Increasing Your Return on Life.®

Frank Talk - 4th Quarter Newsletter (2020)

Published: 12/18/2020

Table of Contents


Written by: Frank Fantozzi

Happy Holidays, clients and friends!

We hope you’re looking forward to spending time with family and friends—either in person or virtually—this holiday season. If the holidays are anything like the rest of 2020, they’ll be anything but business as usual. What was it that Charles Dicken’s said more than a century ago, “It was the best of times, it was the worst of times…?” Those words certainly ring true today.

In many ways, we experienced the full range of human emotions in 2020, thanks to a global pandemic, economic recession, contentious election and rallying stock market. We experienced tremendous hope as scientists raced to develop new therapies and vaccines to fight a deadly virus. We saw companies bring ingenuity to bear, by retooling, refitting and ramping up production to meet the demand for consumer goods and services. We witnessed entrepreneurial individuals and businesses as they created new cottage industries and innovative ways to deliver existing services to consumers. We also experienced deep sadness and despair as hospitalization and death rates continued to grow, suicide rates climbed, and unemployment rose. The strain of being apart took its toll on many, but none more so than those who lost loved ones.

Yet, somehow, the American spirit continued to endure, even in—or despite—the tough times we faced this year. In November, we saw the markets rally on the news of not one, but several effective vaccine trials. This month, the first of the U.S. vaccine supply began to be distributed and administered, promising hope and an eventual return to normalcy for both life and business.

As we move closer to the new year, we hope that you and your family will find much to reflect on that you are thankful for, as we look forward to 2021 with optimism. We wish you and your family the happiest of holidays and all the best in the new year!

What’s In It for You?

At-a-glance guide to your 4th Quarter 2020 Frank Talk newsletter:

  • News & Events
    • Team Member News
    • Recent Events
    • Your 2020-2021 Tax Planning Guide
    • Complimentary Second Opinion Service
    • Visit our Getting Frank Blog
  • Market & Economic Update

News & Events

Team Member News

Amy_Prof1-1.1Wealth Advisor Amy Valentine Receives CFP® Certification
We’re pleased to announce that PFS Wealth Advisor, Amy Valentine, CFA®, recently earned her CFP® certification. For more than 30 years, CERTIFIED FINANCIAL PLANNER™ certification has been the standard of excellence for financial planners. CFP® professionals have met extensive training and experience requirements, and commit to CFP Board's ethical standards that require them to put their clients' interests first. Amy, a CFA® charterholder, brings more than 15 years of experience in financial planning, portfolio management, manager due-diligence, investment research, and financial analysis to helping high net worth families and business owners pursue their Return on Life®. Please join us in congratulating Amy! 

As our team continues to grow and evolve, we want to assure you that serving your needs continues to be our top priority. Our team approach to helping you and your family protect and grow your wealth continues to be one of the unique strengths of our firm. Our team structure enables us to seamlessly provide the high level of service and attention you desire from professionals who bring deep experience and a multidisciplined approach to serving your needs. As our team continues to grow and evolve, we want to assure you that serving your needs continues to be our top priority. Our team approach to helping you and your family protect and grow your wealth continues to be one of the unique strengths of our firm. Our team structure enables us to seamlessly provide the high level of service and attention you desire from professionals who bring deep experience and a multidisciplined approach to serving your needs.

Recent Events

Get Your Medicare Questions Answered
PFS Retirement Plan Advisor, Brian Klecan, AIF®, CFPA, hosted a virtual Medicare seminar for a select group of 401(k) Prosperity® retirement plan clients and their employees on Wednesday, December 16, featuring guest speaker and Life & Health Advisor, Rodika Bender. Ms. Bender shared her knowledge and expertise on Medicare, followed by a live Q&A session.

Joint Force Leadership: Elite Leadership Traits
On Thursday, November 12, we hosted an exclusive virtual event via Zoom with U.S. Navy SEAL (Ret.) and co-author of Joint Force Leadership, Commander Mark McGinnis. Commander McGinnis discussed how today’s business owners and leaders can:

  • Plan with precision
  • Execute at a high level every day
  • Shape a dynamic and resilient organization that accommodates rapid change
  • Unlock the expertise of your best asset, your people
  • Communicate your organization's "commander's intent"

We look forward to bringing you additional events like these in the year ahead!

