distribution and pay taxes on the full value based on your personal tax rates.

The first thing that must be done is determining the type of plan being inherited

• An IRA (including traditional or employee sponsored) and Roth IRA or;

• A qualified retirement plan such as a profit sharing or 401(K) or a similar plan. Then one determines who the named beneficiary is; spouse, non-spouse; trust, or estate executor;

• If you are the spouse and are the named beneficiary of a traditional, SEP, or Simple IRA your options are:

– Take a lump sum and pay tax in full (no penalty and full access to the after tax proceeds)

– Transfer assets to your own IRA: assets are transferred to your own IRA and you have full discretion to choose beneficiaries. The assets are treated as yours and subject to the same distribution rules as your other assets. If you are young and do not need immediate access to the funds, this could be the most advantageous option as the deferral continues in full until you reach the required beginning date for

your minimum distributions.

– Open an inherited IRA: Assets in the account continue to grow tax free and you are not subject to the early withdrawal penalty (Note: if the account is left to multiple beneficiaries you must establish separate beneficiary accounts by December 31 of the year after death in order for each beneficiary to use their own single life expectancy otherwise the oldest beneficiary’s life will control).

• If the owner was under 70 . at date of death; required distributions are required to start by the later of these two dates;(1) the December 31 following the year in which the owner died or (2) December 31 of the year in which the account owner would have reached age 70

• If the account owner was over 70 ; you must start taking the required minimum distribution over your life expectancy beginning no later than the December 31 following the year of death. (Note: if the original account owner did not take an RMD in the year of death it must be taken by the end of that year)

• If the named beneficiary is a non-spouse individual, you have the following two options:

– Open an inherited IRA where the assets continue to grow. There is no early withdrawal penalties and you can chose your beneficiaries.

• Assets are transferred into an inherited IRA in the name of the original account owner. If the account is left to multiple beneficiaries, you must establish separate beneficiary accounts by December 31 of the year after death so that each beneficiary can use their own single life expectancy. Otherwise the oldest’ s life will control.

• You can access funds whenever you like and are taxed on each distribution however:

• If account holder was under age 70 at death:

– If you intend to take an annual Required Minimum Distribution (RMD), you must begin no later than December 31 following the year of the original account holder’s death.

– You may delay distributions until the end of the fifth year after the year in which the original account holder died, at which time all assets need to be fully distributed.

• If account holder was over age 70:

– Your annual distributions are spread over your expected lifetime.

– If you intend to take an annual Required Minimum Distribution (RMD), you must begin no later than December 31 following the

year of the original account holder’s death.

– If the original account holder did not take an RMD in the year he or she died, you must take the distribution by the end of

that year.

– Take a lump sum distribution and the assets are fully taxed at date of distribution

• If the named beneficiary is a trust:

– Determine if the trust is a qualified trust or a non-qualified trust (consult legal counsel) as the rules are complex and the ultimate method of distribution will vary.

– If it is a qualified trust, the distribution period for the assets can generally be spread over the life expectancy of the named beneficiary.

• Open an inherited IRA in the name of the original account owner for the benefit of the trust (individuals of the trust generally cannot establish their own inherited IRAs unless the IRA was actually distributed out by the trust within the designated post death time period.)

• There are two ways that the trust may take distributions:

• Based on the single life expectancy of the beneficiary, if he or she is

the sole beneficiary of the trust.

• Based on the single life expectancy of the oldest beneficiary if there

are multiple beneficiaries.

• If account holder was under age 70.:

• If you intend to take an annual Required Minimum Distribution (RMD), you must begin no later than December 31 following the year of the original account holder’s death. You may delay distributions until the end of the fifth year after the year in which the original account holder died, at which time all assets need to be fully distributed.

• If account holder was over age 70.:

– If you intend to take an annual Required Minimum Distribution (RMD), you must begin no later than December 31 following the year of the original account holder’s death.

• If the original account holder did not take an RMD in the year he or she died, you must take the distribution by the end of that year.

– If the trust is a nonqualified trust meaning that one cannot use the “look through rules” then it will be subject to the no designated beneficiary rule and required distributions will be calculated under the account owner’s life expectancy or the five

year rule depending on the age when the account owner died.

As can be seen, the rules on inheriting an IRA are very complicated and need to be understood before naming beneficiaries. Furthermore, after death, the executor and all stakeholders must be sure that all deadlines are met regarding determining optimum ownership and if necessary distributing and designating who the ultimate owners will be. There are different rules for other non IRA retirement accounts which need coordination with the plan administrator and estate tax counsel to insure they are properly designated and timely handled as well.

