Episode: 04-25-2023 | Estate Planning Basics

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Allison Dubreuil, Wealthway Financial Advisors:  Good evening. Tonight we wanted to talk about one of the two certainties of life. Two certainties of life are death and taxes. We just got through tax season. So why not tackle death?

Kevin Zywna, Wealthway Financial Advisors:  Let’s talk about death. Yes, riveting. Can’t wait.

Allison Dubreuil, Wealthway Financial Advisors:  Well, not exactly death. But we’re going to talk about planning for eventual passing away and how to take care of your loved ones.

Kevin Zywna, Wealthway Financial Advisors:  And transferring of assets to your loved ones or to charities and so forth. We’re going to talk about estate planning tonight, what to do with what you have once you’re gone? But before we jump into that, we do have a caller on the line. And we’re going to jump out into Chesapeake and speak with Chuck. Good evening, Chuck. You’re on Dollars & Common Sense. Thanks for the call.

Best Investment Options For A Liquidity Event?

Caller:  I’m in a situation where I am (without going into much detail) selling a business in the next two or three months. It could be a pretty substantial amount of money and I’m of retirement age but I’m wanting to make an investment (I’m not obviously losing the proceeds from the from the sale of a business) and kind of wondering what would be a stable investment that we can make so that we could have some income from the sale of the of the business but also have it invested so that we wouldn’t lose money on the investment.

Kevin Zywna, Wealthway Financial Advisors:  And when you say lose money, Chuck, what does that mean to you? A permanent loss of invested funds or does it mean a decline in value on the funds?

Caller: Yes, exactly a decline in value.

Kevin Zywna, Wealthway Financial Advisors:  Okay. Okay, so you’re looking for an investment that never declines in value, but that pays income.

Caller: I’m not sure “never declines,” but I think a safe investment that we can be relatively assured that we’re not going to lose our shirt. Obviously, there’s skin in investment. I understand that. But some stable income. I’m not thrilled about the idea of an annuity, quite frankly, but something that we can be fairly assured that we’re not going to lose a substantial amount of money in the investment.

Kevin Zywna, Wealthway Financial Advisors:  Okay, I think we get the get the picture. Congratulations on the sale, the business, probably a lifetime of hard work there that you invested and looks like you have a liquidity event coming up and are at the right time where you can enjoy that money and hopefully have a good next phase of your life with a lot of travel and exciting things to do. And maybe some dreams realized as well.

The first thing you want to do with a big liquidity event is clean your financial house. Any bad debts, any high interest rates, get that paid off. You want to make sure you build yourself a nice safe, secure liquid emergency fund of anywhere between three to six months of your monthly expenses. That’s money that’s going to be sitting in a plain vanilla bank account, earning little to nothing even in this environment and just a basic savings account. Beyond that, then you can look to attempt to invest for growth and or income and use some of this money to number one, supplement your lifestyle. Number two, hopefully try to grow it to offset the corrosive effects of inflation and be able to grow your income stream from the money to ensure that your lifestyle remains protected for the remainder of your days.

There’s no magic investment that is perfectly safe. In other words, does not change in value, and pay substantial income. I will say one of the things we are seeing now for the first time in probably over a decade are some bank products like high yield savings accounts, money market accounts, CDs, that are paying upwards of four, sometimes 5%. But that’s in an environment with an elevated inflation rate. So those bank interest rates are responding to the higher inflation that we’re seeing. And bank interest rates, while higher than they’ve been in the past, are always barring some occasional exceptions, lower than the inflation rate. So even bank assets lose money that lose purchasing power to the effects of inflation. The way to stay ahead of inflation, to keep your purchasing power of your nest egg, is to invest it for long term growth – primarily in equities or stocks. And that can be done directly – stock from a company or in mutual funds, which are instantly diversified or an exchange traded funds and so forth. But those will be subject to more short term volatility. That’s just the natural trade off that one has to accept.

Oh, and bonds, of course. Bonds would also be another option. But Bond values do fluctuate, even if the interest that they pay does not while you hold the bonds. So it’s a balancing act in there. And it really is going to depend on number one, your temperament and what you’re willing to accept in terms of what you classify as risk. And number two, what you’re trying to achieve – what you need from a lifestyle and income standpoint.

Caller: Okay, that sounds reasonable. My wife also has some money set aside through her retirement. I guess that would come into play also. Yes, okay. Well, that’s good information. We’re wondering can we meet up with you all in the office to discuss this?

