20 Years Financial Planning

20 Years Financial Planning

This month marks 20 years as a financial advisor for me. A lot has changed in that time. When I started, we had to hand-write trade tickets, on blue paper for Buy and salmon for Sell, and fax them to the back office. We would photocopy account applications for our file, fax it in to our custodian, and then mail the original signature.

But a lot has not changed. Markets are still volatile. Timing doesn’t work. Investors still have biases. And good habits build wealth over time.

I am happy to celebrate this milestone, and incredibly grateful for the clients who have trusted me with their finances. I’m excited to start a third decade of service. Markets still fascinate me, and I love getting to help families build and preserve their wealth. One of my early clients passed on years ago, but now I work with their children who are approaching retirement age. And we have accounts for the grandchildren, and we have started 529 college savings accounts for the great-grandchildren. Working with four generations of one family gives you a new perspective about the significance of planning.

Learning the Hard Way

I started buying individual stocks in 1998, right at the end of the tech bubble. I had some profitable investments and some that did poorly. By the time I became an advisor in 2004, I think I had already made every mistake possible with my own investments. You can learn from a book, but the pain of losing your own hard-earned money is a more effective lesson.

After 2000, there were three years of losses in the S&P 500 Index, with the back to back shocks of the tech bubble and then 9/11 in 2001. During this time, I was looking for market inefficiencies and they were still existent back then. There were 50% more stocks than today and stock trading was still done by people on the floor of the NYSE, not on computers.

I would find tiny, small cap regional banks which traded only a couple of thousand shares a day. These stocks had a very wide bid/ask spread. For example, the market might show a bid of $20.00 and an ask of $21.00. If you entered a buy order at the market, you would buy at $21. And if you entered a sell order, you would sell at $20. Sometimes the stock would trade in the middle at $20.50, but large trades could easily move the market, and they would either pay too much to buy or get too little when they sold. Wall Street couldn’t touch these stocks and they were too small to bother.

The spread was often 5%: a $1 spread on a $20 stock. And since the expected return of the whole market was only 10% a year, making 5% on a trade over a day or two seemed pretty attractive. So, I would set a buy limit order at the Bid price of $20 and be the ready buyer for anyone who wanted to sell. And once I had shares, I would set a limit order to sell at the Ask price of $21. When this worked, I could make 3-5% in a day or two. And then once I had sold, I would try to buy back again at $20 and repeat the whole process.

Man Plans, Market Laughs

It worked as planned about half of the time. Sometimes however, the stocks kept on going up. I bought at $20, sold at $21, and then the stock went up to $25. I realized a small gain and then missed out on a big gain. Then I had to decide if I wanted to buy the stock at a much higher price or hope it came back down.

Other times, the stock would drop – I bought at $20 and soon the stock is $18. If I had 100 shares at $20, I would buy another 100 shares at $18 and lower my average cost to $19. Now, I only need the stock to get back to $19 for me to sell and break even. I would set a limit order to sell at $19 and hope I can get my money back.

If the stock would recover to $19, I’d sell. But the stock might then go to $22 and I would again have missed out on gains. Other times, the stock would continue to fall to $16, and I would buy more shares at $16 to try to average down further. But I was only increasing my losses.

At the end of the year, I’d have a lot of successful, but small trades where I had gains of 3-5%. And I would have a couple of large losses of 20%-30%, which I had magnified by buying more shares.


Did my trading work? Sort of. I had a profit. In fact, in 2003, I was up 35% in spite of being in cash for a large number of days that year. But here are some of the things I learned:

  1. I made 35% in 2003, but the S&P 600 small cap index was up 37% that year. All the hours I spent researching stocks and following the market daily were not productive. I would have been better off using an index fund and spending my time elsewhere. Everyone thinks they’re a genius when the market is going up.
  2. Costs and Taxes matter. All my gains were short-term capital gains, taxed as ordinary income. With an index fund, I could hold for longer and eventually get long-term capital gains tax at 15%. Back in 2003, each trade cost $19.99 and I paid thousands in commissions that year.
  3. No one can predict individual stocks and speculation will humble you. Investing is better than trading: diversify and remain a buy and hold owner. Prices going up and down are noise.
  4. Let your winners run and harvest your losses. Humans are wired to do the opposite. I cut my gains short and doubled down on the losers. This comes from two behavioral biases: loss aversion and anchoring bias. I was fixated on shares getting back to even.
  5. Simple is usually more effective than complex. Focus on the long-term, not the short-term.

Today, markets are more liquid and most bid/ask spreads today are 1-5 cents. This is much better for investors. In spite of the prevalence of index funds, however, there is still a lot of speculation on individual stocks. Every morning, I read about stocks which were up 4% or down 7% in the previous day. It’s interesting, but not an opportunity. And of course, I have written many times about how managed funds under-perform index funds. I understand the allure of picking individual stocks, but today I have realized that stock picking is less beneficial than asset allocation. Investors don’t become wealthy because of stock picking, but through saving and time in the market.

The More Things Change

The past 20 years have seen some remarkable market events. The Global Financial Crisis of 2008-2009. The Lost Decade of stocks. Zero Interest Rate Policy. Coronavirus and then 9% inflation. Everything seems to have been a “never-seen-before” moment. And yet somehow, what has always worked, still works. I look back to every low point and think, wow, that was such a great buying opportunity!

I’m looking forward to the next 20 years of financial planning. I have no idea what we will see. How will we fix Social Security and Medicare? What is going to happen with the global debt levels? Will inflation remain elevated? Will AI save the economy and create a productivity boom, or destroy jobs?

What the last 20 years have reinforced for me is that we don’t have to know what is going to happen. We save, invest, diversify, rebalance, and keep costs and taxes low. That formula has built wealth for generations. We will continue to learn and improve, but the foundation of the financial planning process is timeless. We are awash in information today, but in spite of all the available knowledge, wisdom still requires experience.

My three month old daughter is asleep in the next room as I write this. Having a child is the ultimate form of optimism. We must have confidence, patience, and faith in a positive outcome. Along the way, there will be ups and downs, but ultimately growth is headed in the right direction. Our years are determined by our days. If we manage our days right (and weeks and months), the years take care of themselves. But we have to think about the years, when deciding how we use our days.

And so it is with money. I remain very optimistic about the work we do for clients and about the remarkable opportunity for Americans to achieve financial independence. There has never been a better time to be alive. Thank you to everyone I have met along the way for a great 20 years!

Performance Chasing Versus Diversification

Performance Chasing Versus Diversification

The chart below highlights the perils of performance chasing versus the benefits of diversification. This chart from JP Morgan shows the annual performance of major investment categories from 2008 through 2023. It includes US Stocks (large and small), Developed Markets, Emerging Markets, Fixed Income, Cash, Real Estate, and even Commodities.