Telemus Capital’s Summer Insights – Q2 2013

From the wealth advisory group, a newsletter evaluating industry practices and ideas for future wealth planning. Read our latest newsletters below.

OUR SUMMER INSIGHTS Q2 2013 NEWSLETTER

OUR SPRING INSIGHTS Q1 2013 NEWSLETTER

Market Commentary

Addressing the most recent activity in the financial world, this review from Telemus CEO and CIO Jim Robinson analyzes what has transpired and how this activity may affect the current and future state of the market.

 


Spring 2013 Quarterly Newsletter
April 2, 2013
It is with great pride and excitement that we introduce our new quarterly newsletter that we’re calling Insights. In these informative pieces you’ll hear from us, and others, regarding the current market environment as well as a variety of investment and financial topics. Please enjoy.

 

Market Commentary
March 20, 2013
Washington failed to produce an alternative budget plan so today marks the first day of sequestration—automatic spending cuts of $85 billion over the next seven months (the government’s fiscal year ends September 30th).

Market Commentary
November 13, 2012
Contrary to some opinions, today’s market selloff has little to do with the outcome of yesterday’s elections and much to do with European Central Bank head Mario Draghi’s comment that he anticipated seeing weakness in the European economy for the foreseeable future.

Market Commentary
June 11, 2012
Over this past weekend the Spanish government secured $125 billion in bailout funds (Prime Minister Mariano Rajoy prefers to call it a line of credit) to secure the Spanish banks.

Market Commentary
March 9, 2012
It’s done! It’s done? It’s done. We aren’t quite sure how to best characterize the completion of the Greek debt restructuring, but we’re relieved that it is at least temporarily over. In present value terms existing holders of Greek debt took approximately 75% losses on their bonds.

Global Outlook

An annual analysis of the global economy, Global Outlook includes our expectations for the coming year. This resource allows our clients a clearer understanding of all the factors throughout the developed world that may affect their investments. Expectations relating to inflation, interest rates, currencies, natural resources, equity markets and bond markets are discussed.

2013 Global Outlook
January 10, 2013
The delay in resolution of the Fiscal Cliff certainly had a negative impact on consumer spending in the fourth quarter and will likely have an adverse effect on Q1 2013 GDP growth as many corporations postponed initiatives awaiting the outcome.

Resources

Telemus in the News

What a Wealth Tax and Lindsay Lohan Have in Common

 Yesterday’s New York Times contains an op-ed article by Daniel Altman, “To Reduce Inequality, Tax Wealth, Not Income,” that suggests replacing the income and estate tax with a wealth tax. Much of the article talks about the growing wealth and income inequality in the United States over the past thirty years.

Article appeared in  Forbes on December 4, 2012.

 

Telemus Capital Again Named Among Barron’s “Top 100 Independent Financial Advisors” Nationwide

PublicCity PR

August 31, 2012

SOUTHFIELD, Mich. – August 31, 2012 – Telemus Capital Partners, an independent advisory firm providing solutions for investment and asset management, as well as wealth advisory services for high-net-worth individuals, has once again been named to Barron’s nationwide ranking of “Top 100 Independent Financial Advisors.”

 

Telemus Capital’s, Bernie Kent, Joins Steve Forbes, Bill Gross and Other Financial Planning Experts in Online Conference

PublicCity PR

July 17, 2012

SOUTHFIELD, Mich. – July 17, 2012 – Bernard Kent, JD, CPA, PFS, a managing director and senior advisor at Telemus Capital Partners, will join other leading financial planning experts in an upcoming interactive online conference hosted by the National Association of Personal Financial Advisors (NAPFA) and Forbes.

 

Telemus Capital Again Named Among Barron’s Top 100 Financial Advisors

PublicCity PR

April 23, 2012

SOUTHFIELD, Mich. – April 23, 2012 – Telemus Capital Partners, an independent advisory firm providing solutions for investment and asset management, as well as wealth advisory services for high-net-worth individuals, has once again been named to Barron’s ranking of “Top 100 Financial Advisors.”

 

Telemus Capital Announces New Community Support

Rachelle Zawinsky

April 20, 2012

SOUTHFIELD, Mich. (April 20, 2012) – Telemus Capital Partners is proud to report on its ongoing support for charitable and community organizations in the places where the firm’s clients and professionals live and work.

