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Most global assets were down on the month. The general weakness in the month came from a few different angles. Here are 3 things you need to know:

1. 10-yr. U.S. Treasury yields hit their highest level (4.36%) since 2007 driven partially by a larger-than-expected Treasury supply announcement.
2. Fitch downgraded U.S. government debt from AAA to AA+.
3. China’s property crisis is rippling through its economy. Chinese economic growth slid to 0.8% over the previous quarter in the three months ending June from the January-March quarter’s 2.2%. Exports have contracted and retail spending is weak.

Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Bloomberg; FactSet.

Indices:

• The Bloomberg Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
• The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
• The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
• The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

We are proud to support the upcoming “The Essentials of Financial Literacy” webinar series presented by FPA Orange County. In this series Certified Financial Planner™ professionals will teach the building blocks you need to create greater financial stability in your life. Michael Allbee, CFP®, will be presenting on “The Importance of Saving and Investing” on September 23^rd. For more information and to register go to: www.fpaocprobono.org.  We look forward to having you join us!

When it comes to effective estate planning and wealth transfer strategies, Grantor Retained Annuity Trusts (GRATs) stand out as one of the best tools. They were popularized by the Walton family (best known for founding the retailers Walmart and Sam’s Club) as a way to get around owing the IRS millions in taxes. This strategy has been used by many other notable individuals like Phil Knight, the founder of Nike. You do not need to be a billionaire to get the same benefits!

A GRAT is an irrevocable trust into which an individual places an asset with the expectation that it will grow in value. In exchange for putting assets into the trust, the individual receives annuity payments for a specified number of years. At the end of that term, any assets left in the trust (typically the appreciated value) are transferred to the beneficiaries (like your children) tax-free.

Think of a GRAT like a special box where you put an asset (e.g., stocks, real estate, or other investments). This asset might be worth a certain amount today, but you believe it will be worth more in the future. The GRAT allows you to benefit from the asset’s growth while minimizing potential gift or estate taxes.

How does a GRAT work?

Imagine that a stock is like a Luke Skywalker action figure toy that’s worth $10 today, but you think it’ll be worth $100 in a few years.¹ You want to give this stock (toy) to your child in the future, but if you wait until it’s worth $100, you might have to pay a big gift tax. So, you use a GRAT:

1. You (the grantor) put the toy (stock) in a special box (the GRAT) and say that for the next few years, the toy will pay you back a little bit of its value each year. This “payback” is called an annuity. The annuity can be a stated dollar amount, fixed fraction, or a percentage of the initial fair market value of the property transferred to the GRAT.

2. If, at the end of those few years, the toy has grown in value more than you expected, everything extra (the remainder interest) goes to your child without any gift tax. *The value of the remainder interest is determined by subtracting the present value of the expected future annuity payments from the fair market value of the original transfer to the GRAT.

3. If the toy doesn’t grow in value, or if it’s worth less, that’s okay! You just got your annuity payments, and the toy goes back to you, so you’re still able to play with the toy after it spent its time in the GRAT.

Example:

Why Use a GRAT?

1. Tax Efficiency – When setting up a GRAT, the value of the gift is reduced by the annuity payments you’ll receive. If the assets grow more than expected, the excess growth passes to your beneficiaries free of gift tax.

2.  If the assets don’t appreciate as much as you hoped, no worries. The assets just revert to you with no adverse gift-tax consequences.

3.  Asset Protection – Assets in the GRAT are generally protected from creditors.

A Few Things to Remember:

• Timing is Essential – GRATs work best in low-interest-rate environments because the assets in the GRAT only need to outperform the IRS’s set interest rate (often referred to as the “Section 7520 rate”) to provide a benefit.
• Risk – If the grantor (the person who set up the GRAT) dies during the trust term, most or all of the trust assets may be included in their estate for tax purposes. Hence, it’s essential to select an appropriate trust term.
• Legal Counsel – Setting up a GRAT involves specific legal processes and paperwork. Always consult with an attorney or financial planner familiar with GRATs and your personal financial situation.

GRATs offer a unique avenue for individuals to pass on appreciating assets to beneficiaries in a tax-efficient manner. Like all financial strategies, it’s vital to understand the ins and outs and seek expert advice tailored to your needs. Remember, as with all financial decisions, it’s always wise to consult with a trusted financial advisor or attorney to ensure that a GRAT is right for your specific situation.

