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How a Financial Advisor Helps You Protect and Grow Net Worth 10.20.2022

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Building and Protecting Personal Net Worth
Emotional Awareness – Strike a Balance between Life Now and Planning for Later
Financial Advisor vs Financial Planner
Find a Financial Advisor Who Will Understand Your Specific Goals
The First Step – Ask Around!
The Second Step – Find a Legal Fiduciary to Work With
How Does a Financial Advisor Get Paid?
How Do I Know if a Financial Advisor is a Legal Fiduciary to Me?
What Can I Expect From a Good Financial Advisor?
What are the Qualifications for a Financial Advisor?
What Will the Best Financial Advisor Do for Me and My Family’s Assets?
When is the Best Time to Hire a Financial Advisor?

Building and Protecting Personal Net Worth

In his essay Advice to a Young Tradesman, Benjamin Franklin famously states, “Time is money.” This phrase, which he wrote in 1748, still rings true today, especially for busy people like you and me.

There tends to be a direct correlation between the number of the zeroes on your net worth statement and the complexity, sophistication, and responsibility of properly managing and coordinating all of your financial affairs.

Accumulating money doesn’t always lead directly to economic peace of mind. This money also has to be managed if it’s going to last through your lifetime. It is common not to have the time, expertise, desire, patience, or discipline to establish, and then consistently execute on, a well-thought-out and customized wealth-building and protecting plan, so that when you’re ready to stop working, your net worth will be enough to help you enjoy the rest of your life.

Investing, coordinating, protecting, and managing your wealth and assets is a challenge that increases as your net worth does.

This leads to the inevitable question that many investors find themselves asking at some point in their net worth building journey – how and where can I partner with a trustworthy, qualified, and supportive financial advisor who can help me properly manage and coordinate much of this financial heavy lifting?

Net Worth

Emotional Awareness – Strike a Balance between Life Now and Planning for Later

Striking the appropriate balance between your career and your family life is challenging and stressful. Adding in the essential responsibility (some might argue “hassle”) of properly managing and coordinating all of your financial affairs creates additional stress and pressure. It is difficult to develop and execute on a well-thought-out and disciplined plan to grow and protect your personal wealth. It’s no wonder this responsibility often gets de-prioritized until you “aren’t so busy.” Additionally, this isn’t simply a task, but an ongoing process that requires constant attention and nurturing. The emotional ups and downs of managing one’s wealth are arguably more difficult to manage than the more data-driven aspects. It’s easier to worry about our net worth than it is to nurture it.

Unfortunately, for many of us, we’re looking forward to retirement as our time to be less busy. But the greatest investment planning opportunities, many critical economic decisions, and basic compounding benefits have already passed by the time we get there.

Find a Financial Advisor Who Will Understand Your Specific Goals

Let’s face it, most of us shop for everything on line these days, and shopping for a financial advisor could look something like asking your device to “find a financial advisor near me.” While you could simply enter find a financial advisor near me in a browser search window and go with the first result, finding a financial advisor who will understand you and your specific needs tends to be the most challenging aspect of hiring one.

Partnering with a financial advisor is about finding one who you trust and feel comfortable with and confident about. They need to be smart, and established, yes, but more than that too. The idea is that you’ll be a partner with them, and be in charge of your own finances. You’re not turning over control. An important part of the wealth building journey is partnering with the right financial advisor; and, like finding a trusted doctor, accountant, therapist, or even housekeeper, this can be easier said than done!

The First Step – Ask Around!

When working to find the right financial advisor, the first step to take is to ask friends and colleagues who have a financial advisor to share their experiences with you. Finding the right financial advisor should have a lasting positive impact on your financial future, and it is essential you are hiring the right person to partner with. For instance, if you are compensated with restricted stock units or stock options, find out if your colleagues are working with an advisor who has this area of expertise.

To increase your odds of longer-term success, your financial advisor will need to know and understand your financial life and oftentimes many aspects of your personal life as well. Providing the most appropriate and customized advice and counsel can only happen when you are as honest and open with your advisor as you expect your advisor to be with you. When an advisor has a legal responsibility to act in your best interests 100% of the time, he or she is known as a fiduciary.

The Second Step – Find a Legal Fiduciary to work with!

An extremely important step when searching for a financial advisor is to ensure they are professionally bound by the legal fiduciary standard. As a legal fiduciary, a financial advisor is regulated by the Securities and Exchange Commission (SEC), and is legally held to the fiduciary standard: the highest standard in the industry. A fiduciary advisor is required to discharge their planning, counsel, and advice solely in the best interests of the client, even if it means placing the client’s interests ahead of their own.

 legal fiduciary standard of financial advisor
Legal fiduciary standard

In stark contrast to the fiduciary standard is the suitability standard, which means a financial advisor is required to make recommendations that are simply “suitable” for a client. Importantly, the suitability standard does not legally require an advisor to act solely in a client’s best interests.

Another significant distinction between these two very different professional standards is how an advisor is compensated.

How Does a Financial Advisor Get Paid?

A fiduciary financial advisor is compensated generally via an annual, asset-based fee that is computed based on a percentage of the client’s assets the advisor manages. A financial advisor who is not a fiduciary can receive compensation via commissions, and hidden compensation derived from products that can have higher fees and expenses. In fact, the White House Council on Economic Advisers has discovered that non-fiduciary advice leads investors to pay higher fees and expenses to the tune of $17 billion a year! Proving something else Ben Franklin said in his aforementioned essay:

“You will discover how…small, trifling expenses mount up to large sums, and will discern what might have been…saved.”

The possibility for conflicts of interest always exists. However, a financial advisor who is a fiduciary is obligated to disclose them to you, and a financial advisor who works under the suitability standard has a much greater possibility for conflicts of interest to occur. Look elsewhere if a prospective advisor is not 100% transparent about answering the following two questions:

  1. How exactly do you get paid?
  2. Are you a legal fiduciary to me?

What Can I Expect From a Good Financial Advisor?

There is no distinguishing set of variables that define a financial advisor vs financial planner or a wealth manager. Because every individual has unique personal and financial circumstances, a crucial first step in working with any financial professional is to jointly discuss your personal and financial goals. While this may seem straightforward, it doesn’t take long for things to become complex and nuanced, especially when you seriously consider responses to the following questions:

  • What financial concerns keep you up at night?
  • How would you like me to work with you so you can rest soundly?
  • What are you working towards in your life?
  • What decline in your overall investment portfolio, in hard dollars, would cause you great personal discomfort such as lack of sleep, anxiety, worry, or even despair?
  • Why do you think you need financial help and guidance?
  • Putting aside the unexpected, what life changes do you expect to occur in the future?
  • How do you picture your ideal life three years from now? Five? Ten?
  • How would you describe your feelings and experiences about money growing up?

This is a small sample of initial questions a financial advisor may ask you during your initial getting-to-know-you conversations (also known as the discovery process). And the questions should continue, as the right financial advisor will have a sincere interest in you. Separate from the questions to ask when hiring a financial advisor, the questions they ask you should illustrate to you the depth of your partnership. In addition to asking, listening to, and considering your answers to thoughtful questions such as these, any good advisor will dedicate time and energy to you to develop rapport, and ultimately, trust.

What are the Qualifications for a Financial Advisor?

According to the Bureau of Labor Statistics, there are more than 200,000 people in the US who hold themselves out as financial advisors. Financial advisor vs financial planner vs investment advisor, the actual job title matters much less than the qualifications and experience a prospective financial advisor brings to the table.

Trust

Regardless of whether you are working with a financial advisor vs. financial planner, do you trust them with not only the intimate details of your financial life, but also with the intimate details of your personal life? The two clearly go hand-in-hand, as a quality financial advisor will help bring alignment between your money and the rest of your life.

Fiduciary Standard of Care

Are they legally bound to serve in your best interests? The opposite of a fiduciary financial advisor is any advisor employed by and first beholden to the company that employs them. Ask any financial advisor at any major Wall Street firm or bank if they are a legal fiduciary, and wait for their response. They are not.

Experience

Has the advisor been around the block, and experienced both good markets and bad? Recessions as well as economic expansions? A quality financial advisor should have a storied history with many successful and happy clients who are willing to step forward and attest to the advisor’s professionalism and knowledge.

Financial Emotional Awareness

Why do investors feel smarter and more confident when the markets are rising, and dumber and less confident when the markets are declining? One word: emotions. At Towerpoint Wealth, we believe that one of the central qualities of a skilled financial advisor is the ability to help their clients remain objective, avoid overconfidence, or, on the flip side, hopelessness. Managing emotions and remaining objective when making financial decisions is an essential component of longer-term success in building net worth.