The results are all over the place. What is often the best investment in one year turns out to be the worst investment the next year. Consider:

  • Commodities were the best category in 2022 and the worst in 2023.
  • Real Estate Investment Trusts (REITs) went from worst in 2020 to best in 2021, and back to worst in 2022.
  • Cash was the worst investment in 2016 and 2017, then the best in 2018, and back to the worst in 2019. It was however, positive, in each of these years!
  • Emerging Markets Stocks were the worst category in 2008 then the best in 2009. EM was the best in 2017 and then the worst in 2018.

Past Performance Is…

Today a lot of investors are experiencing FOMO because they didn’t own enough Tech stocks in 2023. A small number of stocks (seven, in fact) crushed the rest of the US stock market as well as the other categories. There is a palpable frustration to have a diversified portfolio and lag funds which are concentrated in a few growth names.

This January, investors are looking at their 401(k) or IRA statements and wondering if they should make a change. They see that the XYZ Growth fund was up 40% last year, and it is tempting to drop their diversified portfolio in favor of a fund that performed better last year.

This is performance chasing. It is abandoning the benefits of diversification in favor of betting on what has been hot recently. And it is hazardous to your wealth. Often, what is at the top one year will under-perform in the following years. If you chase performance, you will often buy a hot sector just as it is about to go cold. And then you find that you are switching funds every year because there is always a “better” fund. Just remember, past performance is no guarantee of future results!

Valuations Matter (Eventually)

Today’s market has some similarities with the Tech Bubble in 1999. People got very excited about a relatively small number of Tech companies and bid them up to expensive valuations. Those stocks became quite bloated and drove up the multiple of the entire US stock market. In the frenzy, there were a lot of people who bought tech funds at or near the top. They were late to the party and missed the big gains in 98 and 99, but were invested very aggressively when the bubble burst in 2000.

Stocks were so overvalued that we had three years of subsequent losses in the S&P 500: 2000, 2001, and 2002. That had never happened before. The amount of wealth that was wiped out in the Tech Bubble was truly staggering. The bubble seems pretty obvious in hindsight, but human nature has not improved since 1999. We are prone to make the same mistakes.

I don’t know that we are in a new Tech Bubble, but the lesson remains the same. We don’t chase performance, we invest based on valuation. Our portfolios are diversified across many categories, and rebalanced annually. We use index funds and focus on keeping costs and taxes low.

Our tilts towards areas of greater expected return actually means that we do the opposite of performance chasing. We prefer to buy what is on sale, cheap, and out of favor. We are looking for the categories in the lower half of the chart to return to being in favor. This is a disciplined, long-term process which has worked over time. (See: Our Investment Themes for 2024.)

Reversion To The Mean

In the short run, expensive stocks can still go up in price if there are enough buyers. That’s where we are today, but the party won’t last forever. US Growth stocks are expensive and have a lower expected return going forward. The expensive valuations are expected to gradually revert down towards historical levels. And the inexpensive categories have room to return to more normal valuations. The chart below shows Vanguard’s projected returns over the next 10 years.

Over the next decade, Vanguard forecasts US Equities to have an annualized return of 5.2%, versus 8.1% for International Equities. With performance chasing is investors are looking backwards. They project recent returns into the future (Google “recency bias“), rather than recognizing that returns average out over time. Instead of piling into the hot stocks, sectors, or categories, investors should stay diversified and also own the categories which have under-performed.

Performance Chasing is a constant temptation because a diversified portfolio will (by definition) always lag some small subset of the market. There is always a hot category. Unfortunately, no one has a crystal ball to predict what will be the next hot investment and jumping around is more likely to harm than help returns. Thankfully, investors are well-served by ignoring the noise and staying on course with a diversified portfolio designed for their needs and long-term goals.

Investment Themes for 2024

Investment Themes for 2024

Each year, I rethink our portfolio allocations and today I am sharing our Investment Themes for 2024. We don’t time the market, nor do we try to predict how the market will perform. I think this is not only impossible, but also likely to cause more harm than good. We remain globally diversified, use index funds, and maintain a buy and hold philosophy. We have a target asset allocation for each investor and rebalance positions when they drift from our targets.

But that doesn’t mean we are completely passive. No, each year we slightly adjust our portfolio models in two ways. First, we look at current valuations and expected long-term returns (typically 10 years). With this information we add weight to the Core categories which have better valuations and expected returns. And we reduce categories which might be overvalued and have lower expected returns. This is forward looking, rather than looking back at past performance.

The second adjustment we make to portfolios is to annually evaluate Alternative holdings for inclusion in our models. Alternative, or satellite, positions are smaller, more niche investments, which I don’t think merit permanent inclusion as a Core position, but may be appropriate at certain times. We will describe our alternative positions more below.

2023, Better Than Expected

2023 ended up being a great year in the stock market, with the S&P 500 up 24%. This was a shocker. A year ago, 85% of economists were predicting a recession in 2023. But it never happened and the consensus was wrong. A year ago, I wrote that in spite of the calls for recession, the bad news may have already been priced into stocks and that we would remain invested. You can read my Investment Themes for 2023 here. And here are links for my 2022 Themes and 2021 Themes.

Although the S&P 500 and NASDAQ had a great year in 2023, it was aften a frustrating year for investors. Market breadth was poor and performance was concentrated in a fairly small number of Growth and Technology stocks. 2/3 of stocks did worse than the S&P 500 average. And other categories, such as International, Small Cap, or Value, lagged the Mega-Cap names.

It was also a strange year for bond investors. Rising interest rates pushed down the prices of bonds, and detracted from their performance. So, unfortunately, bonds did not add much to the bottom line in 2023. But the flip side of rising rates is that we have purchased very attractive yields which we will hold and profit from for years to come.

Economic Expectations and Stocks

Markets had a great 2023 and the US avoided a recession. But I am afraid this is no guarantee that the economy is in the clear now. The Federal Reserve raised interest rates and has managed to bring inflation down to 3% without damaging the economy or causing higher unemployment – yet. In the past, such aggressive tightening by the Fed has led to a recession. Will they finally be able to engineer a “soft landing” and not cause a recession? The strength and resilience of the US economy in 2023 is truly the envy of the world.

Unfortunately, I think we need to remain cautious and recognize that it is possible that 2023 only postponed a slowdown rather than avoided one altogether. Today the consensus is that the Fed is done raising rates and will start cutting interest rates later in 2024 once inflation is closer to their 2% target. But none of this is a guarantee that a recession is off the table. 2024 could be another volatile year.

And where are we in terms of valuations? US stock earnings grew by 3% in 2023, but stock prices went up 24%. That means that now US stocks are even more overpriced and the expected returns going forward are lower. The returns of 2023 are surprising because they are unwarranted. US growth stocks have become more expensive, not better.