View our 12th Annual Economic Summit on YouTubeEvent Logo for Email

In case you missed it, The 12th Annual Cleveland Economic Summit, which was held virtually on October 20, 2020, is now available for viewing on our YouTube channel.  For those who were not able to attend this exciting event—or if you did join, but would like to revisit some of the themes discussed—click the following link to view a video recording of the live, virtual event.

The video includes introductory remarks from Planned Financial Services founder and president, Frank Fantozzi, and “Tribe Talk” with Bob DiBiasio, Senior Vice President of Public Affairs for the Cleveland Indians. Bob provided an enlightening and entertaining inside look at the history of the Tribe and its plans for the future.

Jacob Drossner, a Portfolio Specialist at ClearBridge Investments, provided economic analysis and insight into today’s capital markets, as well as his outlook for the ongoing economic recovery. You may find this information helpful as you prepare for the year ahead. We’ve also included a link to download Mr. Drossner’s slide presentation: The Anatomy of a Recession: What to Look for and Where We’re Headed.

Click on the following link to access the full video recording of The 12th Annual Cleveland Economic Summit. Be sure to follow us by subscribing to our YouTube channel!

2020-2021 Tax Planning GuideAccess your 2020-2021 PFS Tax Planning Guide

Having a plan in place to manage your tax exposure is an integral part of financial planning and can be especially important during times of change or uncertainty. To help gain the clarity you seek, use the link below to access your Planned Financial Services 2020 – 2021 Tax Planning Guide.

 View or download your PFS 2020 - 2021 Tax Planning Guide now.

 The guide provides an overview of some of the most significant tax law changes in recent years, including the 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act, the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, and the 2017 Tax Cuts and Jobs Act (TCJA) that continues to impact your tax planning. It also addresses other key tax provisions, strategies, and deadlines you need to be aware of to reap the full benefits of collaboration with your qualified tax advisor.

Reminder…Our Complimentary Second Opinion Service is Available to Your Family, Friends and Colleagues

Earlier this year we introduced a new service, available exclusively to your friends, family members and associates. Our complimentary second opinion service provides the people you care about with an opportunity to benefit from the same expertise and guidance that you have come to expect as a valued client of Planned Financial Services. 

In many cases, a second opinion will simply provide confirmation, and the confidence that those you care about are on track to fulfill their values and achieve their goals with their current financial provider or strategy. However, if needed, we are happy to suggest ways in which we can help, including recommending another provider if we are not a good fit for their needs. Either way, following a Discovery Meeting and Investment Plan Meeting with our experienced team, they will receive a Total Client Profile and a Personalized Financial Assessment of their current situation. To learn more about the Planned Financial Services Second Opinion Service, click here to access or download a full description of this service and the benefits it offers to the people you care about most.

Don’t Forget to Visit our Getting Frank Blog

If you haven’t already, be sure to visit our Getting Frank Blog at where you’ll find timely information on the financial planning and investment topics that are meaningful to you. Visit us weekly as we post new articles and opinions.

Market & Economic Update

Stocks and bonds posted strong returns in 2020 despite a tumultuous year, although that may be surprising only for bonds. We believe we’re in the early stages of a new bull market for stocks, but the opportunities for bond investors may require more patience. The investment landscape for both asset classes may offer new opportunities for investors in the new year.

Our 2021 year-end fair value target for the S&P 500 Index is 3,850–3,900, reflecting about an 8% total return from the close on December 11. Our target is based on a price-to-earnings (PE) ratio of around 20—slightly below current valuations—and our preliminary 2022 earnings per share (EPS) estimate of $190.

Skeptics might say after a 64% rally in the S&P 500 since the low on March 23, 2020, that this market may soon run out of gas. Historically, the second year of previous bull markets has been rewarding for investors. We think this bull market is set up potentially for a better-than-average first two years based on the experience during the 2008–09 financial crisis and an expected strong earnings rebound. Fiscal and monetary stimulus and pent-up demand once the economy fully opens will help.

Earnings to Provide a Spark

We expect earnings over the next two years to get a boost from cost efficiencies achieved during the pandemic. As the threat of COVID-19 diminishes and the economy moves toward fully reopening, we anticipate corporate America will begin to showcase its much-improved earnings potential. Up to $190 per share in S&P 500 earnings could be possible in 2022, a 15% increase from our $165 EPS estimate for 2021; FactSet consensus calls for $197 for 2022, up from $195 when Outlook 2021 originally went to print. We expect this earnings strength to enable stocks to grow into elevated valuations—valuations that don’t look as high when compared to low interest rates.