What Will the Best Financial Advisor Do for Me and My Family’s Assets?

A quality financial planner will leverage a broad-based array of resources to provide you solutions and advice, much of which you may never have heard of, been aware of, thought about, or even had access to.

With the best financial advisor, you will have someone at your side who will help you make smart financial decisions. Want to retire early? Not sure what to do with your RSUs? Not sure if you need an estate plan? You will manage your own money with the guidance of a well-educated, responsive, focused and diligent partner.

At Towerpoint Wealth, we will learn about your unique history, and help and challenge you to clarify your distinct goals, values, and dreams, rather than simply inquiring about your balance sheet. We seek personal insight into your life in order to understand the role money plays for you. By adding our professional financial planning and wealth management expertise and wisdom, we will coach you towards your personal goals and financial peace of mind.

When is the Best Time to Hire a Financial Advisor?

Now is the best time to hire a financial advisor. Developing a customized financial and wealth management plan and strategy now will help you advance towards your personal and financial goals, and ultimately help you retire on your schedule. Time is money. Partnering with an advisor that understands you means you may spend less time worrying about this aspect of your life.

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RSU and stock options | What is an RSU? 10.17.2022

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Restricted Stock Units (RSUs) can be a significant component of an employee’s compensation package. But what is an RSU? Do you have an RSU strategy? How are they treated for tax purposes? Taxation of Restricted Stock Units? What are stock options? How do you plan most effectively when your RSUs vest? Net worth means what? The 411 on Restricted Stock Units will tackle these questions and more.

What is an RSU?
RSU and stock options – What are stock options?
What Is the Taxation of Restricted Stock Units?
RSU Strategy
How Can I Most Effectively Plan
How can we help
Learn more

What is an RSU?

RSUs, also commonly known as restricted stock shares, are a form of stock based compensation whereby an employee receives rights to shares of stock in a company that are subject to certain restrictions. These units do not represent actual ownership or equity interest in the company and as such hold no dividend or voting rights. (1) However, once the restriction is lifted, the units are converted to actual company shares and an employee owns the  shares outright (same as traditional stock ownership).  Learn more about What are RSUs.

The restriction on the units is generally based on a vesting schedule. Most vesting schedules will fall into one of two categories:

  • Time-based: based on the period of employment. Common time-based vesting schedules are between three to five years and are either pro-rata or “cliff” based. For a “cliff” based schedule, all shares vest fully at the end of the schedule.       
  • Performance-based: based on the company achieving a performance goal. Common performance-based vesting schedules are based on a company achieving a particular stock price or a return on equity, or earnings per share.    

    *There is a hybrid-approach between time-based and performance-based known as time-accelerated. Vesting is on a time-based schedule but may be accelerated by the company achieving a performance-based goal.  

RSU and stock options | How Are RSUs Different Than Vested Stock Options?

When most people think of stock based compensation, vested stock options, or the right to buy a company’s stock at some future date at a price established now (the strike price), are typically what first comes to mind.  

Historically, vested stock options have been the most popular form of stock based compensation. And up until 2004, stock options merited favorable accounting treatment as a company could avoid recognizing compensation expense by issuing the options.  

In 2004, this loophole was eliminated and subsequently RSUs/restricted stock shares, aka units, emerged as the preferred form of equity compensation.  

RSUs and stock options have some notable differences:

Net Worth Means
RSU and stock options

Scenario 1: An employee is granted 1,000 RSUs when the market price of the company’s stock is $10. When the RSUs vest, the stock price has fallen to $8. The shares are still worth $8,000 to the employee.  

Scenario 2: An employee is granted 1,000 stock options with a strike price of $10. During the window to exercise these vested options, the market price of the stock is always below $10. These options will expire worthless to the employee.  

*There are many other forms of nontraditional compensation, such as Stock Appreciation Rights (SARs), Phantom Stock, and Profit Interests. None of these are as widely used as RSU and Stock Options and will not be a focus in this paper.

What Is the Taxation of Restricted Stock Units?

RSUs are taxed upon delivery of the shares (i.e., when the restriction has been lifted).     

At time of delivery, the shares are included in an employee’s taxable income as compensation at the fair market value of the total shares. The taxation of restricted stock units is identical to normal wage income and as such, is included on an employee’s W-2. (3)    

Taxation of Restricted Stock Units and RSU vs stock options
Taxation of restricted stock units

The shares are subject to federal and employment tax (Social Security and Medicare) and state and local tax as well.     

For paying the taxes due on delivery, companies will provide an employee with either one uniform withholding method or several options as follows:

  • Net-settlement: a company “holds back” shares to cover the taxes and then the company pays the tax from its own cash reserve. This is the most common practice.      
  • Pay cash: an employee receives all shares and covers the income tax burden out of their own pocket. This is a riskier strategy than net-settlement, as it results simultaneously in a more concentrated equity allocation and lower cash balance (less money to pay the taxes).
  • Sell to cover: an employee sells the shares needed to cover the income tax burden on their own. This method provides no real advantage over net-settlement and places the additional burden of selling the shares on the employee.   

When an employee ultimately sells their vested shares, they will pay capital gains tax on any appreciation over the market price of the shares on the vesting date. If the shares are held longer than one year after vesting, the sales proceeds will be taxed at the more favorable long-term capital gains rate. (4)

Restricted Stock Units Stock Options Vesting Dates Towerpoint Wealth
Vest at Stock Price – RSU strategy

Taxation of Restricted Stock Units Example:

An employee is granted 750 RSUs on January 1, 2018. The market price of the stock at the time of grant is $10 and the RSUs vest pro-rata over three years: 

Taxation of Restricted Stock Units : RSU strategy

RSUs and stock options
Taxation of Restricted Stock Units – RSU Stock

Each increment is taxable on its vesting date as ordinary income. The total ordinary income paid over the three years is $11,500.

The employee then sells all 750 shares of stock three years after the last shares vest.

Taxation of Restricted Stock Units – RSU Stock Options

The employee held each share for more than one year, so the gain is treated as long-term. The employee’s long-term capital gain is $11,000 ($22,500 less $11,500) to be reported on Schedule D of their U.S. individual tax return.

RSU Strategy | What Are the Risks of Holding RSUs?

Utilized correctly, restricted stock units/restricted stock shares can be a wonderful complement to a traditional compensation package and can contribute substantially to an employee’s net worth. (5) This can be, however, a double-edged sword.

The overlying risk is that an employee can have too much of their net worth concentrated in one individual stock and for that matter, one individual company.

Restricted Stock Units | RSU strategy
RSU strategy – RSU taxed

Let’s explore a scenario:

Jim has a net worth of $200,000, not including 2,000 shares of RSUs with his employer,  Snap Inc. On January 1, 2019, 100% of Jim’s 2,000 RSUs vest at $50 per share.

Great news! Jim’s net worth, on paper, has now increased by $100,000 overnight. Jim’s overall net worth is now $300,000

Jim decides to keep all his shares in Snap Inc. with the belief the stock price will continue to go up. 

He also sees his colleagues choosing to hold most of their shares, and fears that if Snap Inc.’s price soars, he will have missed out and his colleagues will all become wealthier than him. 

On July 1, 2019, Snap Inc. releases a weak earnings report and the share price drops to $20. Jim’s net worth is now $240,000, down 20% from January 1st. 

Even worse, Jim paid taxes at his ordinary rate on the original share value of $100,000 when the shares are now only worth $40,000.

And finally, because Jim has a significant portion of his net worth in the company he works for, he faces an additional and potentially catastrophic risk. What if Snap Inc. runs into serious financial struggles and he loses his job? Not only will Jim’s net worth plunge from further declines in Snap Inc.’s share price, he also will now have lost his primary source of income.

You may see Jim as foolish, but his predicament is a common one. We often see employees dealing with the hesitation to sell the shares for reasons that can be more emotional than rational.

How Can I Most Effectively Plan for Restricted Stock Units, RSUs?

We recommend you discuss how to effectively plan for RSU shares with your financial advisor to ensure a decision is not made in a vacuum, but rather in the broader spectrum of your entire financial picture. Of course, we encourage collaboration with your tax advisor to determine the optimal strategy from a tax perspective as well.  

In reality, when RSUs vest, you may be better off by immediately (or over a short-term schedule) selling a sizeable portion of the vested units and using the proceeds to add to or build a diversified investment portfolio.    

