Dodging The Estate Tax - For Now

At the end of 2010, when Congress rushed to make sure that the tax cuts of 2002 didn’t expire, the legislation contained good news and bad news , particularly regarding the estate tax.

The good news regarding estate taxes? There’s now a $5 million exclusion for individuals, which means that if you die, your estate won’t owe any estate taxes if it is worth less than $5 million.

The bad news? The new rules are in effect for only two years. After that, anything can happen.

“By putting the exemption at $5 million, they’ve done a lot of people favors by taking them out of the equation,” says Michael Lammers, Senior Vice President and Chief Trust Officer for Investors Independent Trust Co. in Boulder. “But there’s still a great need for people to do estate planning.”

Regardless of the amount of assets in a person’s estate, a plan for distributing those assets must be in place. Otherwise, courts decide how to handle the estate.

Surviving family members can find themselves in a difficult position when someone dies without leaving current estate-planning documents or a will.

“Dying without a will is not a good thing,” Lammers says. “It’s not that expensive to have a simple will in place.”

Lammers suggests that people consult a good estate-planning attorney to examine their options, even though the estate tax isn’t an immediate problem for most families. A good estate plan can make the distribution of assets run more smoothly.

Because the estate tax exclusion amount and other rules seem to change every few years, it is important for people to think about the structure of their estate, says Billie Castle, a trust and estate planning attorney in Grand Junction. Even families who did their estate planning years ago should revisit and update their plan.

“People did their estate planning with the idea that they would never have to touch it again,” Castle says.

However, certain arrangements involving marital and family trusts that once were effective now might be leaving people open to high capital-gains taxes, Castle says. Revising old estate plans and restructuring financial arrangements potentially can save significant money. Revisions also can introduce some flexibility into the plans to deal with changes that might come along after the current estate-tax laws expire in 2012.

“The old estate plans are more likely to bite somebody than the estate tax ever would,” Castle says.
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Real Estate Investing: 'Not for the faint of heart'

Traditional investors hunting for better returns on their money should be cautious about venturing into income-producing properties, says an experienced real-estate investor.

Real-estate investing can have a strong upside. Buying a house or other income-producing property can produce a steady stream of rental income and result in financial-leverage advantages and tax shelters. Buyers of such properties can manage their risk more effectively if they are aware of the potential problems and pitfalls that come with such investments, says Ed Hokanson, a professional real-estate investor in the Grand Junction area with more than 30 years of experience.

“It’s a fairly sophisticated thing for somebody without experience in real estate,” Hokanson says. “It’s not for the faint of heart.”

Hokanson says investors shouldn’t buy real-estate with the expectation that the property will take care of itself. On the contrary, owning rental real estate can be a time-consuming job that requires strong management skills and even a little handyman knowledge. Those might be obvious requirements for investors who manage properties themselves, but investors who hire property management companies to run their rentals must know how to “manage the manager,” Hokanson says.

In fact, he suggests that investors manage properties themselves for two years before hiring a property manager so that they become familiar with the issues they will face as owners of income-producing property. In addition, the more you know about the property you own, the more efficiently you can manage that property and maximize your returns.

Another suggestion from Hokanson: “Don’t buy junk.”

Although foreclosed properties can seem like great bargains, many of them have sustained a significant amount of damage, courtesy of the former owners who defaulted and either neglected or trashed the property before leaving. Such properties can cost investors large sums of money to repair, and there’s no guarantee that more problems won’t appear.

The better investment properties tend to be existing homes or multi-unit complexes that have been kept in good shape and have stable tenants, or new properties that have warranties. Hokanson compares the process to buying a used vehicle: Most people would rather buy a high-quality used car or a new car, rather than a damaged car that requires continuous repair, and the same concept applies to the purchase of investment properties.

Hokanson says real estate can be an effective way to diversify an existing investment portfolio, but he suggests that investors make sure they are comfortable in the role of landlord before they put money into income-producing properties. That means they should be willing to take phone calls from tenants and should be prepared to handle the problems that can arise with buildings, from sewers to roofs and everything in between.