How to Invest

  • Awaiting Style Rotation. We expect the strong performance by growth-style stocks to continue into 2021, bolstered by strong earnings trends and favorable positioning for the pandemic. As the economy makes additional progress toward a return to normal in the coming year, we would expect participation in this young bull market to broaden and potentially help boost cyclical value stocks.
  • Warming Up to Small Caps. We warmed up to small cap stocks in the third quarter of 2020 due to their historical track record of outperformance early in bull markets and prospects for a strong post-pandemic earnings rebound. As 2021 begins, our view on small caps remains neutral, but as the end of the pandemic comes into view, the chances of sustained small cap leadership may improve.
  • Stay with Tech. Despite such a strong 2020, technology remains a favored sector for the coming year for its strong earnings outlook and favorable positioning for this environment. Cyclicals over Defensives. We generally favor cyclical sectors such as industrials and materials over defensives such as consumer staples and utilities, though we also like healthcare.
  • Emerging Markets Stand Out. We expect the solid economic growth across Asia to support continued outperformance by emerging markets equities over developed markets in 2021. As a more durable global economic expansion materializes and the US dollar potentially weakens further, performance for European and Japanese stocks may improve—with an edge to Japan based on massive stimulus efforts and relative success containing COVID-19.

Bonds Staying in their Lane in 2021

A newly expanding economy may present a challenging environment to bond investors in 2021, as this typically leads to higher interest rates. We believe there will still be opportunities for bond investors in the new year, but it may be a year that requires greater patience, lower return expectations, and a more opportunistic approach. The path of the 10-year Treasury yield provides our baseline for our fixed income views. We are targeting a 10-year Treasury range of 1.25–1.75% for year-end 2021, supported by the expanding economy and normalizing inflation.

However, we have a bias toward the lower end of this target as accommodative Federal Reserve policy and foreign buyers drawn to the relatively higher US rates may keep a limit on potential yield increases.

From a historical perspective, the large decline in 10-year Treasury yields experienced from the end of the first quarter of 2019 to the end of the first quarter of 2020 points to a meaningful increase in yields. Since 1990 3 Member FINRA/SIPC we have experienced six yield declines of at least 1.5% over four calendar quarters and have seen a meaningful rebound each time.

Based on our view for rates and the economy, we expect flat to low-single-digit returns for the Bloomberg Barclays US Aggregate Bond Index in 2021. Despite the challenging yield environment, high-quality bonds may continue to play their role as portfolio diversifiers during periods of stock market volatility.

Position for Rising Rates

With modest return expectations for high-quality bonds, we recommend suitable investors consider trading off a degree of diversification for greater insulation from rising rates. From an asset class perspective, we would consider being overweight mortgage-backed securities (MBS) and investment-grade corporates. MBS may not offer the upside potential of corporate bonds, but they can be more resilient when rates rise.

For suitable income-oriented investors, adding more credit-sensitive sectors such as high-yield bonds and emerging market debt may help compensate for the reduced income potential of a low-rate environment, although we would still prefer high-quality bonds to make up the bulk of any bond portfolio. Should any material risks to the economic recovery present themselves, these credit-sensitive sectors would be more vulnerable.

Potential Risks to Our Call

Our stock market forecast could end up being overly conservative. We see possible upside to that forecast depending on the pace of vaccine distribution in the first half of 2021. We also envision a scenario where the market may look through this latest wave of COVID-19 and ride stimulus and the economic recovery to 4,000 or higher on the S&P 500 next year (though not our base case).

While we expect US Treasury 10-year yields to rise modestly to a range of 1.25–1.75%, a better than expected economic recovery could cause an upside surprise to our yield forecast. Further, if the economic recovery is more robust than forecast, inflationary forces may create additional upside pressure to interest rates—creating an interesting debate for the Fed.

Closing Remarks

As we move into the new year, we will continue to monitor and adjust our portfolios as conditions change and keep you up to date on these and other developments. If you, or someone you know, has questions or concerns about your personal investment strategy or business finances, please don’t hesitate to share information about our complimentary Second Opinion Service and reach out to your experienced team of wealth advisors at 440.740.0130.

We also want to remind you that our office is open for clients who would like to meet in person. For those who prefer to meet virtually, we continue to use Zoom for virtual meetings, and are always available via phone. Just let us know how you prefer to meet, and we’ll make it happen! We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.

