Private Advisory Group

Talking with Mom and Dad Before it’s Necessary

Posted by Steve  |  Comments Off

According to a 2006 survey of 1,000 people by Home Instead, Inc., an Omaha-based provider of in-home elderly care, as high as 42% of adults between the ages of 45 and 65 say that having ‘the talk’ with their parents is the most difficult discussion of their lives. Deciding when aging parents can no longer live on their own, and what their next step should be is often an agonizing one – for parents and for their adult children.

According to 2008 federal data, however, it is a crucial step because:

• Approximately 70% of people over 65 are expected to need some long-term care services.
• More than 40% of people over 65 are expected to spend at least some time in a nursing home (the average is three years).
• And 20% of people over 65 are expected to need long-term care services for more than five years.

Putting together a planned strategy with your parents can be a great way to start the discussion. It can give Mom and Dad a way to define and explain their goals and needs. The strategic plan can define the factors that determine when it is appropriate to get in-home help or make the move to assisted living.

Timing May Be Crucial

While many seniors do fine at home, others need long-term care facilities or something as simple as a visiting home aid. Either way, it’s important to start such conversations early. The rule of thumb is “the 40-70 rule”, which means if you’re 40 or your parents are 70 then it’s time to start talking.

Concerns about dementia, of course, will put additional pressure on the situation. People with dementia are eventually unable to make decisions in their own best interests. In addition, they may begin to misinterpret what other people are trying to do for them. Seniors with dementia may become paranoid, depressed or so confused as to be incapable of taking care of themselves.

Having the talk with your parents before the danger of dementia is crucial to their safety. Plus, having a strategic plan in place takes some of the pain out of the decision-making process if that time comes.

Considering the Options

While some busy working adult children may feel pressure to push their parents into choosing the most efficient option, taking the time to discuss the options and encouraging their parents to stay independent as long as possible is nearly always the better choice. Not only is this the less costly option, it also keeps the elderly parent in familiar surroundings.

Parents may resist their offspring’s efforts to relocate them for a variety of reasons. It’s important for adult children to recognize that their parents have their own reasons for wanting to stay in their homes. Some parents worry their children and grandchildren will miss the family home. In some cases, they fear their close friends or siblings will be left alone. Spending the time to figure out what those reasons are will help everyone find the right solution, not just the most expedient one.

Not all elderly parents have to move into assisted living immediately either. In some cases, when elderly parents show signs of not taking care of themselves well, they may simply need some in-home help with cleaning the house or keeping up with the bills. When one parent dies, the other may show signs of not caring for themselves well. The surviving spouse may simply need more regular contact with friends and a social support system to stay motivated and engaged.

Life Insurance – an Investment for Life

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While most people understand the primary idea behind life insurance – wage earners spend a little each month on a life insurance plan so that if they die, their dependents can enjoy some degree of financial security without their income – most do not understand the whole picture. For example, do those who are financially secure need life insurance?

Most individuals will say no, but the experts say, yes!

Traditionally life insurance is an investment because of the death benefit. Unlike equities, life insurance is a (some would say heavily) well-regulated industry that guarantees eventual payout assuming the client pays the premiums – an advantage that may not have sounded important a few years ago, but is likely more appreciated by everyone studying their equity portfolios today.

Life Insurance Advantages

In general, financial advisers see life insurance as a long-term investment useful to most of their clients. Life insurance has three primary advantages over other types of investments:

• certainty
• liquidity
• favorable tax treatment

Let’s go over each of these advantages in a little more depth.

The question about certainty, that is whether life insurance will pay out or not is invalid, of course. The real question is how much the policy will pay out. As you well understand, the sooner the insured dies, the better the return on investment – this is the perverse truth about life insurance, and it’s true even for the types of policies used as investments, those that are whole life insurance policies. These require the insured to pay relatively higher premiums while they are young – to offset, of course, a potential payout if it becomes necessary. With these policies, part of each premium (the monthly cost of the policy) is isolated as cash value. This cash value is eventually used to keep premium costs lower as the person grows older. These cash values grow tax-free over the life of the policy and continue to remain so unless the owner makes a withdrawal while they are alive.