“People still need to know something about real estate before getting into it,” he says. 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Valentine's Day Suggestions

If the early bird gets the worm, then surely the early cupid gets the table and the chance to make magic happen! It might be hard to believe, but Valentine’s Day is right around the corner, and now is the time to get your reservations in for a special night out. If you are looking for the perfect atmosphere to take your special someone to, we have some great suggestions…

An Old Favorite:

Sometimes it’s the familiar that warms our hearts. If familiar is what you’re looking for, you’ll be happy to know that an old favorite, Pantuso’s Ristorante & Lounge, has reopened at the Clarion Inn. Owner Chris Blackburn said that they will definitely be offering some ‘specials for two’ that evening, “probably including a bottle of wine.” If you haven’t been back since they re-opened, Valentine’s Day might be the perfect excuse to renew an old love affair with Pantuso’s, Grand Junction’s original Italian Restaurant. For more information, call Pantuso’s at 970-255-0000.

Something Different:

If you are looking for something different, then Mesa State College’s 1st annual Renaissance Feast might be your ticket. This brand new event is costume optional and will take place on February 12 at 5:30 p.m. in the new Mesa State College Ballroom. This four course feast comes to you complete with a royal court and entertainment by MSC Music Students. Even better, your $75 ticket supports the MSC Scholarship Fund – so you can’t go wrong. In the words of Dana Nunn, Mesa State College Spokesperson, “it will be a very nice event to help celebrate, and certainly for a good cause too.” If you would like more information, or to purchase tickets, contact Doug May, who wears a second hat as president of the Mesa State College Foundation – 970-263-5126.

The Heart of Wine Country:
 
If you are looking for a great ‘get away’ without leaving town, the Wine Country Inn offers the perfect solution. Not only will they feature specials (and special desserts) in the restaurant that night, they are also offering two great packages for those choosing to stay over. The ‘Sweet and Simple’ package is priced at $150 a night and includes an overnight stay for two in a standard king room, truffles, a bottle of wine, logo glasses, and a wine opener. The ‘Passion in Palisade’ includes all the above plus a ‘rose petal’ turn-down, votive candles, and Eros products, for a package price of $200 a night. Packages can be booked for Thursday, Friday, Saturday, Sunday, or even Monday of that week. These packages did sell out last year, so if you are interested, get your reservations in today by calling the Wine Country Inn at 970-464-5777, or toll free at 1-888-855-8330. 
 
 Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Transparency Sets May-Investments Apart

Flying is inherently scary. Would you rather fly inside a cargo plane with no view of the earth below, just trusting in the pilots’ skill? Or is it better to be able to see what’s going on around you? Transparency – being able to see where you are and what’s really happening – generally makes for a more enjoyable ride.  Transparency in the financial industry, however, is the exception rather than the norm.

Whether it is Citigroup hiding subprime mortgages off its balance sheet, or AIG making huge bets in derivatives in a small subsidiary insulated from reality, lack of transparency is the Freddy Krueger of the financial services industry. Handling uncertainty about the future is one of the great challenges of investing, and this problem is compounded when investors don’t understand how their own portfolio is currently invested. When markets turn down, as they did in 2008 and early 2009, this lack of understanding turns to fear and leads investors to make costly emotional decisions.

High fees and complex products go together like Bonnie & Clyde. Made for one another, they target sophisticated investors because that’s where the money is.  Investors often don’t understand the investment strategies being employed in their portfolios. Bernie Madoff refused to explain his “proprietary” trading strategies to anyone. Because Madoff was well connected with the industry regulators, and because of how he dressed and the cars he drove, many investors bought into his “black box” investing style, which turned out to be nothing more than a ponzi scheme.

The industry’s lack of transparency results in emotional decision-making by clients. If you don’t understand what you own, but you see its value cut in half, you are far more likely to sell (probably at or near the bottom) than if you understand the investment you’ve made and are therefore willing to ride out the tough times. Moreover, this isn’t just a theoretical problem. Most of us probably know someone that lost tens of thousands of dollars, if not more, by bailing out of stocks at or near the market bottom in 2008/9.

May-Investments approach has been to be as transparent as possible, as often as possible, in as many forms as possible. The key to this approach is having an explainable discipline.