Happy Holidays!

Don’t forget to join or follow PFS on Twitter, LinkedIn, Facebook and YouTube.

Real People. Real Answers. 

Health, Happiness, and Good Fortune,

Frank Fantozzi
President & Founder


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

S&P Energy Index: A market capitalization weighted index that tracks the performance of energy companies.

*Some research was provided by LPL Financial, LLC, December 2020.  PFS nor LPL make no representation as to its completeness or accuracy.

Planned Financial Services, LPL Financial, The CFP Board, Rodika Bender, Commander Mark McGinnis, Bob DiBiasio, The Cleveland Indians, Jacob Drossner, and ClearBridge Investments are all separate, unaffiliated entities.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.

Securities offered through LPL Financial. Member FINRA/SIPC.


Congratulations on Your Windfall! Now, for the Caveats

Written by: Cynthia Yang

Most Americans would welcome a financial windfall. But receiving an inheritance, legal settlement or prize winnings can be a mixed blessing. For example, managing the money might require financial knowledge and experience you don’t have. Without a comprehensive plan that takes into account your current situation and future goals, you might quickly run through the money and be left with nothing to show for it.

Avoiding mistakes

There are plenty of traps lying in wait for people who receive a sudden and sizable influx of cash. For example, fraudulent charities may come knocking. Or you may be tempted to immediately buy an expensive new car or luxury vacation. Avoid these potential pitfalls by stashing your windfall in a bank or money market account as soon as you receive it. Then let it sit there until you identify your goals — for example, for retirement or your children’s education — and develop a plan. Waiting at least a month before you touch the money can help prevent impulse buys and other mistakes you later regret.

Also realize that you may owe taxes. Some windfalls, such as lottery winnings and certain legal settlements, are subject to federal tax — as much as 37% federal tax if your windfall pushes you into the top income tax bracket. State and local taxes may apply as well. A tax professional can help you determine what you owe.

Best practices

What you eventually decide to do with your windfall depends on many factors. But if you have certain types of debt, you’ll probably want to make that your top priority, especially if it carries a high interest rate and the interest isn’t deductible. Also, establishing or boosting your emergency savings can minimize the need to incur future debt.

Next, consider where you’d like to be five, 10 or 20 years into the future. Develop a budget that will help you move toward your goals — whether that means retiring early, starting a business or something else. Until you have a solid handle on the amount available after taxes and debt, you’ll probably want to keep working. Few windfalls are large enough to see anyone all the way through retirement.

Finally, a word of warning: Be careful when asked for money. Friends and family members may expect to share in your bounty or may pitch “sure-fire” investment opportunities. Charitable organizations may ask for donations. The ability to support loved ones in need or charitable causes is a real benefit of receiving a windfall. At the same time, if you agree to every request, you’ll quickly deplete the funds. And if you give to every charity that contacts you without first vetting the organization, you could end up a fraud victim.

Reward yourself

You’re only human, so it’s ok to buy something small — particularly something you really need — to recognize your good fortune. Just be sure to remember that your windfall could help you achieve goals you once thought were out of reach.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The Kiddie Tax: What's New is Old Again

Written by: Amy Valentine

In late 2019, Congress reversed significant changes to the federal “kiddie tax” that it had made only two years before. Previously, the kiddie tax applied the parents’ marginal tax rate to a child’s unearned income in excess of a certain threshold ($2,200 in 2020). But the Tax Cuts and Jobs Act (TCJA) made that income subject to the tax rates for trusts and estates, starting in 2018 — thus pushing some children into a higher tax bracket than their parents.

However, more recent legislation (the SECURE Act) restored pre-TCJA rules. If you’re contemplating a financial gift to your children, you need to understand the impact of the kiddie tax in its current form. Also, if you made gifts in 2018 or 2019 and calculated kiddie tax on your children’s returns under the TCJA rules, you might want to amend those returns. Here are the details.

Disincentive for income shifting

Established in 1986, the kiddie tax was designed as a disincentive to income shifting by parents who, to reduce their tax bills, transfer income-producing assets to their children in lower tax brackets. By taxing a child’s unearned income over a specified threshold ($2,100 in 2018 and $2,200 in 2019 and 2020) at the parents’ marginal rate, the kiddie tax essentially eliminated the advantages of income shifting. In other words, except for a small amount taxed at the child’s rate, most of the income was taxed as if a transfer hadn’t been made.