Regardless, before you make any decisions, it can be helpful to explore the following questions:   

  • How much of your overall wealth is tied up in RSUs?  
  • Is your company growing quickly or slowly?   
  • What is your current tax situation? Is it better to wait more than one year after the shares vest to sell them to receive the more favorable long-term capital gains tax treatment?  
  • How long do you plan to be with the company?
  • What is your tolerance for risk?
  • If the market value of the stock was instead received in the form of a cash bonus, how much of this would you invest in the company stock?   

How can we help with your RSU and stock options?

While we at Towerpoint Wealth continue to believe in the importance of a diversified portfolio, we also understand every individual situation is unique, what growing net worth means to each individual is different, and understand emotions can play a significant albeit oftentimes problematic role in making sound financial decisions. This is especially the case for RSUs. If you would like to speak further about what is an RSU vs stock options, or need an RSU strategy (or have questions about any nontraditional compensation for that matter), I encourage you to call, 916-405-9166, or Steve Pitchford (Certified Financial Planner) email spitchford@towerpointwealth.com.

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Maximize stock compensation and What are RSUs?

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Download What is an RSU? The 411 on Restricted Stock Units

(1)   While RSUs hold no automatic dividend rights, companies may choose to issue dividend equivalents. For example, when a company pays cash dividends to common stock holders, RSUs can be credited dividends for the same amount. These credits may ultimately be used to pay the taxes due when RSUs vest or can simply be paid out in cash.

(2) RSU strategy – Stock Options can either be Incentive Stock Options (ISOs) or Nonqualified Stock Options (NQOs). They are treated differently for tax purposes.  

(3) When received, dividend equivalents are subject to the same tax rules as RSUs.

(4) Important to note that the shares must be held more than one year for long-term capital gains treatment. If sold exactly one year from the vesting date, they will be taxed at the higher short-term capital gains. 

(5) Net worth means the total value of all of an individual’s assets less their liabilities.

Towerpoint Wealth, LLC is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth, LLC unless a client service agreement is in place.

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What Estate Planning Documents Do I Need? 09.27.2022

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Estate planning documents specify how you want your assets distributed upon incapacity or death. The collection of these documents together is called an Estate Plan. Some people don’t believe they have an “estate,” and therefore, don’t need to create a plan. Many other individuals recognize that everyone needs some kind of estate plan, but defer addressing, or even worse, flat-out avoid establishing a proper estate plan. Perhaps the thought of incapacity or death is simply too much to contemplate, or intimidating legal jargon incorporated into estate planning documents stunts an individual’s action. 

Regardless of the reason, establishing and then maintaining a proper estate plan is an essential aspect of a cohesive, well-thought out financial plan. And if you have a financial plan, you have an estate. In fact, no matter your net worth, once you die, everything you own is considered part of the estate you left behind. 

Below are descriptions of the most fundamental estate planning documents, as well as other estate planning considerations. 

Estate Planning and Wills
Estate Planning | Trust
An Advance Health Care Directive
A Financial Power of Attorney
Beneficiary Forms
Life Insurance 
Owning a Business
Four Ways to Maximize Your Beneficiary’s Inheritance
Keeping Your Estate Planning Documents Organized 
How can we help? 

Estate Planning and Wills 

A will is the most well-known and widely used of the estate planning documents. A will is a legally binding blueprint that dictates how an individual would like their assets to be handled upon their death. 

Specifically, a will can direct those to leave property to (property may include bank accounts, investment accounts, real estate, or any other assets you own at the time of your death), name a guardian for minor children, choose an executor of the estate, plan personal affairs (such as burial arrangements, gifts, and donations), and hurdle other legal challenges. 

Should everyone have a will? Yes. We believe everyone should have a will. A will is essential even for individuals with a very simple estate, or who have already established a revocable trust (see next section). 

What if someone dies without a will? If an individual dies without a will, they have died “intestate.” When this occurs, the law of their state of residence determines how their property is distributed upon death. Dying intestate virtually guarantees a costlier, longer, and more stressful probate process when compared to an individual who had a properly drafted will. 

Probate is the legal process through which a deceased person’s estate is distributed to heirs and designated beneficiaries and any debt owed to creditors is paid off. In general, probate property is distributed according to the decedent’s will, if there is one, or according to state law if no will exists. 

You can visit the following website to review the intestate rules for California.

Does a will have any shortcomings? A will, unlike a properly funded revocable trust, will be subject to probate. It is almost always preferable to avoid probate given the costs associated with the process (which include attorney’s fees, court costs, and appraiser’s fees), coupled with the fact that probate is public record, limiting the privacy of an individual’s estate and heirs. 

Even with its limitations, a properly drafted and administered will is an essential estate planning document for almost all individuals. The shortcomings of a will can be mitigated by adding a revocable trust. 

Estate Planning | Trust

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts are extremely flexible, with the ability to specify how and under exactly what conditions the assets held “in trust” pass to beneficiaries. 

The most common and widely applicable form is a revocable trust (also known as an inter vivos, or, living trust). Revocable trusts are funded during the lifetime of the grantor—the individual that creates the trust—and can be altered, changed, modified, or revoked entirely during the grantor’s life. Revocable trusts are unique in that the grantor and the trustee are the same person. 

What are some advantages of a revocable trust? Advantages of a revocable trust include: flexibility, avoiding the cost, delay, and publicity of probate, protection from court challenges, and the ability to control one’s assets after their lifetime. 

Why do I need a will if I have a revocable trust? A revocable trust only deals with the specific assets titled or held within the trust, such as life insurance, real property, and investment portfolios. Even with a revocable trust, most attorneys still recommend a pour-over will to account for those items not placed, or titled, in the name of the trust. 

Should everyone have a revocable trust? Not necessarily. Individuals (or couples with no children) who have a very simple estate and/or do not have significant assets may only need a will. 

two intersecting circles with headings illustrating the difference between living trusts and wills

Anthoor Law Group, Plan Your Living Trust Now, digital image, Anthoor Law Group, accessed October 22, 2018 – Estate Planning | Living Trust and Estate Planning and Wills

An Advance Health Care Directive

An Advance Health Care Directive is a document that allows an individual to select someone they trust to make decisions regarding their health care in the event they are mentally or physically unable to make decisions for themselves. An Advance Health Care Directive allows for specificity by identifying many different mental and physical impairments and the desired actions for each. 

An Advance Health Care Directive is the terminology used in California. In other states, it may be known as a durable power of attorney for health care, a medical power of attorney, or a health care proxy. 

Do I need an Advance Health Care Directive if I am in good health? Though an Advance Health Care Directive is particularly essential for someone with a family history of poor mental or physical health, or for someone whose health is rapidly declining, we believe everyone should have one. 

A Financial Power of Attorney

A financial power of attorney allows an individual to give a trusted person authority to handle their financial affairs if they become unable or unwilling to do so by incapacitation or other means. A financial power of attorney can be as simple as allowing this trusted person to pay the incapacitated individual’s bills, to as involved as operating their business. 

estate planning documents power of attorney
Bellah Perez, PLLC, Protecting Your Family with a Power of Attorney, digital image, Bellah Perez, PLLC, accessed October 22, 2018.

When creating a financial power of attorney, we recommend making the power durable. 

A durable power of attorney will last for the entire individual’s life. So, if the individual becomes incapacitated more than once in their life, the durable power of attorney will continue to serve its purpose. If durability is not added, the trusted person’s power will lapse when/if the individual recovers from an incapacitation. 

Should everyone have an Advance Health Care Directive and financial power of attorney in their estate planning documents? We believe everyone over the age of 18 should have a properly executed Advance Health Care Directive and financial power of attorney. 

Beneficiary Forms

For certain assets, an individual can designate a beneficiary or beneficiaries to automatically receive the property upon their death. For example, an individual can establish a Transfer on Death (TOD) account or a Payable on Death (POD) account, held outside of their trust, designating specific beneficiaries for these types of accounts. All retirement accounts are subject to beneficiary designation rules as well. 

Naming a beneficiary for these types of accounts is often very easy to do and should not be overlooked. If you do not name a beneficiary for these accounts, the assets may go through probate. The intestate rules then dictate the beneficiary to receive these assets and this may be inconsistent with your intended wishes. 

Image illustrates a four-step process for managing primary beneficiaries
Jahnke, Sandy, April 12, 2018, 4 Simple Steps for Naming Beneficiaries and Why It Matters, digital image, TD Ameritrade, accessed October 22, 2018, https://tickertape.tdameritrade.com/personal-finance/naming-beneficiaries-retirement-estate-planning-14994

Life Insurance 

One way to ensure that all of your debts are paid in the event of your death (or disability) is through adequate life insurance coverage. A life insurance trust, that you create, can purchase the policy so the death benefit isn’t included in your taxable estate. 