Having a discipline to explain portfolio construction, rather than a hot story for each investment, makes it much easier to communicate. May-Investments uses an electronic newsletter, a free audio book, its company web site, and traditional marketing materials to make this discipline as transparent as possible. In addition, the firm hosts seminars and workshops to focus on specific issues and encourages clients and other friends of the firm to attend as many of these as they can.

This new eMag focuses on a much broader range of topics of interest to retirees, and those preparing for retirement. After all, enjoying retirement is not just about the money. Retirement is about the relationships and activities that clients pursue in retirement that give purpose and enjoyment to that season of life.

On the other hand, the firm’s Audio Book explains in detail how investments are chosen for clients’ long-term investment portfolios. May-Investments is an active manager, changing the portfolio as the investing environment evolves. This is very different from an industry which espouses “buying and holding” the same investments throughout the cycle, and simply riding out the sell-offs in hopes of owning the right securities when good times return, which we call an “asset storage” approach. Simply being an active asset manager, these days, is unusual. Being able to explain the discipline is priceless.

May-Investments just finished hosting its annual Economic Update Forecast luncheon where clients and friends of the firm learn about May-Investments expectations for the year ahead. We don’t get things exactly right. Indeed, the past two years have turned out much better than we had anticipated (thankfully). What’s important is that by developing the forecast, and monitoring its key elements throughout the course of the year, we (and clients) are better able to understand the current investing environment.

Our firm belief, however, is that there is value in forecasting, even if you don’t get it right every time. There are good reasons to actively manage the portfolio, even though you’ll never know exactly which asset class or industry sector is going to come out on top each quarter. The question of how you allocate portfolio assets is a critical issue, and much too important to ignore just because some in-house compliance attorney would rather not have you admit in public that your forecast might be wrong.

I’ve got news for the compliance department. The public already knows that we’re often wrong!

In addition to the large Economic Update seminars, May-Investments also hosts small educational workshops on specific topics. We have used these more intimate meetings to explain to clients current portfolio holdings, to help people wrestle with questions such as whether or not to convert from a traditional IRA to a Roth IRA, and to examine bigger issues such as how to organize your financial records, to be better prepared in the event of an emergency. The only difficulty is in finding enough new information so that we are actually able to have them walk away having learned something they didn’t already know. (Having a practice that targets sophisticated clients has certain disadvantages!)

We have also used small workshops to teach people how to use our free financial planning software, which we make available to subscribers to our monthly eMag. The software provides people with complex retirement calculations and for those able to use it without additional input from us, we make it available free. For those who need additional help, for a reasonable hourly fee an advisor can help clients initiate a retirement planning process that can help guide them down the path to a life well lived.

Having a plan and investing with a discipline make it easier to adjust to the uncertainties that impact us in retirement, which can be a stormy time. Like relying on the airplane instruments when flying in a storm when visibility is bad, a discipline enables us to react proactively to extremes in volatility and uncertainty and helps us stay on the flight path as intended. Being transparent throughout the process, even during times of turbulence, makes the journey better for everyone. 

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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The good patient: How you can help your doctor

We all know what we’re expecting when we go to the doctor: We expect to get well.

But what do doctors need from us so they can help us get well?

Dr. Phil Mohler has practiced medicine in Grand Junction for 36 years and serves primarily elderly patients, and he also works as associate medical director for Rocky Mountain Health Plans. He provided several tips for patients that can make it easier to navigate the complicated health-care system.

The first tip: Find a primary care physician to serve as your first stop. Pick a doctor whose professional practice will outlive you. The idea is for you and the doctor to develop a relationship over time that will give the doctor greater insight and knowledge about you.

“People need to have a primary care physician,” Dr. Mohler says. Some patients try to diagnose their own ailments and then go directly to a specialist, shortcutting what would have been the role of a primary care doctor. Such an approach ultimately can be more expensive and less effective than first seeing a primary care doc.

“Sometimes that’s an inefficient model, and sometimes that a very expensive model,” Dr. Mohler says. “Primary care physicians are trained to take care of 85% of the complaints people come in with.”

Other tips:

• When making an appointment, ask for the first appointment in the morning or the afternoon. The doctor is more likely to be on time for the first appointment, and you won’t have to wait so long.

• When you call the doctor, be up-front about the problem you’re experiencing. By thoroughly explaining your problem, you can help the doctor’s staff schedule an appropriate amount of time with the physician.