Looking at our core stock categories today, we have the same themes, but only more so. US Value is cheaper than Growth and has a higher expected return. International has a higher expected return than US. Small Cap is attractive relative to large cap. Emerging Markets have strong growth potential. We were already tilted towards Value and International at the start of the year, and this was early. US Growth outperformed in 2023, but the case for Value and International has only grown stronger and more compelling. Our outlook is for more than one year at a time, and sometimes that means we have to remain patient to see a reversion to the mean.

For 2024, we will make a small addition to our International funds, from our US Midcap funds. We use Index exchange traded funds (ETFs) for our Core positions.

Source: Vanguard Economic and Market Outlook for 2024, published December 2023

Interest Rates and Bonds

Interest rates rose steadily through October of 2023. We continued to buy individual Investment Grade bonds. Our core bond holdings are laddered from 1-5 years and we generally hold to maturity and reinvest. 2023 offered the best yields available in the past 15 years. We wanted to lock in some of these yields for longer, and so we had extended duration in 2023, adding some longer term 10-15 year bonds.

Interest rates peaked in October with the 10-year Treasury briefly touching 5%. Since then, the 10-year has fallen to 3.9%, a massive move in a very short period of time. (This high demand for bonds, and inverted yield curve, is a red flag for stocks and the economy.) We’ve seen a lot of Agency bonds getting called and refinanced to lower rates. And so it is possible we have seen the peak interest rates for this cycle already.

I am glad we were buying when we did and that we extended duration. Today, it is less attractive to buy longer bonds, and our purchases in 2024 will return to being on the shorter end of the yield curve. We will not be adding to bond holdings in 2024, just aiming to maintain our 1-5 year ladder as bonds mature or are called. But there is a good rationale for holding bonds. Real yields (after inflation) are attractive. We have purchased yields which are comparable to the expected 10-year return of US stocks. And so, the 60/40 portfolio at the start of 2024 looks better than it has in years. And if we have a Bear Market in stocks in the next couple of years, the bonds will be defensive and give us the opportunity to rebalance and buy stocks when (not if) they drop.


Bond yields have been so good in 2023 that the appeal of alternatives is less. Why take on a volatile, complex investment if T-Bills are yielding over 5%? We will not be adding to any alternative or satellite categories in our 2024 models. We have several existing positions, which we will continue to hold.

TIPS (Treasury Inflation Protected Securities) were added in 2022 and they have given us a good inflation hedge. Our largest TIPS holding will mature in 2027 and at this point the plan is to hold to maturity. Inflation is less of a concern now, but our TIPS are still paying a decent yield.

Last year, we trimmed our holdings in Preferred Stocks, which sold off as interest rates rose. Today, they have started to bounce back and offer yields over 6% while often trading at a 30% discount to their Par value. The current 6-8% cash dividends we receive from Preferreds is above the expected return of common stocks. I’m happy to have that cash flow for retirees or to have cash to reinvest throughout the year. There is some potential for price appreciation in the next rate cutting cycle, but I am happy to hold these for the dividends and ignore any price volatility.

Our third satellite holding is a small position in Emerging Markets bonds. We use a Vanguard fund and ETF, which offer low cost diversified access to this high yield sector. I’ve seen that this category often bounces back well after a difficult year. And after being down in 2022, our fund was up nearly 14% in 2023. The fund begins 2024 with a 7% yield.

Staying On Course

We look each year to make some minor changes in our allocations, and communicate these ideas in our “Themes” letter. But, I think the real key for investors is to think long-term and be willing and able to stick with the process. There will inevitably be ups and downs and the markets often surprise us and don’t do what we expect. We have done well to stick to the basics: Don’t try to outsmart the market. Buy and Hold index funds. Keeps costs and taxes to a minimum.

If you have questions about our Investment Themes for 2024, please reach out. Even with these themes, we still have different investment models for our clients’ individual needs, risk tolerance, and time horizon. 2023 was a year full of surprises, and we will have to see what is in store for 2024!

Home Mortgage Strategies

Home Mortgage Strategies

With the 30 year mortgage rate at 7.50% today, it’s time we revisit home mortgage strategies. Loving your home is an undeniable part of the Good Life. In the past couple of months, we’ve had several clients who have moved or looked at buying a second home.

Understandably, the 7.5% mortgage rate is giving many people anxiety about this decision. And that is exactly what the Federal Reserve wants. To slow housing inflation, they needed to drive out buyers and reduce speculation to cool an overheated market. With home affordability problems in many areas, it may be a good thing to slow the rapidly rising house prices of recent years.

In the past, we might have seen real estate prices plummet given how quickly the Fed has raised interest rates. Prices today are not dropping, but at least the prices have stabilized and are no longer growing at double digit rates. We have an under-supply of housing, and there is relatively little construction of single family homes occurring, given the nationwide need. What is unique for 2023 is that sellers are disappearing, unwilling to move out of a home with a 3% mortgage (you will see why, below). There were 300,000 fewer homes on the market in September 2023 compared to one year earlier. Inventory remains very thin and that is why prices do not appear likely to drop anytime soon.

2023 versus 2021

We’re going to look through some mortgage examples and share some of the numbers that are typical today. We will go over a couple of home mortgage strategies that still make sense today. And we will revisit our philosophy and beliefs about home ownership.

The median home price was recently $412,000. For our examples, we are rounding that to $400,000 and putting down 20%, or $80,000, for a mortgage of $320,000. With a 7.5% 30-year mortgage, your monthly payment including taxes and insurance would be around $2,671 depending on your location.

For the rest of our examples, we are going to strip our taxes and insurance from the monthly costs and only look at the principal and interest payments. Your mortgage-only payment would be $2,237.49 a month. Over 30 years, you will pay a total of $805,495.11, in payments. That will repay your $320,000 loan plus $485,495.11 in interest payments. You will, in effect, be paying 150% more in interest than you borrowed. Borrow $320 thousand, pay back $805 thousand. It is just obscene, although not without precedent. Your parents may have had a similar mortgage rate at some point in the previous century.

Staying Put

If you had made the same purchase in 2021 with a 3% mortgage, or refinanced, it is a very different story. Your principal/interest payment would have been only $1349.13 a month, almost $900 less a month. Over 30 years, you would pay total payments of $485,687.85. That is only $165,687.85 in interest plus $320,000 in principal. And it seems much nicer to know that you are primarily paying principal and the interest payments are much less.