Life insurance is considered liquid because the insurance company is obliged to pay the proceeds as soon as a claim is filed. It’s also considered liquid because life insurance, in general, sidesteps probate. Liquid cash always has an advantage because it can be used immediately to buy things and it’s of particular advantage for an estate. Without that liquid cash, heirs may be stuck trying to pay estate taxes and may be forced to sell substantial property or other assets in order to pay them. So, having the balance of the life insurance proceeds can often mean significant savings for the insured’s heirs.

Lawmakers see life insurance as a hedge against catastrophic loss rather than a true investment and so it has retained, over the years and over the passing administrations, significant tax advantages. Specifically, all of the cash value collected in a permanent life insurance policy grows tax free. This includes the cash value in policies that move away from the classic life insurance model and instead serve as a wrapper for equity investments. This wrapping method can be especially useful for wealthy or affluent investors who invest their money in hedge funds, because short-term trades don’t benefit from low capital-gains rates. In almost all cases, life insurance can be passed on to heirs tax free as well. With federal estate taxes slated to return in the near future, those who want to avoid that particular tax may find setting up a special life insurance trust with a trusted individual as trustee will give them additional tax benefits. With the buyer/insured no longer in direct possession of the policy, it is not included in their estate and the proceeds of the policy can be distributed free of tax.

Other Advantages of Life Insurance

Life insurance policies also help those in the position to make large donations or gifts during their lifetime. In most cases, such transfers are subject to a gift tax, but an additional advantage of a life insurance trust, is that it accumulates cash over a rather long time. That is, over the life of the insured. When properly drafted, a life insurance trust can benefit from an annual contribution up to $13,000 for each beneficiary without being subject to gift tax. Those annual contributions are allowed to grow tax free and can eventually become a fairly significant sum. With the proceeds passing on without being subjected to additional income, estate, or gift taxes, it’s an excellent method for distributing comfortable sums of cash to your heirs. Of course, the key to this method is getting started early.

When you are making large contributions to a life insurance trust later in life, the gift tax will not be too great because the amount of the gift isn’t the amount the policy will eventually pay out, but rather the amount needed to pay the premium for a particular term. Also, the gift tax can be reduced even further by implementing some complicated planning techniques. Instead of paying the gift tax yourself, for example, you might loan the money to your life insurance trust to do that for you. This is only useful when interest rates are at favorable rates because you wouldn’t normally want the trust to have to make big interest payments (and interest-free loans are strictly limited under the tax code). With interest rates currently at rock bottom, you could loan the money to your trust for very little.

If you loan the insurance trust the money to purchase the policy outright, you could avoid the gift tax altogether, but that would require a larger and potentially costly loan.

Short-term Life Insurance – useful or no?

While the benefits of long-term, or permanent, life insurance are clear, the benefits of short-term policies is more debatable as it eliminates many of the advantages held by long-term life insurance. One of the advantages of permanent life insurance is that you can still indirectly access the policy’s current value – even after you have formally given it to a trust. This is because the trustee can always borrow against the cash value of the policy and loan you that money. If you don’t pay the money back, the depleted cash value may mean insufficient funds to completely pay the premiums on the policy in later years, which ultimately reduces the payout. On the other hand, individuals setting up life insurance trusts can take comfort in knowing their money is available if they absolutely need it – a technique that is not the case for many estate-planning techniques.

Some investors ‘overfund’ their life insurance policies with more cash value that is needed. Some experts consider this a useful investment technique because it avoids income taxes, and others aren’t so sure because there are other forms of financial planning that are far less cumbersome and don’t involve the charges imposed by many insurance companies. Rarely, however is an estate plan created without a life insurance component. With estate taxes set to return to over 50% soon, affluent investors would be well served to look into life insurance for a life investment.

Winning by Not Losing–Implementing their approach

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I thought you’d have interest in this reallocation alert issued by Stadion, one of our managers.