While a detailed discussion on life insurance is outside the scope of this checklist for estate planning, the two most common types are term and whole life. 

Owning a Business

If an individual also owns a business, their estate planning becomes more complicated and more important. Not only do they need to consider their family’s best interests, but also their business partners, co-owners, heirs, and employees. Here are some tools to help them address the interests of other constituents of their business: 

Management succession plans specify who will take over their role. 

Buy/sell agreements help to assure business continuation for the surviving partner(s) or co- owner(s). 

Family limited partnerships help engage heirs and survivors. 

Four Ways to Maximize Your Beneficiary’s Inheritance 

When most individuals are thinking about estate planning and wills and assembling their estate planning documents, they generally only think about the tax consequences to themselves. But a truly comprehensive estate plan takes planning a step further and considers the tax consequences the beneficiaries of the estate may face. When creating an estate plan, it is important to understand and properly plan for these taxes. This will help ensure your beneficiaries get the largest inheritance possible. 

1. Consider the taxes on Inherited Pre-Tax Retirement Accounts. Understand the different distribution rules for eligible beneficiaries and non-eligible beneficiaries. 

2. Consider Gifts to family and friends as a way to lower the value of your estate. Give less than $15,000 annually to your children and grandchildren, or contribute to a 529 plan. They won’t pay taxes on the cash gift. 

3. Consider philanthropy as a way to lower the value of your estate. If you are charitably inclined, you can make gifts of any size at any time while alive directly to charities or to a Donor Advised Fund.

4. Take advantage of a step-up in cost basis. Instead of gifting appreciated stock or property before your death, have the recipient inherit it after your death, so they won’t have to pay capital gains when he or she sells the asset 

To read more about minimizing taxes to maximize your beneficiary’s inheritance, visit this link on our site.

Keeping Your Estate Planning Documents Organized 

We believe estate planning documents should be kept in three separate places: the individual(s) should have the originals, their attorney should have a copy, and their wealth manager should have a copy as well. 

For personal safekeeping, while we continue to recommend keeping a physical copy of your documents, you should also consider utilizing a website to store these documents in the cloud. Reputable websites to store these documents include: 

Estate Map | Everplans | The Torch

We also recommend visiting the following webpage to read a complete guide to keeping personal financial records.

For every American adult, where ever you are in life, it’s never too early to start thinking about estate planning and trust creation. 

How can we help? 

The Towerpoint Wealth family works in tandem with our clients’ estate planning attorneys and supports our clients as their estates grow and change. To help you with estate planning, financial advisors can counsel on legacy planning and coordination. 

Download the white paper: The 411 on Estate Planning— This white paper focuses on the most fundamental, as well as other estate planning considerations. 

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Towerpoint Wealth, LLC is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth, LLC unless a client service agreement is in place. 

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How Much is Enough? 5 Steps to Retiring with $2 Million 09.08.2022

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What’s the fastest path to retiring with $2 million? A 2020 survey from Schwab Retirement Plan Services found that the average worker expects to need roughly $1.9 million to retire comfortably. Are you almost there? Have a long way to go? Is retiring with 2 million dollars a reasonable goal for you? Is this enough for you to be happy and comfortable? We’ve put together 5 steps you can take to increase the size of your nest egg and considerations for a well-thought out, customized, retirement income plan in this white paper. We’re happy to offer it to you here. 

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There ARE Solutions for Required Minimum Distributions! 11.15.2021

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By: Steve Pitchford, Director of Tax and Financial Planning      

Dreading a Required Minimum Distribution, or RMD, from a retirement account? No doubt, it’s because of T-A-X-E-S.

While RMDs can be an unwanted by-product of contributing to and investing in retirement accounts such as 401(k)s, IRAs, 403(b)s, etc., there are impactful and proactive tax planning strategies that can materially lessen the tax sting of an RMD.

What are RMDs, and how should an individual plan for them within the context of a tax-efficient retirement strategy? Read on to learn more about RMDs, and specifically, three actionable RMD strategies worth evaluating to better keep Uncle Sam at bay.

Required Minimum Distributions RMD taxes

What is an RMD?

The Internal Revenue Service (IRS) requires that individuals begin taking annual distributions (read: withdrawals) from pre-tax qualified retirement accounts[1] when they reach age 72. These withdrawals are referred to as required minimum distributions (RMDs).

RMDs from pre-tax qualified retirement accounts are subject to ordinary income tax rates in the year in which they are taken.

Examples of pre-tax qualified retirement accounts include:

  • Regular/Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k) plans[2]
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans
  • Other defined contributions plans  
  • Inherited IRAs (subject to special rules, see page six)
  • Annuities, but only when held within another qualified retirement plan

Generally, Roth IRAs are the only type of qualified retirement plan not subject to RMDs. Withdrawals from Roth IRAs are tax-free, and the IRS does not mandate distributions from these accounts, as no tax revenue is generated when taking a Roth distribution.

Why are Investors Subject to RMDs?

Pre-tax contributions to a qualified retirement account provide two important and major tax advantages:

  1. A dollar-for-dollar reduction in taxable income (read: an income tax deduction) for the contribution in the year it was made
  2. Investment earnings (interest, dividends, and capital gains) are not taxed until withdrawn from the plan[3]. The power of tax-deferred compounding is tremendous, FYI:
The Power of Tax Deferral RMD taxes

If RMDs did not exist and an individual had sufficient supplemental financial means[4] to meet their retirement spending goals and objectives, they would probably avoid distributions from a pre-tax qualified retirement plan in the interests of avoiding paying the concurrent ordinary income taxes on those distributions. Requiring these distributions ensures that the government will not lose out on valuable tax revenue, on top of the lost tax revenue from the upfront tax deduction and tax-deferred growth that retirement accounts already provide.

How are RMDs Calculated?

For most individuals, the annual RMD calculation is as follows:

  1. The individual determines the account balance as of December 31 of the year before the RMD is to be taken.[5]
  2. The account owner determines his or her “life expectancy factor” using the life expectancy tables published by the IRS.
  3. The account balance is divided by the life expectancy factor to determine that year’s RMD.

The life expectancy table used for most individuals is the following:

Required Minimum Distributions How are RMDs Calculated

*Individuals should speak with their financial advisor or tax professional to ensure that they are not subject to a different life expectancy factor, as exceptions to the above table do exist.

Investment custodians such as Charles Schwab, Fidelity, and Vanguard typically calculate RMDs on behalf of the retirement account owner. However, it is the responsibility of the owner to ensure the RMD is satisfied before year-end.[6]

Towerpoint Tip:

Withholding taxes directly from qualified retirement plan distributions is generally the most convenient way to pay the RMD taxes. However, using after-tax dollars instead to pay estimated tax payments to cover the RMD taxes may be a more tax-efficient approach.

Form 5329 | What If an Investor Misses Taking Some or All of Their RMD?

If a retirement account owner who is subject to an RMD misses taking it by December 31, the penalty is steep: 50% of the RMD shortfall.

If this happens to occur, the individual should immediately:

  1. Take corrective action and distribute the shortfall from their qualified retirement account as quickly as possible.
  2. File a Tax Form 5329.
  3. Attach a letter to the Form 5329 explaining the steps taken to correct this and why it was missed in the first place. While there is no formal guidance from the IRS regarding an error that would qualify for the penalty to be waived, three common positions taken are a change in address resulting in not getting the RMD notification, a death in the family, or an illness.

How to Effectively Plan to Decrease RMD Taxes

There are three strategies that we regularly employ for our Towerpoint Wealth clients to mitigate RMD taxes.

Strategy One: Accelerate IRA Withdrawals

Subject to certain exceptions, age 59 ½ is the first year in which an individual is able to take a distribution from a qualified retirement plan without being subject to a 10% early withdrawal tax penalty.

Consequently, the window of time between age 59 ½ and age 72 becomes an important one for proactive RMD tax planning. By strategically taking distributions from pre-tax qualified retirement accounts between these ages, an individual may be able to lessen theiroverall lifetime tax liability by reducing future RMDs (and the risk that RMDs may push them into a higher tax bracket) by reducing the retirement account balance.

This strategy becomes particularly opportune for an individual who has retired before age 72, as it often affords the individual the ability to take these taxable distributions in a uniquely low income (and lower income tax) period of time.

At Towerpoint Wealth, we utilize BNA Income Tax Planner, a robust piece of tax planning software, to evaluate these types of tax planning opportunities, helping our clients optimize this decision-making process.