If you have that 3% mortgage, you probably don’t want to move to a new house. The 7.5% rates are keeping you out of the market, which again, is just as the Fed wants. There’s no doubt it can be preferable to stay put and enjoy your low mortgage rate. A few thoughts about your 3% mortgage:

  • Don’t send additional payments to a 3% mortgage. There are money markets, CDs, and government bonds yielding 5-6% today. Only send the minimum mortgage payment. Talk to me if you have extra cash.
  • Will it cash-flow? Rather than selling, have you considered turning your house into a rental or Airbnb? It is a lot of work and not for everyone. However, if you have a 3% mortgage, you have a much better possibility to turn a profit than a new investor who is going to have a 7.5% mortgage (or higher).
  • Downsize. If you have built a lot of equity into your home and have more space than you need, I would not hesitate to downsize. If you can take your tax-free gains and buy a small house for cash, this can improve your retirement readiness. Having no mortgage at all can be very freeing.

Jump Starting Your Amortization

Back to our $320,000 mortgage at 7.5%. You’ve just bought this house and now have a monthly payment of $2,237.49. In the first month, that payment includes $2,000.00 in interest and only $237.49 in principal. In the second month, your payment would consist of $1998.52 in interest and $238.97 principal. These high interest rates have a horrible, ugly amortization schedule. Your initial years of payments are primarily interest and you hardly make a dent on your principal.

After three years of payments, you will have made $80,550 in mortgage payments, but only paid $9,555 in principal. If you go to move, you would still owe $310,455 on the mortgage. All this money spent on interest is gone.

Now, let’s take a look at what would happen if you could make a one-time extra payment of $10,000 in the first month. This is probably the last thing any new homeowner is thinking of doing, but let’s run the numbers and talk about why it might be a good idea.

That one early payment of $10,000 will reduce your loan by 37 months, saving you $73,452 in interest over the life of the loan. And it jump starts your amortization, shifting $62 from interest payments to principal payments every month.

Mortgage Strategies:

  • If you have a 7.5% mortgage, try to make prepayments as early as you can. This can dramatically shorten your loan. Every dollar of principal will save you a multiple of interest in the years ahead.
  • Evaluate your cash levels. Keeping a ton of money in the bank at 0% while you have a 7.5% loan isn’t helping. Make those prepayments now and avoid excess cash. Here is a Prepayment Calculator to estimate your situation.

15-Year Mortgage

I’ve long been a fan of the 15-year mortgage and have written about it previously. I’ve used 15-year mortgages previously on primary residences and been very happy with the decision.

Back to our example, we buy a $400,000 house and put down $80,000 leaving us with a $320,000 mortgage. With a 15-year mortgage, the interest rate today is 6.75% rather than 7.50% for the 30-year. Yes, the 15-year mortgage is going to be more expensive. It will be $2,831.71 a month, versus $2,237.49 for a 30-year. For less than $600 extra per month, you can cut your mortgage in half, from 30 years to 15 years. I like that, and it will help reduce expenses for retirement.

The 15 year mortgage also allows you to more rapidly build equity in the house, with more of each payment going towards principal. Remember for the 30-year, the first payment of $2,237.49 consisted of $2,000 in interest and $237.49 principal. With the 15-year, your first payment of $2,831.71 consists of $1,800 in interest and $1,031.71 of principal. I prefer this quicker amortization – the payment is $600 more, but $800 more is going towards principal.

After 15 years, you own a house outright with a 15-year mortgage. You might think that after 15-years, you would be halfway through a 30-year mortgage, but that isn’t the case. You would still have a balance of $241,365 of your original $320,000 loan. In the first 15 years, you paid less than 25% of the principal, and will pay 75% in the second 15-years. So, if you decide to move after 15 years on a 30-year mortgage, you have not accumulated a lot of equity to put towards the next home.

Home Perspectives

No doubt that a home is a key to building wealth. Oh no, I don’t mean that a home is a good investment. Not at all. Rather, a home is an expense, your largest liability. Choose poorly and a house can consume all your income and leave nothing left to save and invest. Living beneath your means remains the way to accumulate wealth. Consider House Hacking if you really want to minimize your expenses. So, a few more thoughts, most of which I have shared previously.

  • Don’t wait for a housing crash. The supply of homes may be well under the demand for many years. I think we are unlikely to have a repeat of the 2008 housing sell-off, at least on the nationwide level. You can buy now, and potentially refinance in a couple of years if interest rates drop. But we also might see house prices rise again with lower interest rates as houses become more affordable. So, waiting for lower house prices or lower mortgage rates is not guaranteed to be beneficial. If you can find a great long-term home today, maybe it still makes sense long-term.
  • Renting has become more attractive. In most of the country, renting is now much cheaper than buying. Renting gives you fixed expenses, few surprise repair costs, and the flexibility to move. There is too much pressure to own a home in the US. For many people, renting is preferable, especially if you plan to be there for less than 5-10 years.
  • Your home is not an investment. Over the long-term, house prices only have done a little better than inflation. And that statistic is highly misleading because it doesn’t account for expenses. Don’t buy a home hoping for substantial appreciation. Buy it as a place to live and for your family.
  • Tax benefits. Sorry, most people are not getting a tax benefit from their homes anymore. And yet, I still see realtors talking about tax benefits. The standard deduction for 2024 will be $14,600, or $29,200 for a married couple. Very few people will actually have enough in mortgage interest and property taxes to take an itemized deduction. Also, there are caps on what you can deduct: State and Local taxes up to $10,000 and interest only up to $750,000 of a mortgage. Most of my clients used to itemize before 2017 and almost none of them do today.

Financial Planning

Financial Planning is more than just investing well, and that is why we talk about things like Home Mortgage Strategies. The 7.5% mortgage rates are hurting home affordability. If you have to buy a house, understand what your amortization looks like and try to be sure to refi if you can save one percent or more. Back in 2020, I saw people who were looking at paying off a 3% mortgage because cash yields were so low. We discussed the opportunity cost of paying off a mortgage, and that still applies today. Unfortunately now in 2023, the expected 10-year return of stocks have not changed as much as mortgage rates have, and so today the weight of leverage at 7.5% is too great to ignore.

If you are thinking about moving, carefully consider the home mortgage strategies we discussed. Staying put can make sense. If you have an expensive mortgage, consider making prepayments in the early years. If you can afford it, choose a 15-year mortgage. I worry a lot about housing because it has become so much more expensive that people risk being House Rich and Cash Poor. And then, there is nothing left to invest. A home is often the biggest purchase of your life, so choose carefully! Think about how will this help to maximize your future net worth.

Taxes Living Abroad

Taxes Living Abroad

Since we moved to Paris in February, we’ve become much more familiar with taxes living abroad. This may be of interest to anyone who is thinking of living or retiring to another country. I will share the situation for me as a US citizen living in France, but the basics will apply to most countries.

If you thought US taxes were complex, things get really difficult when you add in a foreign tax system and then have to figure out how they will interact together. Given this complexity, this article should be considered just a primer on basic terms and not used as individual tax advice. You need a tax professional who has experience with US clients living abroad.