Soon after the start of June, we noticed a change in market dynamics. The succession of higher highs, higher lows and the climb of support through resistance changed its tune. Our indicators, which had been steadily increasing in a positive level, started a descent toward a negative reading. All of our equity exposures were removed following their respective stop loss thresholds being met during this pullback.

Our first reduction in equity exposure came on June 19, as XLB (Materials Select Sector SPDR) hit its stop loss level. A further reduction in equity exposure occurred a few days later on June 23 when our large cap market holdings of SPY (SPDR S&P 500) and DIA (Diamonds Trust) hit their respective stops loss levels. As the market continued its negative trend for the month of June, the remaining equity exposure was removed with the sale of XLP (Consumer Staples Select Sector SPDR) on June 26 as it hit its stop loss level.

Current market action calls for a position of safety which will either be rewarded by further declines, or turn into a “whipsaw.” While whipsaws are frustrating, we have no reservations about re-initiating equity exposure if dictated by our Model. Making money during the good times is nice, but only if you can protect it in the bad times.” Etc. Etc.

As of today they are 100% in cash waiting for the right time to get back in.

It is always great to see them actually do what they said they were going to do. And, given the fact the S&P is down 4.5% since Stadion decided to go back to cash, they are definitely winning by not losing!

Winning By Not Losing–A Disciplined Approach

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It’s true that no one can predict the stock market, but it is possible to know when conditions are favorable for making money—and
when they’re not.

Stadion’s three-part management approach allows us to do just that.

First, we use our quantitative investment model to assess the market’s risk level at any given time. Our model is built on several proprietary indicators that use internal market data and price trends to determine when we have an edge or when we need to be defensive. This weight-ofthe-evidence approach determines how much exposure Stadion investors will have to equities at any given time.

The second step in our tactical asset allocation process is making sure our portfolios are overweighted in the asset classes that are doing well and underweighted in asset classes that are out of favor.

The final step in the process is our objective, well-defined sell strategy. We do not hesitate to shift our portfolios to more defensive positions when market
internals weaken and intermediate price trends turn negative. Our safety measures may occasionally cause us to miss some market gains, but they are critical in helping us avoid devastating losses.

Winning by Not Losing

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Stadion’s investment method is called ”winning by not losing.” Their focus is on keeping returns as “real” as possible. To achieve this, they work hard to capture most of the market’s good times and miss most of its bad times. Losing less when the market goes down, means you have less to make up to get to a place where your returns are real, not just “relative”.

It is an approach that resonates with investors who want to earn a decent return over time, without worrying about suffering big losses in tough times.

Stadion’s winning-by-not-losing investment strategy has achieved solid long-term results without account damaging, confidence shattering drops along the way. During the Tech Bust, many investors watched in horror as their portfolios lost 25% to 50% of their value. Those investors subsequently needed returns of 33% to 100% just to break even. But because our investors didn’t suffer such severe losses, much of the return we captured in the market recovery was adding to our clients’ retirement wealth, not just recovering what had been lost.

More recently, the bear market that began in 2007 has stripped investors of the gains made during the post-Tech Bust upturn. In fact, by the end of 2008, buy-and-hold investors had experienced what was ultimately termed “The Lost Decade,” a 10-year period of little or no true gains.

Conversely, Stadion clients are protected from staggering losses during these types of bear markets. In fact, during that same lost decade (1999 – 2008), Stadion Managed Strategy investors saw their account values nearly double. We sometimes underperform the market during the up years (capture most of the good times) and then outperform it during the tough years (miss most of the bad times). The net result is what matters. Had you been invested
in Stadion over the past ten years, you would have a portfolio value significantly higher than if you had been in the S&P 500—and with much less volatility.

Their model not only creates a smoother ride, but it can also stabilize your account as you begin to take money out to live on postretirement. Market losses coupled with withdrawals can lead to account depletion that can never be recovered. But with Stadion, the first of these two dangers is drastically reduced.