• If you have several problems, make a list and prioritize the problems. Focus on the top issue with your doctor, and save the rest for another time, if possible.

• Regarding medications, seek the generic version of the product the doctor offers. “Generic drugs work great,” Dr. Mohler says. “There is a miniscule number of times you would not use the generic version.” If a doctor offers a brand-name drug, ask if a generic version exists.

• “Don’t go in and demand the new drug you saw on TV last night,” Dr. Mohler says. “Ninety percent of those drugs are ‘me-too’ drugs developed by drug companies after their blockbuster’s patent ran out.” Low-cost generic drugs and over-the-counter medications often work just as well as expensive name brands.

• Get immunizations. “In older folks, immunizations are still probably the best bang for our buck in medicine,” Dr. Mohler says. He says it is estimated that for every dollar spent on immunizations, the health-care system (and its patients) save $6 to $10 in costs. Typical immunizations protect against diseases such as flu, tetanus, whooping cough, and shingles.

• It doesn’t matter where you receive your immunizations, whether at your doctor’s office or at the grocery store’s pharmacy. But if you receive an immunization from someone other than your doctor, be sure to call your doctor’s office and ask that a record of the immunization be placed in your chart.

• Consider creating a medical power of attorney that gives someone you trust the ability to make medical decisions for you if you are incapacitated. Share a copy of the document with your physician.

• The Medicare website at http://www.medicare.gov/ contains some tools to help people select the type of supplementary medical coverage they need when they reach the age to qualify for Medicare. Another resource exists on the website of CVS pharmacy. Visit http://www.cvs.com/, and in the menu on the left side of the page, scroll down until you see "Medicare Information" under "Pharmacy Services."

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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Portfolio Commitment to Energy Sector Increased

The May-Investments mutual fund model reduced its position in high yield (junk) bonds in order to increase the portfolio’s commitment to the energy sector. In the model, the high yield bond investment was made in December 2008, during the midst of the bank panic. Bond prices have appreciated significantly since that investment was made, and the bond fund also paid investors double-digit yields (based on cost) in the interim. More recently, however, higher prices on these bonds have reduced their potential for upside as well as the yield paid to investors (based on current value). As a result, junk bonds have had a difficult time keeping up with the upward move in equities.

The December 2008 purchase of junk bonds represented an unusual “doubling-down” on the sector. Yields on some bond funds at that time rose to more than 20%, which would be roughly equivalent to paying a Price/Earnings multiple of only five on a stock with flat earnings prospects. However, at that time – flat earnings prospects looked pretty good, since earnings on the S&P 500 had gone into a freefall. Moreover, bond holders were in a better position to preserve wealth in the event that corporate defaults were widespread as a result of the Great Recession.

As it turned out, bankruptcies did not increase as much as many feared. Both stocks and bonds have rallied once the economy stabilized, but the risks born by stock owners during this time was much greater than the risks that bondholders faced. Some companies that went bankrupt actually paid bondholders 100 cents on the dollar after the bankruptcy, while shareholders in those companies have not been made whole. It may well have been a once-in-a-lifetime opportunity to invest in junk bonds at incredibly low price levels, but that time is past.

At current prices, the risk/reward trade-off is much different. It is much harder to justify a doubled-up weighting in the sector at this point. With the sale in January, the portfolios still typically have one remaining high yield bond fund position remaining, at least for now.

The proceeds from the sale were used to reinvest in a mutual fund that invests primarily in natural gas exploration companies. Apache Corporation, Anadarko Petroleum, and Devon Energy were top holdings as of November 30. The energy sector has re-emerged as a very strong part of the market as investor optimism about the market, and the economy generally, improves. Commodity prices have moved higher, vehicle miles travelled has recovered from depressed levels in 2008/2009, and it is possible that the inflation-panic trade (buy gold!) may be giving way to the recovery-induced-inflation trade (buy energy!). Research by BCA Research shows that during the past forty years, often times the energy stocks have outperformed following phases of increased economic activity, regardless of the direction of crude oil prices. The recent strength in crude oil prices merely reinforces the notion that if energy stocks are moving up, our portfolios want to have significant exposure to this key area. 

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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