In general, US citizens have to pay US income taxes on their global income, regardless of where you live. You don’t get out of US taxes by going abroad. But you may be able to reduce your US taxes and that is what we will discuss. Also, there are many other tax considerations besides the annual income tax bill to understand.

Tax Residency

If you spend more than one-half of the year in France (183 days), they will likely consider you a Tax Resident of France. This makes you subject to full France income taxes, which is levied on your global income. If you live in France less than half the year and are not a tax resident, you would still be subject to France taxes on any French derived income.

If all your income sources are from the US, you could potentially live abroad for just under half of the year and not become a Tax Resident. And then you would only have to file US taxes. Currently, as a US tourist, you can stay in the European Union for up to 90 days out of the rolling previous 180 days. Make sure you fully understand the “rolling 180 days” part – it is not based on a calendar year. If you can stay a tourist and not become a tax resident, this will make your life much simpler!

Avoiding Double Taxation

For a US citizen living abroad, you have the problem of double taxation. Your income will be taxed by your resident country and then it will be taxed again by the US. Thankfully, there are tax treaties with 70 countries which provide some benefit and there are several ways to reduce or eliminate the double taxation. Still, you will need to file a US tax return even if you don’t end up owing any US taxes.

Foreign Earned Income Exclusion

The US tax code allows for a citizen to exclude up to $120,000 (2023) in Foreign Earned Income from being taxable on your US taxes. This is doubled to $240,000 for couples who are married filing jointly and who both have foreign wages. You must live abroad for 330 out of the past 365 days. For someone whose income is below the FEIE threshold, you could end up with zero taxable income for the US. You would calculate this exclusion on IRS form 2555 “Foreign Earned Income”.

The FEIE does not apply to any US wages or to any US capital gains, dividends, interest, rent, or other US sourced income. So if you have US wages or income, those earnings are still taxable outside of the FEIE amounts.

In addition to the FEIE, there is also a US tax exclusion for foreign housing expenses, which has a cap of 30% of the FEIE, or $36,000 for 2023. If you reduce your US taxable income to zero through the FEIE and/or housing exclusion, please note that you will be ineligible to make any IRA contributions. (Because your taxable income is zero.)

Foreign Tax Credit

Alternatively, you may be able to claim a credit on your US tax return for foreign taxes paid. The FEIE may take many people’s taxable income to zero and you can stop right there. However, US citizens who make more than the FEIE thresholds, or who have some US-sourced income, may still owe US taxes. And in those situations, applying the Foreign Tax Credit may be preferable. Please note that you have to choose either the FEIE or the Foreign Tax Credit, but cannot do both.

In my situation, we will probably end up using the Foreign Tax Credit. That’s because we have both US and France sources of income (US for me and France for my wife). And since the French taxes will likely be higher than the US taxes, it may take our US tax bill to zero.

Except for one thing: although France taxes us on global income, they exclude Real Estate income. They believe that all real estate income should be taxed locally. And indeed, if you buy a rental property in France, they will charge you income tax on that property even if you never set foot in the country or become a tax resident. As a result, our AirBnb Properties in Hot Springs will remain solely taxed in the US.

One challenge with using the Foreign Tax Credit is that it requires that you finish your foreign taxes before you complete your US tax return. For many, this will require filing a US tax extension past April 15th. And once you are beyond April 15th, you have passed the window to make Traditional or Roth IRA contributions or to calculate 401(k) profit sharing amounts. You may not be able to determine your eligibility until you complete your tax return, so you might miss out on some opportunities.

Social Security

In France, the payroll tax for Social Security is 20%. That is much higher than the US contribution of 7.65% for Social Security and Medicare. However, the French contribution includes all social programs, including Health Insurance, unemployment, maternity leave, as well as “retirement” Social Security.

Although 20% is 12% more than what we would pay in the US, we don’t have any health insurance expenses in France. And so it may be fairly comparable to what we would pay in the US for total costs. As a self-employed person in the US, we might pay $1,200 a month for a family plan with a $5,000 deductible. That’s a $19,400 annual expense we don’t have in France. And the medical system here is excellent.

We just had a baby girl a month ago, and I have no complaints about the value we have received. I will say that the social charges here are a great deal if you have a modest income, but if you have a very high income, you may feel that you are paying in more than you are getting back.

Social Security Vesting

There is one problem for us, however, with social security taxes abroad. Just like the US Social Security, the French retirement system has a 10-year vesting period. Only after you have contributed for 10 years do you become eligible to receive a retirement pension. We do not plan to stay in France for 10 years, so all the money we will pay into their Social Security will not come back to us later in retirement.

Our French earnings are not credited toward the US Social Security system either. US Social Security benefits are calculated based on your highest 35 years of inflation adjusted earnings. We are effectively losing these years of contributions. We are paying in France for no future benefit, while losing the years that could have been added to the US benefits. There’s no 401(k) in France, so no other employer retirement contributions, either.

If you are considering working abroad, make sure you understand its impact on your future benefits! We have enough in ongoing savings and investments for this not to be a major problem, but it is an opportunity cost that we are missing by working outside the US.

Pitfalls Abroad

Besides wages, there are other tax events which could become major pitfalls when living abroad. Here are a few things which could become huge tax bills for US citizens in other countries.

  1. Home capital gains. In the US, we have a $250,000 capital gains exclusion on the sale of your primary residency. France does not. If your US house sale closes a week after moving to France, it occurred while you are a tax resident of France! Maybe you have a $100,000 capital gain which is ignored in the US but now taxable in France. Sell your house before you move! Or keep it.
  2. Gift Taxes. Large gifts to children or others are fine in the US with a lifetime Gift/Estate tax exemption of $12.92 million. Not so in France. Gift taxes could be 20% and apply with thresholds dependent on the relationship. There are even gift taxes between spouses! The French gift tax exemption is only 31,865 Euros per 15 years.
  3. Trusts not recognized. Based on Civil, not Common Law, France does not recognize trusts for tax purposes. Don’t set up US Trusts before becoming a tax resident abroad.
  4. Inheritance Taxes. If you are in France for more than six years, you are subject to inheritance taxes. These are paid by the recipient, unlike US Estate Taxes, which is paid by the Estate. The US threshold is $12,920,000 before any Estate taxes are due. In France, inheritance taxes start at 5% at 8072 euros, but steps up to 45% tax on amounts above 1,805,677 euros (2023).

Get Help

If you are contemplating working or retiring outside the US, taxes living abroad can be complex. Luckily, you’re not the first one to do this. You will want to have tax advisors in the US and in your new country who have experience navigating these complex rules. And having a Wealth Manager who understands the tax implications of your portfolio construction is very important, too.