All Telemus in the News >

Gary Ran discusses the state of the markets at FOX Business, in a segment from July 13, 2013

Gary Ran discusses the state of the markets at FOX Business, in a segment from July 13, 2013

2013 Telemus Capital Second Quarter Market Update

The domestic stock market managed to post another solid quarterly return despite having its first negative monthly return of the year in June.  The S&P 500 returned 2.9% for the second quarter.  Unfortunately for diversified investors, the US and Japanese stock markets were the only markets to post positive returns for the quarter.  European stocks were down 1.4%, emerging market stocks were down 10%, domestic bonds were down 2.5%, international bond markets were down 3.1%, general commodity prices were down 5.9%, and precious metals were down a whopping 25%.  It was a challenging quarter for asset allocators.  We think the good news is that investors may finally be focusing on fundamentals and abandoning the “risk on/risk off” mindset.

 

Most markets were humming along quite nicely through the mid-point of the quarter when Federal Reserve Chairman Ben Bernanke suggested the Federal Open Market Committee was looking into possibly tapering off some of its bond buying activities (quantitative easing) in the coming months.  Those comments, and the subsequent statement and press conference following the June FOMC meeting, spooked investors across the globe.  Longer-term US Treasury bond yields rose 1% (that represents a price decline of approximately 10% on longer-dated US Treasury securities as bond prices move in the opposite direction of their yields) and global stock markets declined over 6%.  Fortunately, bond yields began to stabilize and stock markets recovered some of those losses over the last week of the quarter.

 

Our clients’ portfolios struggled along with the global stock and bond markets in the second quarter.  In fact, the more conservative the allocation the more difficult the quarter as global taxable bond indices returned a negative 2.8% and global stock indices returned a negative 0.25%.  On a relative basis clients’ portfolios did benefit from our allocation to non-traditional equities (which actually posted a positive return for the quarter) and to our non-traditional fixed income strategies that, while still negative, did manage to outperform traditional bonds by roughly 1.5%.  Our inflation sensitive real asset holdings (natural resources, commercial REITs and infrastructure) were a drag on portfolio returns as inflation expectations continued to decline during the quarter—the Fed’s favorite gauge of inflation, the Personal Consumption Expenditures Index, actually hit a 50-year low during the quarter.

 

Five weeks of panic selling often leads to many opportunistic pricing dislocations.  While we don’t necessarily agree with the magnitude, we understand the rise in Treasury and mortgage yields; but, we are puzzled as to why corporate bond yields rose even more than Treasury yields.  The Fed outlined a data-dependent timetable for reducing its bond purchases.  Specifically, GDP growth approaching 3%, inflation approaching 2% and unemployment falling below 7%–we think that’s an ideal environment for equity investors; and, if it doesn’t happen the Fed will continue its bond purchases—an environment that heretofore has also been ideal for equity investors.  Even with the recent rise in bond yields we would still favor equities and our non-traditional fixed income strategies over traditional bonds.

 

Not to worry, we remain committed to our mandate to build the least risky portfolios necessary for our clients to achieve their financial goals.

Mid-Year 2013 Global Outlook

U.S. Overview

Economy

As we mentioned in our beginning of the year Global Outlook, the delay in resolution to the Fiscal Cliff had an adverse effect on the economy in the fourth quarter—GDP came in at a near stall speed of 0.4%; and, the automatic sequester cuts didn’t help the recovery from that slow growth—Q1 2013 GDP came in at 1.8%.  We believe the economy is showing gradual, incremental signs of improvement but we are not nearly as optimistic as the Federal Reserve appears to be.  Economic growth for the full year will struggle to get much above 2%; and, the unemployment rate will likely remain at the 7-7.5% level.  The story really hasn’t changed over the past four years:  fiscal policy is non-existent due to Washington’s political gridlock and monetary policy can only spur so much growth.

Inflation

Some Federal Reserve Governors have recently expressed concern about the trajectory and absolute level of inflation.  The Personal Consumption Expenditures Index, the Fed’s preferred measure of inflation, has been declining consistently over the past year and presently stands just above the 1% level (below 1% is considered to be dangerously deflationary)—the slowest rise in prices over the past 50 years.  Chairman Bernanke and the Federal Open Market Committee have outlined a data-dependent timeline for withdrawing quantitative easing.  Should the Fed’s optimistic projections pan out, the Fed would begin cutting back on its bond purchases toward the end of this year and stop them altogether by the middle of next year.  Unfortunately, the Fed has consistently been overly optimistic in its economic projections over the past four years.  We don’t believe quantitative easing will end until the Fed is certain deflationary pressures are off the table—which would equate to a Personal Consumption Expenditures Index closer to 2% than the current 1%.