Towerpoint Tip:

Don’t forget Social Security! Leveraging distributions taken from qualified retirement accounts to serve as a retirement income “bridge” is an important consideration when strategically planning how and when to receive Social Security benefits. Oftentimes, it is advisable to take distributions from qualified retirement accounts to meet retirement spending goals and objectives and delay filing for Social Security benefits until age 68, 69, or even 70.

Why? Each year Social Security benefits are deferred, starting at the first eligible filing year of age 62, until age 70, the monthly benefit amount increases by a guaranteed 8%! 

Strategy Two: Execute a Roth Conversion

A Roth conversion is a retirement and tax planning strategy whereby an individual transfers, or “converts,” some or all of their pre-tax qualified retirement plan assets from a Traditional IRA into a tax-free Roth IRA.

While ordinary income taxes are owed on any amounts of tax-deferred contributions and earnings that are converted, a Roth conversion, when utilized properly, is a powerful tax planning strategy to reduce a future IRA RMD, as Roth assets are not subject to RMDs. Further, Roth conversions 1) maximize the tax-free growth within a taxpayer’s investment portfolio, 2) provide a hedge against possible future tax-rate increases (as Roth retirement accounts are tax-free), and 3) leave a greater tax-free financial legacy to heirs.

Roth IRAs IRA RMD

For both strategies #1 and #2: Consider executing these strategies for the older spouse first, as this individual will be subject to an IRA RMD earlier. For this same reason, it is often advisable to contribute to the younger spouse’s pre-tax qualified retirement plan first.

Towerpoint Tip:

At Towerpoint Wealth, pairing a Roth conversion with the “frontloading” of a Donor-Advised Fund (DAF) has been a powerful tax planning strategy, allowing our clients to convert additional assets “over” to tax-free Roth assets at lower tax rates, while also allowing taxpayers who would not ordinarily itemize deductions to “hurdle” the standard deduction. This ensures that they receive at least a partial tax deduction for their charitable contribution to a DAF.

Strategy Three: Use the IRA RMD to Make Qualified Charitable Distributions

When an individual becomes subject to an IRA RMD, in lieu of having the IRA distributions go to them, they may consider facilitating a direct transfer from their IRA to one, or more, 501(c)3 charitable organizations (up to $100K annually). This is known as a Qualified Charitable Distribution (QCD).

As long as these distributions are made directly to the charity, they 1) satisfy the RMD and 2) are excluded from taxable income.

This strategy, when executed property, results in a dollar-for-dollar income reduction compared to a “normal” RMD.

Required Minimum Distributions Charitable Distributions

What Is an Inherited IRA, and Are They Subject to RMDs?

An Inherited IRA, also commonly known as a Beneficiary IRA, is a qualified retirement account that is opened on behalf of the beneficiary(ies) of the original owner’s qualified retirement account after the death of this owner. While the rules surrounding RMDs for Inherited IRAs can be complicated, Inherited IRAs are subject to mandatory distribution schedules.

For most individuals, the RMD on Inherited IRAs is levied as follows:

            RMD on Inherited IRA for an owner who passed before December 31, 2019

Subject to a life expectancy table similar to those for regular RMDs. These RMDs begin the year following the death of the owner.

            RMD on Inherited IRA for an owner who passed after December 31, 2019

Subject to the “10-Year Rule” where all funds need to be distributed ten years after the year of the owner’s death. How and when funds are distributed within this ten-year time horizon is up to the owner of the Inherited IRA.

Towerpoint Tip:

The “10-Year Rule” is making Inherited IRA tax planning more important than ever. Although the flexibility of how and when to withdraw funds within this period may be helpful, the window of distribution is more compressed (for most individuals) compared to the “old” rules.

Individuals should consider a Roth conversion if they are concerned about their inheritors paying taxes on future distributions. While Inherited Roth IRAs are subject to the same RMD rules as Inherited IRAs, the distributions are tax-free. A Roth conversion, within this context, is an estate planning strategy to transfer tax liability to the original account owner and away from the future inheritor(s).

How Can We Help?

At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to serve you and will work with you to formulate a comprehensive and tax-efficient retirement strategy. If you would like to discuss further, we encourage you to call, 916-405-9166, or email spitchford@towerpointwealth.com to open an objective dialogue.


[1] A retirement plan that provides tax advantages relative to nonqualified plans. Most employer-sponsored plans are qualified retirement plans.

[2] Less than 5% owners can defer RMDs until they leave the company or retire.

[3] Taxable investment accounts, such as a brokerage account or trust account, are subject to taxes based on annual earnings. Investors receive a Form 1099 each year showing the income to be reported on tax returns.

[4] Pension income, Social Security benefits, taxable investment assets, etc.

[5] For example, a 2021 RMD is calculated using the account balance as of December 31, 2020.

[6] RMDs may be taken all at once or throughout the year.

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Six Strategies to Optimize Your Charitable Intentions 04.13.2021

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By: Steve Pitchford, Director of Tax and Financial Planning and Matt Regan, Wealth Advisor
Published: April 13, 2021 updated October 22, 2021

Most individuals who are philanthropically inclined usually just take the path of least resistance and write a check directly to a charity. Of course, this is a straightforward approach and can qualify for an income tax deduction, but when being charitable, there are many different (and often economically more advantageous) options and strategies available to you. Indeed, with strategic and thoughtful planning, a taxpayer may be able to optimize their gifting strategy, meeting multiple objectives by maximizing the economic benefits 1.) to themselves, 2.) to their favorite charities, and even 3.) to their loved ones.

Are you optimizing your philanthropy and gifting strategy? Below you will find a myriad of different charitable strategies we regularly employ for Towerpoint Wealth clients, designed to help you better understand your options.

Cash/Direct to Charity

A cash gift is the simplest and (by far) most popular form of charitable giving.

The income tax deduction[1] for a cash gift is generally equal to the amount of cash donated less the value of any goods or services received in return. And while the benefit of a cash donation is its simplicity, as you will see below, it is not always optimal from a tax and gifting perspective.

Donor-Advised Fund

A Donor-Advised Fund (DAF) is a charitable fund, a 501(c)(3) entity in and of itself, that allows an individual to donate cash or appreciated securities, such as individual stocks, bonds, mutual funds, or exchange-traded funds (ETFs).[2]

Donor Advised Fund DAF Charitable Intentions White Paper

Donating appreciated securities can be a more tax advantageous way to fund a DAF, as donating an investment that has gone up in value generally provides the exact same tax deduction as donating cash, while at the same time provides the extra benefit of eliminating the capital gains tax that a taxpayer would normally pay upon selling the security.

How does it work? The donor makes an irrevocable gift of cash or appreciated securities to a DAF. The donor is then able to decide, on their own timeline, when to grant funds out of the DAF and directly to a charity or charities of their choice. If the contribution is appreciated securities, the DAF is allowed to sell these positions tax-free. The DAF will typically then, at the donor’s discretion, invest the funds in a manner consistent with the donor’s charitable goals and objectives. Once the donor is ready to make a grant from the DAF, he or she simply informs and authorizes the DAF custodian (usually via the custodian’s online platform) to send a check directly to the charity on the donor’s behalf.

Typically, the funding and operational costs of DAFs are low, and our clients also love that they provide a year-end summary report, eliminating the hassle and stress of tracking each contribution/grant out of the DAF individually.

Towerpoint Tip:

At Towerpoint Wealth, we also evaluate “frontloading” a DAF with several years’ worth of potential charitable contributions, allowing a taxpayer to “hurdle” the standard deduction and thus, not only eliminate the future capital gains tax of the donated funds, but also provide them with at least a partial tax deduction for their charitable contributions in a particular tax year.

Private Foundation

A private foundation is a 501(c)(3) organization set up solely for charitable purposes.

A private foundation may be structured either as a corporation managed by a board of directors, or as a trust managed by trustees. Unlike a public charity, the funding for a private foundation typically comes from a single individual, family, or corporation.

The primary benefit of a private foundation is the enhanced control that it provides, as it is able to formulate its own customized charitable gifting approach and platform (and continue to gift directly to other charities as well). A donation to a private foundation is an irrevocable charitable gift, and qualifies for a potential income tax deduction that, for most individuals, will be the exact same as gifting directly to another 501(c)(3) charity.[3]

Importantly, private foundations have administrative and tax reporting requirements that may be costly, and speaking further with a financial advisor and tax professional regarding the benefits and drawbacks of establishing one is recommended.

IRA Qualified Charitable Distribution

Individuals who are over the age of 72 are subject to annual required minimum distributions (RMDs) from their pre-tax IRA(s). These distributions are included on an individual’s tax return as taxable income and are subject to ordinary income tax.