Originally, the kiddie tax applied to children under 14, but in 2007 the age threshold was raised to 19 (24 for full-time students) as of the last day of the tax year. The tax doesn’t apply to children who are married and file joint returns or are 18 or older with earned income that exceeds half of their living expenses.

Harsh consequences

By imposing kiddie tax at trust and estate rates, the TCJA created some harsh outcomes. That’s because for trusts and estates, the highest marginal rates kick in at very low income levels. For example, in 2018, trusts and estates were subject to the highest rate, 37%, on ordinary income or short-term capital gains over $12,500. Long-term capital gain income over $12,700 was subject to 20%. In contrast, the thresholds for married couples filing jointly were $600,000 for ordinary income and $479,000 for long-term capital gain and qualified dividend income.

Say a married couple with $250,000 in taxable income made a substantial gift of income-producing assets to their child in 2018. Income that exceeded the $12,500 and $12,700 thresholds would be taxed at 37% for ordinary income and short-term capital gains and 20% for long-term capital gains and qualified dividends. The married couple would have been taxed at rates of 24% and 15%, respectively, on the same income.

The TCJA kiddie tax was particularly unfavorable for children of deceased military personnel, first responders and emergency medical workers who received certain government benefits. Because these benefits were considered unearned income, they were taxed at rates as high as 37%, even if the surviving parent was in a lower bracket, such as 22% or 24%.

To avoid such unintended consequences, the SECURE Act reinstated the pre-TCJA kiddie tax rules, effective for tax years beginning in 2020. It also gave families the option of applying the old rules on their 2018 and 2019 returns. (See “Should you amend your children’s returns?”)

Planning for the future

Before you make financial gifts to your children, consider the impact of the kiddie tax. The SECURE Act made the tax more palatable than it was, but it still could thwart your tax-planning goals. For children subject to kiddie tax, you might consider postponing gifts until they exceed the age thresholds. Alternatively, you could make gifts that won’t — or are less likely to — trigger the tax, such as growth (as opposed to income) investments, tax-exempt or tax-deferred bonds, and contributions to Sec. 529 college savings plans. Talk to your tax advisor to explore options that make the most sense given your family’s circumstances.

Sidebar: Should you amend your children’s returns?

If your children paid kiddie tax in 2018 or 2019, filing an amended return could be beneficial. Taxpayers may apply the Tax Cuts and Jobs Act (TCJA) rules or pre-TCJA rules for those years (see main article). Even though the SECURE Act was passed before the 2019 filing deadline, most tax software programs calculated kiddie tax for 2019 under the TCJA rules.

To determine whether you should file amended returns, your tax advisor can calculate your child’s tax liability under both sets of rules. Many families find that they’re better off using the pre-TCJA rules and that it would pay to amend returns that followed the TCJA rules. But the TCJA rules don’t always result in higher taxes. At lower levels of your child’s unearned income, the TCJA rules may produce tax savings.

Suppose, for example, that in 2018 a married couple in the 32% tax bracket gave their child an investment that earns ordinary income. Using pre-TCJA rules, unearned income beyond the $2,100 threshold would be taxed at 32%. But using TCJA rules, it would be taxed according to the trust and estate rates as follows:

  • Up to $2,550, 10%,
  • The next $6,600, 24%,
  • The next $3,350, 35%, and
  • Any income above $12,500, 37%.

So, depending on the amount of income, the TCJA rules may save taxes.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. 

Should You Start Social Security Benefits Early?

Written by: Brian Klecan

Full retirement age for Social Security benefits generally is between ages 66 and 67. But you can take a reduced benefit (by as much as 30%) starting as early as age 62. You also can increase the amount of your benefits — by 8% per year, up to a maximum of 32% — by delaying your start date to as late as age 70. Here’s what you should consider if you’re thinking of taking one of these options.

Other income sources. As a general rule, you shouldn’t claim Social Security benefits early if you have other sources of income. Waiting until full retirement age or, better yet, delaying benefits to age 70, is roughly the equivalent of an investment with a guaranteed rate of return as high as 8%. That’s difficult to duplicate in a low-interest environment. Consider tapping the equity in your home or taking distributions from IRAs or qualified retirement plans as an alternative to early Social Security benefits. But also consider the impact of life expectancy (see below).