Interest Rates

Short-term interest rates will remain low for some time.  Longer-term US Treasury yields, which have risen significantly over the past two months thanks to the Fed’s discussion about removing quantitative easing, are comprised of two component parts:  a real interest rate plus an inflation expectation.  The 1% rise in the 10-year US Treasury yield since the end of April was comprised of a 1.25% rise in real yields and a 0.25% decline in inflation expectations.  We would expect the real interest rate component to rise another 0.5% when the Fed does finally cease its quantitative easing—we don’t expect that to happen until inflation expectations increase.  As noted above, we have more deflationary than inflationary pressures at present.  As a result, we expect longer-term interest rates to stabilize and likely decline a bit from these levels over the balance of this year.  Longer term we expect the Fed will eventually succeed in engineering higher inflation rates and therefore higher long-term interest rates as both real interest rates and inflation expectations rise.

Domestic Equity Markets

Stock prices follow corporate earnings and we believe the corporate earnings environment remains positive even as the overall economic environment remains sluggish.  We also believe stocks will continue to benefit from an overall reallocation from bonds to stocks by investors.  Individual investors have been woefully underweighted in stocks since the financial crisis, and institutional pension plans will have a difficult time achieving 8% actuarial rates of return with any investments in investment grade bonds yielding 2.5%.  The stock market still offers comparable yields, far more upside, and only slightly more downside than the investment grade taxable bond market.  We remain bullish on the stock market over the balance of this year.

Domestic Bond Market

The domestic bond market experienced a major re-pricing over the past two months.  Investment grade bond indices were down 4% as bond yields rose nearly 1%–the biggest two month decline in bond indices and rise in rates since the height of the financial crisis in late 2008.   We think investors misinterpreted and overreacted to the Fed’s message, and we would expect bond yields to stabilize and likely decline modestly over the balance of this year.  Longer term we believe bonds are a poor investment as they still offer historically low yields, little upside and lots of downside risk as investors experienced these past two months.  Non-traditional fixed income securities such as senior bank loans, convertible bonds and preferred stocks continue to provide the most attractive risk/reward characteristics. 

International Overview

Economy

Europe is in a recession and many of the emerging market economies, particularly China, have definitely slowed down.  Central banks across the globe, with the exception of Japan, are looking for ways, like our own Federal Reserve Bank, to ease their respective economies off of the monetary stimulus drip they’ve been on for the past several years.  The monetary stimulus policies recently adopted in Japan are having an impact—the Japanese economy finally appears to be emerging from two decades of deflation.

Inflation

Slowing growth in the emerging markets coupled with most major central banks contemplating exit strategies for monetary stimulus should keep inflation in check.  We still believe that deflation may still be a greater risk than inflation to the overall global economy.

Interest Rates

As with the domestic market, we expect global short-term interest rates to remain low.  Longer-term interest rates in most major markets are still near historic low levels.  Any improvement in economic activity will drive those rates higher—we don’t expect that to happen over the balance of this year.

Currencies

The dollar has had quite a run ever since the Fed started talking about curbing its bond buying activities.  Just as we expect interest rates to stabilize at these levels, we would expect the dollar to do the same versus most major currencies with the exception of the Japanese yen—we expect the yen to continue weakening.

Natural Resources

The slowing of emerging market economies, particularly China, and the strength in the US dollar, has had a direct negative impact on commodity prices.  We don’t see that changing over the balance of this year, but longer-term we believe the emerging and frontier markets will resume their growth trajectories and natural resources will follow.

Global Equity Markets

While emerging market economies continue to show signs of slowing, we believe some of those markets’ stock valuations are becoming attractive.  At present we still have a bias toward domestic versus international stocks; frontier markets over emerging markets, and small cap stocks over large cap stocks in both domestic and developed international markets.

Global Bond Markets

Most of the weaker countries in the Eurozone (Greece, Italy, Spain) have seen their bond yields come down dramatically in recent months.  While we haven’t read or heard much about the European sovereign debt crisis lately, it doesn’t mean it’s been resolved.  We believe the risk is still there but the potential reward has been greatly reduced.  We would favor higher rated developed European countries at these levels.  We remain underweight emerging market debt as we don’t believe investors are being compensated for the reduced liquidity and lower credit quality in those markets.