1. A 1978 Luke Skywalker figurine sold for $25,000 in 2015 as part of a $500,000 Star Wars collection at Sotheby’s.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By: Henry VanBuskirk, CFP®, Wealth Manager

One of the biggest decisions that a person about to graduate from high school can make in life is whether or not they choose to go to college. That’s also why it’s no coincidence that when toymaker Milton Bradley was designing the board game, The Game of Life®, one of the first things you do in the game is to decide whether or not your character will go to college.¹ In the real world, electing to go to college is not as easy of a decision. The actual game of life is much more complicated. Going to college means a significant financial cost for you and your loved ones that has outpaced inflation over time. To highlight this, take the University of Pennsylvania’s tuition and associated expenses in 1960 (the year that the board game Life® was published).

Now fast forward to the 2020-2021 academic year for the University of Pennsylvania and the price tags have increased drastically:

I’m not here to preach one way or the other on whether or not this is wrong. I’m just here to point out that this is the reality we live in. If you went to college in the early 60s, imagine what life was like for you. If you have grandchildren, chances are that you want them to have a better start to the game of life than you did. If their parents do not have the means to fund college, then they will have to use student loans and fill out the FAFSA (Free Application for Federal Student Aid) to receive financial aid to help pay for those post-secondary education goals.

You may want to contribute to an investment vehicle to help them save for college. The most popular investment vehicle for saving for future college expenses is the 529 plan. There have been new changes to the 529 plan and how it interacts with the FAFSA form. My goal today is to show you how you can take advantage of these new changes to help your grandchildren have a better opportunity to graduate from college and have a fulfilling career of their choosing.

What is a 529 plan?

A 529 plan is an investment account that is sponsored by states, agencies, or investment companies, that grows tax-free, and distributions can be tax-free as long as the distributions are made to pay for qualified education expenses (such as tuition or room and board). In 2023, you can contribute up to $17k per person, per beneficiary. There is also the option to “superfund” a 529 plan, which would be making 5 years of contributions to the 529 plan in one year.  This is where you can put $85,000 into the 529 in year one (5 * $17,000) but cannot make additional contributions until year 6. This can also be used to help mitigate the size of your taxable estate at the time of your death. However, careful planning must be done since if the 529 plan is super funded and you pass away within the 5 years of super funding, the 529 plan as the contribution would then be added back to your estate.

The FAFSA Rules

The old FAFSA Rules when it came to grandparent-owned 529 plans were that distributions from the 529 plan would be counted as non-taxable income to the student and 50% of the distributed value would impact potential financial aid. This would impact the Expected Family Contribution (EFC), potentially meaning that less federal financial aid would be awarded to the student.

The new rules are that distributions from a grandparent-owned 529 plan are not counted at all towards FAFSA and are not considered non-taxable income to the student. The EFC is not impacted, and the grandparent-owned 529 plan is just assumed to not exist when it comes to awarding federal financial aid to the student. Keep in mind, however, that grandparent 529 plans are still considered on the CSS Profile (an additional financial aid form used by about 200 private colleges to award their institutional aid).

The rules for a parent-owned 529 plan are that the first $10,000 of a 529 plan account is excluded from FAFSA and only 5.64% of the account’s value above $10,000 is factored into the EFC when filing the FAFSA and determining any potential federal financial aid.

What does this mean for you?

If education planning is important to you and your family, it may be more beneficial to focus on having a greater balance in a grandparent-owned 529 plan rather than a parent-owned 529 plan. There also may be options to change the owner of a 529 plan from a parent to a grandparent, depending on the state that your 529 plan is in. If you have both a parent-owned and a grandparent-owned 529 plan, it is important to coordinate the distributions from each account for the optimal financial aid available for the student. Due to the new Secure Act 2.0, there is also the ability to roll over up to $35,000 of funds in a 529 plan to a Roth IRA for the beneficiary if the beneficiary chooses not to go to college. The funds had to be in the 529 plan for at least 15 years to take advantage of this and the amount that can be rolled over each year is subjected to the annual Roth contribution limits.