When my wife’s employer offered her a position in their Paris office, it was an offer we could not refuse! It has been a remarkable opportunity. If you could have the chance to live or work overseas, I would encourage you to see if it is possible. The taxes are a headache and will take a bit more time, but I do think it will be worth it for the experience. Certainly part of achieving the Good Life is being able to fearlessly make the choices to live your life as you dream it could be!

Should I add more Bonds?

Should I Add More Bonds?

Yields have risen on bonds this year and for many investors it may now make sense to increase their bond exposure. Eleven months ago, I wrote how bond yields had actually crossed above the expected return for stocks. At that time, we could find A-rated bonds with a 6 percent yield. And that compared favorably to the 5.7% expected return of stocks, as projected by Vanguard over the subsequent 10-years ahead.

This past month, we bought some new 10-year government agency bonds with a 7% yield. Now it looks even better to be adding bonds and maybe even reducing some of your stock market exposure. Last November, the Vanguard Capital Markets Model suggested a 5.7% expected return for US stocks over the next 10 years. As of mid-year 2023, they have reduced that to 4.7%.

Even though stock predictions are usually very inaccurate, I do think it is worthwhile to look at these projections. While the historical returns of US stocks may have been 9-10% over the long haul, returns can be above or below average for an extended period. There have been many 10 year periods which have done better or worse than the “average”. There are many factors which can help us estimate returns, including starting equity valuations (such as the Price/Earnings ratio), corporate earnings growth, or productivity gains. It should not come as a surprise that when stocks are expensive (like in 2000), the following 10 years are below average. Or when stocks are beaten down and cheap (like in 2009), the next 10 years are often above average in return.

Portfolio Models

We manage a series of investment portfolios for our clients with an approximate benchmark blend of stocks and bonds. Our Premiere Wealth Management Portfolio Models include:

  • Ultra Equity (100% stocks / 0% bonds)
  • Aggressive (85/15)
  • Growth (70/30)
  • Moderate (60/40)
  • Balanced (50/50)
  • Conservative (35/65)

In the 4th quarter of each year, we analyze our portfolio models and make tactical adjustments based on where we perceive relative value. We overweight the segments or categories which have better expected returns and we reduce the categories which have a lower expected return. In addition to our Core holdings of Index Funds and investment grade bonds, we consider satellite investments in alternative categories.

But this year is different. We are now looking at bond yields that are above the expected return of US stocks. I think it may make sense for a lot of my clients to consider a healthy increase in their bond holdings. For the last 15 years, since the 2008 global financial crisis, bond yields have been absurdly low. Today, we have a chance to lock-in longer yields at a time when the stock market looks potentially mediocre for the next several years of returns.

I have thought for a long time about how to increase bond holdings. If we move a 60/40 portfolio from 40% to 50% bonds, we probably shouldn’t still call it a 60/40 model. So, instead of making large changes on the model level, I will be discussing with each client if we now want to consider reallocating from the 60/40 to the 50/50 model, for example.

Pro / Con of Adding Bonds

The hope, by adding more bonds, is to reduce volatility and have a smoother, more consistent return each year. If the 4.7% expected return of stocks is correct, bonds could out-perform stocks and improve the return of the overall portfolio. For investors close to retirement, adding bonds could reduce the impact of a large drop in stocks, right before income was needed. And for retirees taking distributions, the now high income from bonds means we can better meet your need for cash flow versus selling shares of stocks.

Of course, there is no guarantee stocks will under-perform as projected. The 10 year projection from Vanguard is an annualized average – the stock market will undoubtedly have years with very different performance than the annual average. Investors with FOMO may be unhappy in bonds, even 7% coupons, if stocks are up 20% in one year. Young investors who are making monthly deposits may prefer dollar cost averaging and not worry as much about stock market fluctuations.

Understand Callable Bonds

Many of the Agency, Corporate, and Municipal bonds available today are “callable” bonds. That means that the issuer has the right to pay off the debt early. “Calls” happens when interest rates fall and the issuer can replace their 7% debt with a lower yield bond. It’s just like refinancing a mortgage to a lower rate.

We don’t necessarily have to hold a 10-year bond to maturity. Here is how past economic cycles worked: Eventually, the economy will slow and fall into recession. At some point, the Federal Reserve cuts interest rates and we often see both short and longer term interest rates drop. At that point, the issuer of the 7% bond may be able to refinance down to 6% or 5%. So, they will call their bonds early and redeem them at full value.

If we are in a recession, it’s also possible that the stock market could be down 20% or more in that period. And that may be a good time to rebalance – to take the proceeds from the called bond and invest it back into a stock market that is beaten up. That certainly worked well in March and April of 2020. If interest rates drop, we are likely to get called and might not be able to find another 7% bond. But that may be okay, if we are willing to rebalance the overall portfolio and buy other investments when they are on sale. And of course, regardless of when a bond is redeemed, we made 7% a year, since we bought these bonds at Par.

Reducing Call Risk

Why not just buy non-callable bonds? I would if they were more available and at the same yields. Most bonds today are callable, with the main exception being US Treasury bonds. But the yield on the 10-year Treasury is 4.7%, not 7%. So, I am willing to take some call risk for the extra 2% in return. Still, there are some things we are doing:

  • Buying discount bonds. Older bonds with a lower coupon often trade at a similar yield to maturity as new issue (and high coupon) bonds. These are less likely to be called. And if we buy a bond at 90 and they call it at 100, that is great.
  • Preferred Stocks are also now trading at sizable discounts, often 60-70 cents on the dollar. If we are comparing a bond from Wells Fargo versus their Preferred Stock, there may be advantages of the Preferred. While they may have similar current yields, the preferred has upside to its $25 price. The bonds, trading near Par, have no price appreciation potential.
  • Fixed annuities (multi-year guaranteed annuities or MYGAs) generally are not callable. And since there is no 1% management fee on the annuity, a 5.5% 5-year annuity may net the same return as a 6.5% 5-year corporate bond. Except the annuity is guaranteed, unlike a corporate bond. So, if you aren’t needing flexible liquidity, MYGAs can reduce your call risk and lock in today’s interest rates.

Your Bond Strategy

We’ve waited 15 years to have bonds with these juicy yields. I think now is not a time to be too defensive with a money market or short-term T-Bills. Those are fine for your immediate needs. But at some point in the future, rates could drop. The risk is that when today’s 5.5% T-Bills mature, the new T-Bills might only yield 3% or 2%. Then we will regret not locking in the longer duration yields available to us now at the end of 2023.

These last four years have been quite a roller coaster for investors. A huge crash in March of 2020, followed the fastest recovery of stocks ever. Then unprecedented inflation. A Bear Market in 2022 brought a 20% drop. A recovery in 2023 that was limited only to a handful of tech stocks. A lot of stock funds have little or almost no gains to show for all this commotion. Stocks have been disappointing.