Impact of earnings. Delaying Social Security benefits is particularly advantageous for those still working. If you start benefits before reaching full retirement age, they’ll be reduced by one dollar for every two dollars you earn above a certain threshold ($18,240 in 2020). In the year you reach full retirement age, benefits will be reduced by $1 for every $3 you earn above a different threshold ($48,600 in 2020) up to the month before you reach full retirement age. After reaching full retirement age, your benefit amount will be recalculated to give you credit for months you didn’t receive a benefit because of your earnings.

Life expectancy. Social Security benefits are actuarially calculated. If you take a reduced benefit starting at age 62, the total you’ll receive over your remaining life expectancy will be roughly the same as what you’d receive if you took a higher benefit starting at age 70.

If you live beyond your statistical life expectancy, you’ll receive a windfall by waiting longer to start. Likewise, if you wait and don’t reach your life expectancy, your total benefits will fall short. Those concerned that health issues could prevent them from reaching life expectancy might consider starting Social Security benefits early.

Fortunately, you can change your mind midstream. For example, you might start collecting Social Security early and then suspend benefits once you reach full retirement age. At age 70, you could then restart them at a higher rate.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.


How a CRT Can Work as a "Stretch IRA" Substitute

Written by: Frank Fantozzi

Until recently, if you named someone other than your spouse as the beneficiary of your IRA or qualified retirement plan, that person would have the option of taking distributions over his or her life expectancy. This strategy, commonly called a “stretch” IRA, offered significant advantages by allowing distributions to be spread over decades. But the SECURE Act of 2019 drastically reduced these benefits (with certain exceptions) by requiring distributions to be completed within 10 years.

Fortunately, there are still strategies you can use to replicate some of the benefits of a stretch IRA. If you’re charitably inclined, one approach is to name a charitable remainder trust (CRT) as the beneficiary of your IRA or qualified plan.

Spreading distributions

Stretching distributions over a beneficiary’s life expectancy offers two primary benefits:

  1. It allows the funds to continue growing and compounding on a tax-deferred basis for as long as possible, and
  2. It often results in lower overall taxes on the distributions.

Stretching out distributions means that a significant portion of the funds will be distributed during retirement, when the beneficiary’s tax rate may be lower. If distributions are bunched into a 10-year period, they may be received during a beneficiary’s peak earning years.

Following the SECURE Act, beneficiaries must take distributions within 10 years, with a few exceptions. As before, spouses may take distributions over their life expectancies or roll the funds over into their own IRAs and defer distributions until the age of 72. There’s also an exception for disabled or chronically ill individuals or trusts for their benefit. Minor children may stretch distributions over their life expectancies until they reach the age of majority. But once they’re adults, the balance must be distributed within 10 years.

Using a CRT

If your intended beneficiary doesn’t fall within one of the exceptions, naming a CRT as beneficiary of your IRA or qualified plan can provide some of the benefits of a stretch IRA — assuming it’s structured properly. A CRT is an irrevocable trust that distributes a percentage of its assets to one or more individual beneficiaries for life or a term of up to 20 years. After that, the remaining assets go to charity.

The percentage distributed can range from 5% to 50%, and annual payouts may be based on a fixed percentage of the trust’s initial value (a charitable remainder annuity trust, or CRAT). Or it may be based on a fixed percentage of the trust’s value, recalculated annually (a charitable remainder unitrust, or CRUT). CRUTs generally are preferable because making annual recalculations allows payouts to keep pace with inflation and ensures the funds will never be exhausted.

IRS guidelines

Because a CRT is a tax-exempt entity, the funds aren’t taxed until they’re distributed to your noncharitable beneficiaries. If payouts from the CRT are spread out over a 20-year term or a beneficiary’s lifetime, a CRT can, when structured properly, provide benefits similar to that of a stretch IRA.

However, under IRS guidelines, the actuarial value of a charitable beneficiary’s remainder interest must be at least 10% of the trust’s initial value. The need to preserve a minimum value for charity can restrict the length of the trust term or the size of payouts. This mandate may even make it impossible to establish a CRT for the life of certain younger beneficiaries.

Weigh your options

A CRT can be a viable substitute for a stretch IRA, particularly if your beneficiary is expected to live a long time. To determine whether a CRT is right for you, work with your tax and estate planning advisors to weigh the costs against the potential benefits of stretching distributions well beyond 10 years.

Investment advice offered through Planned Financial Services, a Registered Investment Advisor.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.


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