As an alternative to taking a “normal” RMD, an individual can instead execute a Qualified Charitable Distribution (QCD), which allows them to both satisfy their RMD and their charitable intention at the same time.

How does a QCD work? Instead of a “normal” RMD, which usually is deposited into an individual’s checking, savings, or brokerage account, a QCD is paid directly from the IRA to a qualified charity. This distribution not only offsets – or, depending on the amount, fully satisfies – an individual’s RMD, but it is also excluded from taxable income.[4]

And unlike other gifting strategies, a QCD’s net effect as an “above the line” dollar-for-dollar tax deduction can offer additional economic benefits when compared to a “typical” itemized charitable tax deduction.

Charitable Remainder Trust

A charitable remainder trust (CRT) allows a donor to make a future charitable gift, while at the same time, receive an income stream during their lifetime for their own spending goals and needs. There are two types of CRTs: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). The two main differences are how the annual distribution to the income beneficiary(ies) is calculated and how often assets can be contributed to the trusts.[5]

When the donor establishes and contributes to a CRT, they are entitled to a current income tax deduction that is equal to the future expected value of the trust assets that will ultimately pass to the charitable beneficiary(ies). The deduction calculation is based on a number of different factors, such as the annual income stream payout set by the CRT, the age(s) of the income beneficiary(ies), the trust’s specified term of years, and the published IRS monthly interest rate.

At either 1.) the donor’s death, 2.) the death of the beneficiary, or 3.) the completion of the trust’s term, the trustee will distribute the balance of the trust assets directly to the chosen charity(ies).

The primary benefit of a CRT is that an individual may receive a substantial tax deduction in the year they open and fund the CRT, while at the same time, continue to receive income for themselves (or other income beneficiaries) during their lifetime. If the CRT is funded with cash, the donor can claim a deduction of up to 60% of adjusted gross income (AGI); if appreciated assets are used to fund the trust, up to 30% of their AGI may be deducted. In addition, if the trustee decides to sell contributed appreciated securities, he or she can do so tax-free.

Towerpoint Tip:

Opening, funding, and administrating a CRT is complicated and there are important ongoing tax filing obligations. As such, it is highly recommended to work with a trusted financial advisor and tax professional to ensure that a CRT is the right choice. Further, the tax deduction calculation may be audited, so it is important to hire a qualified professional to appraise this value.

Charitable Lead Trust

In the simplest sense, a charitable lead trust (CLT) is the reverse of a CRT. The income generated by the contributed assets is distributed to the chosen charity, and the beneficiaries receive the remainder interest. Like a CRT, a CLT can be an annuity trust (CLAT) or a unitrust (CLUT), but different distribution rules apply.

There are two main types of CLTs: a grantor CLT and a non-grantor CLT. A grantor CLT, like a CRT, is designed to give the donor an upfront charitable income tax deduction. However, to receive the charitable deduction, the donor must be willing to be taxed on all trust income. Since the gift is “for the use of” a charity instead of “to” a charity, cash contributions to a grantor CLT are subject to reduced deduction limits of 30% of AGI, and appreciated asset contributions are subject to deduction limits of 20% of AGI. For non-grantor CLTs, the grantor does not receive a charitable income tax deduction, nor are they taxed on the income of the trust. Instead, the trust pays tax on the income, and the trust claims a charitable deduction for the amounts it pays to the charity. It is very important to note that since they are not tax-exempt, neither type of CLT offers the ability to avoid or defer tax on the sale of appreciated assets like a CRT does.

A CLT may be a better option than a CRT if an individual has no need for current income and wants to ensure that, upon their death, their loved ones receive an inheritance.

Towerpoint Tip:

A charitable lead trust is often structured to provide gift-tax benefits, not necessarily a current income tax deduction. A donor is able to gift more to family members with a reduced gift-tax effect because the gift’s present value is discounted by the calculated income to be paid to the charity(ies). The tax deduction the individual receives is based on the annual amount provided to the charity.

Pooled-Income Fund

A Pooled-Income Fund (PIF) is a type of charitable trust that functions like a mutual fund.

A PIF is comprised of assets from many different donors, pooled and invested together. Each donor is assigned units in the fund that reflect his or her share of the fund’s total assets. Each year, the donors are paid their proportionate share of the net income earned by the fund – the distribution amount depends on the fund’s performance and, importantly, is taxable income to the beneficiary (which is typically the donor but may also be a family member, friend, etc.). At the death of each income beneficiary, the charity receives an amount equal to that donor’s share in the fund.

PIF contributions provide a tax deduction to the donor upon contribution and, like the other charitable gifting vehicles described previously, affords the donor the ability to avoid paying any capital gains taxes on the contributed appreciated securities.

Pooled Income Fund Donor Charity

A primary drawback of a PIF is that the donor has no control over how the assets are invested, as the investment of the fund is directed by a professional manager. As such, it is important that individuals speak with a financial advisor to ensure that a PIF is thoughtfully incorporated into their overall investment allocation and strategy, as well as philanthropic and charitable giving plan.

How can we help?

At Towerpoint Wealth, we are a legal fiduciary to you, and embrace the professional obligation we have to work 100% in your best interests. If you would like to learn more about charitable giving strategies, we encourage you to contact us to open an objective dialogue.

Steve: 916-405-9166, spitchford@towerpointwealth.com


[1] In order for an individual to receive a tax deduction, their combined itemized deductions must exceed their standard deduction.

[2] Appreciated securities may be donated directly to certain charities as well. However, doing so is typically an administrative hassle for both the individual and the receiving organization.

[3] Donations to a private foundation are tax deductible up to 30% of adjusted gross income (AGI) for cash, and up to 20% of AGI for appreciated securities, with a five-year carry forward

[4] Up to an annual maximum of $100,000, per taxpayer.

[5] A CRAT pays a fixed percentage (at least 5%) of the trust’s initial value every year until the trust terminates. The donor cannot make additional contributions to a CRAT after the initial contribution. A CRUT, by contrast, pays a fixed percentage (at least 5%) of the trust’s value as determined annually. A donor can make additional contributions to a CRUT.

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Is Your 401(k) in Disarray 03.29.2021

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As a small business owner, we know that you are an “around the clock” grinder, with a myriad of responsibilities that often supersede the core responsibilities you have to the growth of your business. And understanding that a regular review of your business’s retirement plan may not be a top priority of yours, at Towerpoint Wealth we have created this 401(k) “healthcheck” for your benefit. We regularly come across 401(k) and other company-sponsored retirement plans that, as currently structured, are in serious need of attention and improvement, and we are experienced in helping you, as a trustee and fiduciary to your company’s retirement plan, minimize the hassle of giving your plan the attention it needs.

Is your 401(k) plan structured and optimized properly to help you and your employees maximize the myriad of economic, investment, and tax benefits? Are you properly managing your fiduciary responsibility? Ask yourself the questions found below to quickly gauge whether your 401(k) needs adjusting or improving.

 Does my plan have a safe harbor structure?

You want to ensure that your 401K) retirement plan passes the annual non-discrimination testing conducted by the IRS. In its simplest sense, non-discrimination testing ensures that an employer is making contributions to each employee’s retirement account that equals the same percentage of salary for everyone. Importantly, if a plan fails a non-discrimination test, the 401(k) may lose its tax-qualified status.1

Retirement Plan 401(k) Disarray Towerpoint Wealth White paper 2021

[1]The most common reason a 401(k) plan fails this non-discrimination testing is when one or more of the business owners make much greater 401(k) contributions compared to their employees.

A safe harbor 401(k) plan structure ensures that you meet the non-discrimination regulatory requirements by following strict guidelines specific-to employer plan contributions, participant disclosures, and much more. 

Does my plan have a profit-sharing component and if so, am I optimizing its structure?

For a business owner to maximize the personal net worth building benefits associated with sponsoring a company retirement plan and receive the maximum 401(k) annual contribution amount of $58,000 in 2021[1] (employee deferrals + employer contributions), pairing a profitsharing component in the plan’s design is essential.

All profit sharing plan structures – same dollar amount, comptocomp, new comparability, etc.[2] – are not created equal. In particular, the new comparability strategy is becoming increasingly more common in modern 401(k) plans as this type of profit-sharing plan allows for unique flexibility in allocating the profits among the business owner(s) and employees.

Is my investment fund lineup optimized?

401(k) investment fund lineups vary from basic to advanced and passive to active. And with employees having better and more diverse investment options outside of 401(k) plans, annually reviewing your company’s fund lineup for improvements is critical to ensure that employees do not look to invest their hard-earned dollars elsewhere, and also to meet your fiduciary responsibility as plan trustee.