Bonds today offer a higher yield than the 4.7% expected return of US stocks over the next decade. That’s quite a shift and investors should pay attention – yields will not stay at these levels forever! We are always cautious in making large changes, but would generally prefer bonds over stocks if they had the same return.

Stocks are supposed to have an Equity Risk Premium to compensate you for their added risk and volatility. Not today. Bonds offer lower volatility, a more predictable return of “yield to maturity”, and current income. For retirement planning, these are very desirable qualities that can improve the outcomes of our planning simulations both before and during retirement years. These are the reasons will are looking to add more bonds today.

Do I Need A Trust?

Do I Need A Trust?

If you’re thinking about your estate planning, you might ask Do I need a Trust? And to answer that question, we have to first ask why you might want a trust. There are many types of trusts and it is not as simple as a generic Yes or No. Many people do not need a trust, but for other families it may be valuable or even essential.

In this article, we are going to talk about the reasons for wanting or needing a trust. If you are clear on the reasons, you can help your estate attorney make sure you have the best type of trust for you. These can be slightly different from state to state. Or you can determine that you don’t need a Trust to accomplish your Estate planning objectives. The taxation of trusts is often overlooked and sometimes misunderstood, even by attorneys.

Every small town offers estate planning, but if you have a complex situation, I would suggest you seek out an attorney who is board certified in Estate Planning. They are often better up to date with all the trust pros and cons for your needs. You don’t see your family doctor for a hip replacement, you see a specialist. Do the same for your Estate Planning.

Avoid Probate

One of the most common reasons to establish a trust is to avoid having to go to Probate Court to distribute your assets upon your death. Probate can take a year or longer in some states and has a number of costs, including court fees and attorney expenses. A Revocable Living Trust (RLT) can sidestep the probate process, potentially saving some time and expense for your heirs.

These types of trusts are generally fairly harmless. But they are not always necessary. Remember that some assets already do not go through the probate process. Non-probate assets include:

  • Joint accounts with rights of survivorship
  • Retirement accounts (IRAs, 401k, 403b, etc.) with a named beneficiary
  • Life Insurance and Annuities
  • Transfer on Death or Payable on Death accounts

If you have a house, car, boat, etc., with a title or deed, those assets MUST be retitled so that the trust owns the asset. Otherwise, those assets will still have to go through Probate. So, unfortunately, what often happens is that someone has a RLT but has one or two items which were not titled correctly, so they still have to go to Probate for those items. Please note that real estate goes to probate in its home state. So if you have a home in Texas and one in Colorado, you would need to go through Probate in both states. That is also a good reason for a RLT.

Spendthrift Trust

Another reason to have a trust would be to have a Spendthrift provision. A “Spendthrift” is someone who spends in an irresponsible way. Sometimes that may mean a gambling, alcohol or drug problem, or a mental illness. If you are concerned that one of your heirs is going to waste the money and squander their inheritance, than you may want a trust. The trust can stipulate how much a beneficiary can withdraw or present them with an allowance rather than a lump sum. Or you can establish a trustee to oversee the distribution of money to ensure that the beneficiary is doing okay.

Family Considerations

There are other family reasons for establishing a trust. First, consider minors. If an minor is a beneficiary of an estate, they cannot receive the money. Instead, the probate court will appoint a trustee, based on their rules. Then when the child reaches the age of majority, 18 or 21 depending on the state, they will have access to 100% of the money. You might prefer a trust to hold this money and provide access at a later age or for specific reasons (such as education, medical, buying a first home, wedding, etc.).

Second, a trust may help keep money in the family in case of divorce. You may love your kids but not be certain about their spouses or future spouses. Some states, like Texas, can preserve inheritance money as a separate asset, not subject to division in a divorce. Other states do not. The risk is that the funds are commingled or squandered. So a trust may again be appropriate in these situations. Half of all marriages are ending in divorce and that may well include your kids.

Third, you may have future grandchildren or great-grandchildren. A trust could provide for a longer inter-generational transfer to unborn generations. It might also be helpful in preventing some heirs from deciding not to work and to spend the inheritance on lavish cars, houses, and vacations. Many successful entrepreneurs worry about how an inheritance could de-motivate their heirs from pursuing their own careers. Why go to Medical School if you are already a multi-millionaire at 18? A trust can set some rules.

Fourth are Special Needs Trusts. If you have an heir who has a physical or mental disability, you may want to establish a Special Needs Trust. Generally, these trusts are created to provide a supplemental benefit while still allowing the beneficiary to qualify for Medicaid or state funded care.

Fifth, What if you are remarried and have a blended family with children from previous marriages. You may want to leave income to your spouse but leave the remainder or principal to your children. Otherwise, there is potentially a possibility that your spouse could remarry after you are gone or decide to cut your children out later. One solution is a Qualified Terminal Interest Property Trust, called a QTIP.

Estate Tax and Asset Protection

We wrote extensively last week about the Estate Tax and how the exemption is set to be cut in half in 2026. A lot of families who are not thinking about the Estate Tax could be subject to a 40% tax in the future. And that risk is a very real reason to consider an Irrevocable Trust today – to lock in the very generous Estate and Gift exemption we have in 2023 through 2025. Today, a couple could put in almost $26 million into a Trust, without gift taxes, and avoid a future estate tax, even if Congress later lowers the Estate Tax Exemption.

Moving assets out of your name and into a trust could also protect those assets from creditors. If you are concerned about a lawsuit or bankruptcy, moving assets out of your name may be a good idea. For some professions and businesses, this is a very real risk.

Trust Taxation

Be sure to ask and understand how any proposed trust will be taxed in the present and future. Taxes can be misunderstood by families who thought a Trust was doing a great thing for heirs. Some trusts are pass-through entities, where the income taxes are payable by the grantor or the beneficiaries.

Other trusts are their own entity and have to file their own tax return. And this type, you need to be very careful. Trust and Estate tax rates are much worse than individual tax rates. Both trusts and individual have the same top rate of 37% in 2023. But the Trust reaches that 37% tax rate at only $14,451 of income versus $578,126 for an individual (2023).

Billionaires don’t care about trust tax rates because they and their heirs are always going to be in the top tax bracket. To them, the trust tax rate doesn’t matter. But for most beneficiaries, there will be a large increase in taxes if the trust is a taxable entity.

For example, consider $100,000 ordinary income to an individual versus a Trust (2023):

  • Individual taxpayer (after $13,850 standard deduction) = $14,261 tax
  • Trust with same income = $35,144 tax

It may be that the other goals: spendthrift, family, estate planning, etc., outweigh the additional tax costs. But you should fully understand what the taxes will look like while you are alive and also for your heirs.