Conclusions

As a grandparent, now your grandchildren have all of the tools they need to succeed in any post-secondary education that they choose. You sit down with your grandchild, explain that you started a 529 plan to save for their future post-secondary education goals, and they give you a hug since they know that they can fulfill their dreams now because of you:

Ok, maybe some dreams should be scrutinized. I’m guessing you probably don’t want your legacy walking around in oversized shoes, wearing multicolored overalls, and donning a large fake red nose (and I’m not here to judge if that is what you want for your legacy).² If you wish, you can also change the beneficiary on the 529 plan at any time and as often as you like. Since Bart isn’t planning on using the funds in the 529 plan wisely, it may be prudent for you to change the 529 plan beneficiary to his more responsible sister, Lisa:

While Bart is upset that he won’t get any funds from the 529 plan (he’ll just need to pull himself up by his oversized bootstraps and work hard to finance his Clown College tuition), you and Lisa are ecstatic to learn how the new FAFSA rules for grandparent-owned 529 plans and how you contributing to a grandparent-owned 529 plan can bolster your grandchild’s future educational endeavors and help instill your personal morals and values to the next generation.³

Legacy planning is one of the most important financial planning topics that we address with our comprehensive financial planning services. If you are in a comfortable financial position where you are looking to help others in your family succeed by passing on your personal morals and values, we can help you fulfill those goals. To summarize, I would like to point out this chart from the National Center for Education Statistics:

To reference another board game from my childhood (this time from Hasbro), don’t take the Risk® of waiting to discuss your grandchildren’s future education needs with your family and your financial planner.⁴ The above chart shows that delaying this conversation means funding future education goals will only become more difficult over time. That hurdle can be conquered by setting up an investment vehicle like a 529 plan to fund future education expense needs now. Our team of Certified Financial Planner™ (CFP®) professionals is here to construct your comprehensive financial plan and be a sounding board for you to voice how you want your family legacy to be remembered by future generations. We’re here to help you win at this game of Life® (at least financially) and the first step to playing is by giving us a call at 714-282-1566 or emailing us directly at financialplanning@bfsg.com to schedule an appointment with our team.

Footnotes:

1. https://en.wikipedia.org/wiki/The_Game_of_Life. Also sometimes called Life®.
2. Bart from The Simpsons
3. Lisa from The Simpsons
4. https://en.wikipedia.org/wiki/Risk_(game)

Sources:

• https://archives.upenn.edu/exhibits/penn-history/tuition/tuition-1960-1969/
• https://archives.upenn.edu/exhibits/penn-history/tuition/tuition-2020-2030/
• https://www.forbes.com/advisor/student-loans/college-tuition-inflation/
• https://www.bankrate.com/loans/student-loans/college-tuition-inflation/#years
• https://www.wealthmanagement.com/college-planning/fafsa-gets-overhaul
• https://www.forbes.com/sites/robertfarrington/2021/10/29/grandparent-529-plans-get-a-boost-from-new-fafsa-form/?sh=4b02026e3acb

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The IRS recently released the 2024 contribution limits for health savings accounts (HSAs), as well as the 2024 minimum deductible and maximum out-of-pocket amounts for high-deductible health plans (HDHPs).

What is an HSA?

An HSA is a tax-advantaged account that enables you to save money to cover healthcare and medical costs that your insurance doesn’t pay. The funds contributed are made with pre-tax dollars if you contribute via payroll deduction or are tax deductible if you make them yourself using after-tax dollars. (HSA contributions and earnings may or may not be subject to state taxes.) Withdrawals used to pay qualified medical expenses are free from federal income tax.

You can establish and contribute to an HSA only if you are enrolled in an HDHP, which offers “catastrophic” health coverage and pays benefits only after you’ve satisfied a high annual deductible. Typically, you will pay much lower premiums with an HDHP than you would with a traditional health plan such as an HMO or PPO.

If HSA withdrawals are not used to pay qualified medical expenses, they are subject to ordinary income tax and a 20% penalty. When you reach age 65, you can withdraw money from your HSA for any purpose; such a withdrawal would be subject to income tax if not used for qualified medical expenses, but not the 20% penalty.

Importantly, make sure to stop contributing to your HSA at least six months before you do plan to enroll in Medicare. This is because when you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back farther than your initial month of eligibility. If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty.

What’s changed for 2024?

Here are the updated key tax numbers relating to HSAs for 2023 and 2024.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.