It is also a requirement that a business owner (usually with help from an investment professional) formulate, and review at least annually, an investment policy statement (IPS) for their 401(k).

Is my ERISA fidelity bond fund amount appropriate?  

The Employee Retirement Income Security Act (ERISA) requires 401(k) plans to hold a fidelity bond, which protects the plan from losses resulting from improper handling of the funds.

While fidelity bonds are generally inexpensive for the coverage offered, we often see the amount protected as either 1.) inadequate or 2.) overkill.  

[1] Increased to $64,500 for business owners 50 years of age or older.

[2] There are often several different terms that refer to the exact same type of profit-sharing structure.

Does my plan currently allow for after-tax Roth contributions?

While changing for the better, many 401(k) plans still do not allow after-tax Roth contributions. 

For business owners and employees that are in a temporarily low income tax bracket –  a business owner “winding down” and closing in on retirement or a younger employee at the beginning of their career and earning curve – offering an after-tax Roth contribution option, particularly given it typically costs nothing to do so, is a valuable and often overlooked plan benefit.

Is my vesting schedule appropriate?

Retirement Plan 401(k) Disarray Towerpoint Wealth White paper 2021

In order to incentivize employees to stay with your company, having a vesting schedule for any  employer-matching profit sharing contributions that is not overly generous is important. For a number of Towerpoint Wealth’s clients who are business owners, a vesting schedule of six years (with 0% vesting in the first year of participation) is appropriate, but each business and retirement plan is unique.

Have I considered automatically distributing an employee’s 401(k) balance when they leave the company?

Many 401(k) plan administrators charge their fees based on the number of employees that the plan has. 

In order to keep fees to a minimum, it is advisable to consider automatically distributing account balances below a certain threshold when an employee separates from service.

Am I managing my fiduciary responsibility and minimizing my fiduciary liability?

All business owners who offer a 401(k) for themselves and their employees have a fiduciary responsibility to ensure that they are acting in the employees’ best interests, being prudent, diversifying plan investment assets, and adhering to all provisions of the retirement plan documents.

There are concrete steps that a business owner can take to uphold their fiduciary duty and at the same time, minimize their fiduciary liability.

Retirement Plan 401(k) Disarray Towerpoint Wealth White paper 2021

Wealth management firms that specialize in helping business owners optimize their retirement plans, such as Towerpoint Wealth, are able to help guide you through these murky waters.

Am I doing everything I can to maximize my own personal net worth within my company’s retirement plan?

Even if a small business owner has a well-structured plan that meets everyone’s needs, is it important to remember that 401(k)s, and other types of company-sponsored retirement plans, are uniquely customizable. And often, there are overlooked plan features that may help the business owner maximize their ability to accumulate wealth within the plan. 

One of these particularly powerful features is allowing for after-tax deferrals (not the same as after-tax Roth deferrals), which then affords the business owner to take advantage of the “Mega Backdoor” Roth IRA strategy.

Some other questions that are worth your thoughtful attention: Do I allow for hardship distributions and if not, should I? What about allowing rollovers from other retirement plans? Is it risky to offer loans to employees? Are my plan’s expenses and fees reasonable?

How Can We Help?

Steve Pitchford, CPA, CFP®
Director of Tax and Financial Planning

At Towerpoint Wealth, we are a legal fiduciary to you, and specialize in optimizing retirement plan structures for business owners.. If you would like to speak with us regarding any other tax questions you may have, we encourage you to call (916-405-9166) or email (spitchford@towerpointwealth.com) to open an objective dialogue.

Towerpoint Wealth, LLC is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth, LLC unless a client service agreement is in place.


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The Frustrations of Form 1099 : TPW White paper 03.08.2021

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It’s Tax Time | What is the Form 1099?

What exactly is a Form 1099, why can they be so frustrating to process, and how do you manage the problem of receiving an amended one? Read on to find out!

What is the Form 1099?
A Form 1099 is any one of a series of documents that contains information on all transactions that occurred inside of a “taxable” account1 during a given tax year. Reporting this information on a taxpayer’s annual federal individual income tax return is required. Most investment custodians (e.g. Charles Schwab, Fidelity, Merrill Lynch, etc.) will consolidate the various Form 1099s into one consolidated document, known as a Composite Form 1099.

The most common transactions represented on a Form 1099 are:

• Dividends and Distributions (Form 1099-DIV): Typically generated by owning a stock/equity investment product.
• Interest Income
(Form 1099-INT): Typically generated by owning a bond/fixed-income investment product.
• Capital Transactions (Form 1099-B): Reflects gains/(losses) from the sale of a capital asset.

Towerpoint Tip:

A Form 1099 is not the same as a Form 1099-R. The latter form reports annual distributions from tax-advantaged retirement accounts, such as “regular” pre-tax IRAs, Roth IRAs, SEP IRAs, and 401(k)s.

What do I do with a Form 1099?

If you work with a CPA/tax advisor, you should provide this tax form to them for inclusion on your federal individual income tax return.

If you prepare your own tax returns, be sure to utilize the import function that many tax preparation software programs now provide. This will ensure accurate reporting to the IRS, which is particularly important for Form 1099s, as any reporting discrepancies in the information you input versus the information the Internal Revenue Service (IRS) receives from your custodian automatically “flags” your federal tax return for additional scrutiny.

Why do I receive my Form 1099 late or even worse, receive an amended Form 1099?

Generally, investment custodians have until February 15 to provide taxpayers with their Form 1099s, although more recently, custodians are requesting exceptions and extensions to, or even flat-out missing, this issuance deadline, so be aware that you may be waiting past this date to receive yours.

Why? Before completing Form 1099s, custodians must first receive and collect taxable income information from each of the underlying investments all of their clients were invested in during the prior year; and more often than not, 1099 issuance delays originate with the underlying companies themselves.

It is also common for custodians to have to restate the originally issued Form 1099, and reissue what are known as amended Form 1099s, when one or more of the underlying investment companies revise, update, or correct an error made in their initial reporting.

What do I do if I receive an amended Form 1099, and are there any steps I can take to make this less of a headache?

if you receive an amended Form 1099 after already filing your tax return, you may need to file an amended tax return. You should speak with your CPA/tax professional for guidance on this important consideration.

To put yourself in the best position to avoid this hassle, we recommend that taxpayers work with their CPA/tax professional to prepare their tax returns in full as early as possible in the filing season, but wait until later in March to actually file them. While we fully understand the desire for some of you to finish and file your tax return as soon as possible, waiting to file minimizes the likelihood that you’ll have to file an amended tax return after receiving an amended Form 1099. Additionally, this gives your tax professional adequate time to properly prepare and file your return should you receive amended 1099s.

Towerpoint Tip:

If the difference between the original Form 1099 and the amended Form 1099 is slight, and can be considered in your favor, the cost of amending the tax returns may outweigh doing nothing. However, we advise you file an amended return when the amended Form 1099 results in additional taxes owed.

How Can We Help?

Steve Pitchford, CPA, CFP®
Director of Tax and Financial Planning

At Towerpoint Wealth, we are a legal fiduciary to you, and embrace the professional obligation we have to work 100% in your best interests. If you would like to speak with us regarding any other tax questions you may have, we encourage you to call (916-405-9166) or email (spitchford@towerpointwealth.com) to open an objective dialogue.

Towerpoint Wealth, LLC is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth, LLC unless a client service agreement is in place.

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Comprehensive Estate Planning | TPW White paper 03.08.2021

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Navigating the Tax Laws to Maximize | Your Beneficiary’s Inheritance | Comprehensive Estate Planning

When most individuals are establishing an estate plan, they generally only think about the tax consequences to themselves. But a truly comprehensive estate plan is one that takes planning a step further and considers the tax consequences the beneficiaries of the estate may face. When creating an estate plan, having a clear understanding of, and properly planning for these taxes will help ensure your beneficiaries get the largest inheritance possible.

Need more information on what estate planning documents do I need? Click here.

When one inherits money as a beneficiary of an estate, there are three different taxes that oftentimes need to be understood and accounted for:

Let’s take a look at these individually:

Estate and Gift Tax

• The 2021 federal estate tax exemption (commonly known as the unified tax credit) amount is $11,700,000 per individual.
• Only the deceased taxpayer is subject to the estate tax when the estate value is greater than the unused exemption.
• Even if the decedent did not have a taxable estate, the estate of the decedent survived by a spouse should file Form 706, Estate Tax Return, to pass any remaining/unused unified tax credit exemption to the surviving spouse.
• When someone dies, their assets become property of their estate. Any income those assets generate is also part of the estate, and may trigger a requirement to file Form 1041, Income Tax Return for Estates and Trusts.
• An inheritance is not considered taxable income to the beneficiary.
• Currently, in addition to estate taxes assessed at the Federal level, 12 states and the District of Columbia also collect an estate tax. California does not currently have an estate tax.