Two other questions to ask about taxes before entering a trust:

  • Will my heirs receive a step-up in cost basis if the trust owns this asset when I pass away? In many cases, this answer alone may dissuade you from certain types of trusts.
  • What will happen if I name the trust as beneficiary of my retirement account or life insurance policy? In some cases, certain benefits may be lost if a trust is a beneficiary rather than a natural person.


Do I need a trust? To answer that question, we’ve outlined two areas of focus. First, be very clear about why you need a trust. Is it to avoid probate, for a spendthrift, for family reasons, to reduce estate taxes, or protect assets from creditors? These require different approaches. Second, be sure you understand how the trust will be taxed today and in the future. Some are simple and some are complex and can be costly for your heirs. There are no tax-free trusts, someone is always liable for taxes and you need to understand how this works.

Every family should have a Will and related estate planning documents: a Durable Power of Attorney, a Physicians’ Directive, and Health Care POA. Keep these up to date, especially if you have a change in your beneficiaries, executors, or trustees. If you don’t have a specific need for a trust, it’s quite possible that you don’t need one. I am not of the opinion that everyone must have a trust. In many cases, the majority of their assets can pass outside of probate, just through beneficiary designations or TOD accounts. There are pros and cons to that approach, too.

If you do establish a trust, please share it with your financial advisor. It may even be beneficial to set up a meeting or call with you, your attorney, and your financial planner to ask questions about account titles, beneficiary designations, and taxes. That way, we can work together to make sure your estate plan will work as intended. Our Wealth Management process is often planning for several generations and not just for this year or even for just your retirement. If you are thinking about how your money can benefit your family long-term, let’s chat.

What Is The Estate Tax?

What Is The Estate Tax?

Many investors are unclear about exactly what is the estate tax in the United States. Thankfully, very few people currently have exposure to the estate tax. However, for wealthy families, the estate tax can be significant. Even if you are not currently subject to the estate tax, you might be in the future, and you need to read this article. Here’s what you need to know about the estate tax and key planning strategies to reduce a future estate tax liability.

Estate Tax in 2023

Today, for 2023, the estate tax exemption is $12,920,000 per person. This is the amount that you can pass on to other people without paying any estate tax. If your estate is above this amount, your estate pays tax on the amount above the $12,920,000 threshold. The tax begins at 18% and increases to 40% once you reach $1 million above the threshold.

Spouses have separate exemptions, so a couple can effectively have an estate of $25,840,000 before owing any estate taxes. The exemption is indexed to inflation and is increasing each year. The tax must be paid by the estate before the assets are distributed to your heirs. There is no estate tax for leaving assets to your spouse, provided that your spouse is a US citizen.

Please note that the estate tax has nothing to do with “probate”. Items which are excluded from probate, such as retirement accounts, life insurance, TOD accounts, and revocable trusts, are still included in your assets for the calculation of the estate tax.

When I became a financial advisor two decades ago, the estate tax exemption was only $1 million. A lot of people were getting hit by the tax and planners were much more focused on the estate tax. Over the past 20 years, we’ve seen the exemption expanded greatly. Today, there are relatively few families who are subject to the tax, but that is likely to change.

The Future of The Estate Tax

The estate tax exemption is set to be cut in half in 2026. The current exemption amount is scheduled for sunset as part of the Tax Cuts and Jobs Act of 2017. On January 1, 2026, the exemption will drop to around $6.5 million or so (depending on inflation over the next couple of years). And immediately, people with over $6.5 million will be subject to the estate tax.

For example, if you have $11 million as an individual, your estate tax would be $0 today. But in 2026, if the exemption is $6.5 million, your heirs would owe estate tax on $4.5 million. The tax bill would be $1,745,800.

Of course, Congress could act to extend the exemption amount or even increase it. We don’t know what will happen. Personally, I don’t think there is much appetite in Washington for continuing or expanding the estate tax limits. Given the increased perception (and reality) of wealth disparity in our country, it seems unlikely to me, especially with our growing debt and deficits. It is easier to raise taxes on the 1%. There were candidates in the previous presidential election who proposed lowering the threshold to $3.5 million and increasing the tax to 45%. So, it will definitely depend on who is in control in Washington in 2025-2026, but the writing is on the wall. I think the estate tax threshold is likely going lower, maybe a lot lower. It’s a real risk.

Wealthy Americans who have $3 million to $26 million as a couple presently don’t have to think about the estate tax. But that seems likely to change, and families in this range could have a different situation in the future. Also, make sure to consider a calculation of future growth. With a hypothetical 7% annual return, $5 million will become $20 million in 20 years. Just because you don’t have an estate tax liability today is no guarantee you will not in the future.

Thankfully, there are a number of planning opportunities to reduce your future estate tax exposure.

State Estate Taxes

Before we get to estate tax strategies, there’s more bad news. A number of US states impose their own estate tax or Inheritance tax, on top of the US estate tax. And all of these states have a MUCH lower exemption, ranging from $1 million in Massachusetts to $5.9 million in New York, meaning that even if you don’t pay a federal estate tax, you could end up owing estate tax to your home state. Residents of these states will pay both the state and the federal estate tax.

States with an estate tax include: CT, DE, DC, HI, IL, MA, MD, ME, MN, NE, NY, OR, and WA. The following states impose an inheritance tax, which is similar, but imposed on the beneficiary rather than on the Estate: IA, KY, MD, NE, NJ, and PA. State estate tax rates are up to 20%. This is in addition to the Federal estate tax, so the combined estate tax could be over 50% in certain states.

Planning for the state estate tax can be very simple. Move to another state without an estate tax or an inheritance tax.

Ways to Reduce the Estate Tax

Below are ways to reduce the estate tax and it is by no means a complete list. Each of these strategies below could be a full article. There are many planning strategies we could use, depending on your individual situation.

  • Charitable giving. Your gifts to charity reduce your estate and if done in advance can also provide income tax benefits. Don’t forget Qualified Charitable Distributions from your IRA if you are over age 70 1/2. Better to gift over time, rather than at death, to maximize income tax deductions, which are limited to 50% of Adjusted Gross Income annually.
  • Use your annual gift tax exclusion of $17,000 (2023) per person. You can also pay an unlimited amount for medical and educational expenses. Pay for your grandchildren’s college directly.
  • Give your heirs $12,920,000 now and use up your lifetime unified exemption today. Or establish an Irrevocable Trust with this amount. When you give away or fund the trust now, the IRS cannot later charge you gift or estate taxes if the future exemption drops. You have locked in your gift at $12,900,000. And next year, if the exemption does increase, say to $13,050,000, you could give away another $150,000. This strategy is essential to do before 2026.
  • Establish a family limited partnership (