Inheritance Tax

• Only six states currently collect this tax (Iowa, Kentucky,Maryland, Nebraska, New Jersey, and Pennsylvania).
• Property passing to a surviving spouse is exempt from inheritance taxes in all six of these states.

Income Tax

• Inherited retirement account distributions are subject to ordinary income taxes.
• If you sell or dispose of inherited property that is a capital asset, you will be subject to either a long-term capital gain or loss, regardless of how long you, as the beneficiary, have held the asset.

Additional considerations

Inherited Pre-Tax Retirement Accounts

• Eligible Designated Beneficiaries and Non-Eligible Designated Beneficiaries are subject to different required distribution rules.
• Consider Roth conversions to allow the beneficiaries to take tax-free distributions.

Lowering the Value of Your Estate – Gifting

• Make annual cash gifts to your children, grandchildren, other family members, and even friends. You can also contribute cash to a 529 plan to help pay for future school to any individual you would like. The receipt of cash is non-taxable to the recipient, and, if the gift is below the $15,000 annual exclusion amount, you will not eat into your above-mentioned $11,700,000 lifetime estate and gift tax exemption amount.

Lowering the Value of Your Estate – Philanthropy

• If you are charitably inclined, you can make gifts of any size at any time while alive directly to charities or to a Donor Advised Fund. The donation of appreciated securities provides not only an immediate deduction of the fair market value of the stock at the time of contribution, but also avoids capital gains tax upon sale.
• Charitable contributions due to the death of the taxpayer result in a dollar for dollar reduction of the taxable estate.
• Additional vehicles available include Charitable Remainder Trusts or Charitable Lead Trusts.

Life Insurance

• If you are considering buying life insurance to either pay for the estate tax liability or provide more for your beneficiaries, set up a life insurance trust and have it purchase the policy so the death benefit isn’t included in your taxable estate.

Step-Up in Cost Basis – Take Advantage!

If you have appreciated stock or property and gift it to someone, the recipient gets the carried over basis and will have to pay capital gains when he or she sells the asset. Instead of gifting before your death, have them inherit it after your passing so they get a “step up” in basis and recognize a smaller gain on future disposition.

The Future of Estate Taxes Under the Biden Administration

• During his campaign, President Biden discussed the possibility of decreasing an individual’s federal estate tax exemption amount either to $5 million per individual (and $10 million for a married couple) or to the pre-Tax Cuts and Jobs Act amount of$3.5 million per individual (and $7 million for a married couple). This decrease in lifetime exemption could be paired with an increased top tax rate of 45 percent.
• President Biden also proposed eliminating stepped-up basis on death and possibly taxing unrealized capital gains at death at the proposed increased capital gains tax rates.

How Can We Help?

At Towerpoint Wealth, we are a legal fiduciary to you, and embrace the professional obligation we have to work 100% in your best interests. If you would like to learn more about Towerpoint Wealth and how we can help you achieve your financial goals, we encourage you to call (916-405-9166) or email (spitchford@towerpointwealth.com) to open an objective dialogue.

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Strategies to Own a Concentrated Stock?

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Own a Concentrated Stock Position? Our 5 Strategies to Help Manage Risk and Taxes

Stock compensation can be a wonderful complement to a traditional compensation package, oftentimes contributing significantly to an investor’s net worth. However, there is an overlying risk to investors who have too much of their net worth concentrated in the stock of one company. This is more complicated if this stock has appreciated to an extent that selling would result in a substantial capital gains tax liability.

How can an investor mitigate the risk of having too much of their net worth concentrated in a single appreciated stock, and avoid significant tax liabilities? 

Multiyear-Sales Strategy 

Some investors may feel that the solution to owning an overconcentration of stock in a single company is simple: sell all of the stock and reinvest the proceeds in a diversified portfolio. While this strategy has the obvious benefit of immediately eliminating the overconcentration risk, the tax “hit” of utilizing this strategy can be substantial – especially considering that investors who received the stock as compensation may have a very low (or no) cost basis in it.

One approach to mitigate the tax impact of these stock sales is to amortize them over a period of two or three years. While this will not reduce an investor’s risk exposure as quickly as an outright sale, this strategy has the advantage of spreading the capital gains taxes over a multiyear period – allowing an investor to better control the timing of the capital gains with the goal of realizing more of these gains in relatively low tax years.  

 Put Option or Protective Equity Collar

A put option gives an investor the right to sell a stock at an agreed upon price on or before a particular date. The advantage of owning a put option is that it establishes a “floor” price at which the investor will be able to sell a stock position. This greatly reduces an investor’s downside risk, while at the same time allows them to retain the unlimited upside.

Instead of paying “out-of-pocket” to cover the premium (cost) of the put option, an investor can simultaneously sell a call option, which gives the purchaser of the call option the right to buy the stock at an agreed upon price on or before a particular date.

The strategy of simultaneously buying a put option and selling a call option is known as a protective equity collar. The potential drawback of an equity collar is the investor is now limited on the upside of the stock price as well. However, understanding that the premium from selling a call option will often cover the entire premium to purchase the put option, an equity collar can be a low-cost approach to hedging a concentrated stock position. Buying and selling options is best handled by a financial professional working on your behalf. 

Pool Shares into an Exchange Fund 

Exchange funds are private placement partnerships where an investor contributes a concentrated stock position into a fund that includes a mix of other stock positions. Oftentimes, these other stocks were donated by investors that had the same intent of diversifying their own appreciated stock positions.

With exchange funds, each investor receives a pro-rata share of the partnership (measured in units) based on the value of the stock that they contributed.

While one obvious advantage of an exchange fund is immediate diversification, an additional appeal of this strategy is that capital gains taxes are deferred until the investor sells their fund units. 

There are several important disadvantages of exchange funds, such as the typically high fund management fees, the lack of control over the other stock positions in the fund, and the lock-up period before an investor can sell their units (which is often as high as seven years). Further, exchange funds are regulated private placements, so they are typically subject to investment minimums and only available to investors that meet certain net worth thresholds.

Variable Prepaid Forward Contract

A Variable Prepaid Forward (VPF) contract is an agreement that an investor will sell a specific number of shares at a discount (usually between 75-90%) at a pre-specified future date in return for an upfront cash payment.

The “variable” in the term VPF refers to the fact that the shares the investor is selling at a future date are not fixed and are dependent on the performance of the stock. A lower stock price results in more shares sold to satisfy the obligation and a higher stock price results in fewer shares sold.

The benefit of a VPF contract is the immediate liquidity received from the cash advance. In addition, the use of the VPF contract allows for the deferral of capital gains – as the variability of the shares to be sold means that a VPF contract is not deemed a constructive sale by the IRS until the shares are delivered. However, in order to avoid IRS scrutiny, a VPF contract should be drafted by a qualified tax professional or lawyer. 

Charitable Gifting

While charitable gifting is a broad category that requires further in-depth discussion, there are several charitable gifting strategies an investor can utilize to reduce the risk of an overconcentrated stock position.

The simplest strategy is for an investor to donate the overconcentrated stock position to a charity (or charities) of their choice. Not only will an investor generally receive the same exact 

tax deduction as if they donated cash, donating stock has the dual benefit of eliminating the capital gains tax that would be associated with selling the stock outright. 

In our view, donating stock is a great way for an investor to both reduce their concentrated stock position and fulfill their charitable intentions.

Pairing this with a Donor-Advised Fund (DAF), a charitable investment account, can streamline the process of gifting stock and has the added benefit of allowing an investor to control the timing of both their tax deductions and their donations.

There are also different charitable trusts that may be appropriate for an investor with an overconcentrated stock position. These types of trusts, which include a Charitable Remainder Trust (CRT) and Charitable Lead Trust (CLT), allow an investor to better control and customize the charitable strategy that works best for them.

Charitable trusts come with material costs and added complexity, and we recommend you work with an experienced estate planning attorney and your financial advisor to determine the best choice for you.

How Can We Help?

At Towerpoint Wealth, we are a fiduciary to you, and embrace the legal obligation we have to work 100% in your best interests. We are here to advise you, and will work with you to decide the optimal strategy for your concentrated stock position. 

If you would like to discuss further, we  encourage you to call, 916-405-9166, or email spitchford@towerpointwealth.com to open an objective dialogue.