Kevin Zywna, Wealthway Financial Advisors: Sure, Chuck? Yes, we’d be happy to talk to you over the phone, if you want some general information or have you and your wife come in for a formal consultation. www.wealthwayadvisors.com is our website and has all our contact information. Or you can just give us a call at the office 757-456-2200. And I will just make a general comment about your situation. If you’re at retirement age, most people think that is around age 65 or so here in the United States, you probably still have another good third of your life ahead of you. That’s a long time horizon. That’s no time to start getting overly conservative with your investments. You will restrict the options that you have down the road if you get too conservative too soon. So just something to think about.

Caller:  Yes. Okay. Well, that makes sense. I appreciate that. We will give you a call and maybe have a consultation over the phone initially and then go from there.

Kevin Zywna, Wealthway Financial Advisors:  All right, Chuck, we look forward to hearing from you.

Allison Dubreuil, Wealthway Financial Advisors:  Chuck mentioned annuities as well. I just thought I’d give make a high level comment about annuities. When people are looking for a safe place to put their money with guarantees that you won’t lose anything income annuities do often come to mind. A word about that is that anytime there are any sort of guarantees or risk is taken off the table you are giving up something. You’re giving up return. You’re giving up future spending power. You’re giving up the control of your money. So, there’s just always some give and take with annuities and of course, some hidden fees so you want to be very careful when approaching an annuity.

Kevin Zywna, Wealthway Financial Advisors:  Right every investment option comes with its own pros and cons. That’s why it’s a good idea to work with a competent professional to help design the plan that is just right for you. We’re going to speak with David here in Virginia Beach. Good evening, David, you’re on Dollars & Common Sense.

Is The 60/40 Investing Practice Dead?

Caller:  Glad to be on, I just have a quick question. I’ve been told that the younger you are, the more you should have in equities versus fixed income. So maybe in your 20s and 30s, you have 75 to 80% in equities, and the balance in fixed income or cash. And then as you get older, you should have a little bit less and less equity exposure. And of course, some people think the 60/40 split between equities and fixed income is a magic number. And so I guess my question to you is, is the 60/40 portfolio dead?

Kevin Zywna, Wealthway Financial Advisors:  Well, it’s not dead. It is very much alive and thriving across the financial services universe. However, it is our opinion that for all intents and purposes that yes, the 60/40 portfolio is dead, at least in our practice and among our clients. We think it’s an old, antiquated notion of looking at portfolio management and risk management risk tolerance for clients. When we say 60/40, just for other listeners, that typically means a poor investment portfolio made up of 60% stocks, equities and 40% bonds. Traditionally, once one sort of crossed the threshold into retirement, they would gobble up all their assets, their 401Ks and their TSPs, and turn it into a portfolio made up of 60% stocks and 40% bonds and then use that as their income supplement for the rest of their life. But it’s been our belief, for at least a decade, if not longer, that bonds are not an appropriate long term investment vehicle, they can be an appropriate short to midterm investment vehicle, but for long term investing of at least five years, closer to 10, that equities are your best friend. And retirement is not the end. Retirement is just a transition. Like we were talking to Chuck earlier, if he’s at retirement age, just sold the business he has, statistically speaking, if you are in reasonably good health at that age 65, you probably have another third of your life ahead of you – another 30 years to live. That’s a long time horizon. That’s no reason to get conservative with a 60/40 portfolio. And it’s certainly not a good reason to invest in bonds and what used to be a very low interest rate environment now that has ticked up a little bit. But bonds were down worse than stocks in calendar year 2022. So there was no place to hide there as we expected with bonds. We for ourselves, that’s a long winded answer, say yes. In our practice, we think they’re dead. The 60/40 portfolio is dead.

Caller:  Can I push back just a little bit?

Kevin Zywna, Wealthway Financial Advisors:  Sure thing. Of course.

Caller:  If you ladder those bonds, and you hold them to maturity, (I mean, the world’s not coming to an end because your Bond went down by 10%) as long as you’re not too out there on the maturity you should be okay. And then you can just rebound. But it was nice talking to you. I love you guys. Love your show. Have a great day.

Kevin Zywna, Wealthway Financial Advisors:  All right, David. Yes, thanks for the call. I appreciate that. And so, yes, you make some good points there. There are some more sophisticated strategies that you can use when you’re trying to build out that bond portion like laddering them. But, you know, keep them there. Another name for bonds is fixed income, the income that bonds pay is fixed. So, if you bought a bond two or three years ago, the most you are getting out of corporate bonds, or even a government bonds was maybe one or 2% per year. If you’re holding that bond that you purchased a couple of years ago, still holding it, and it’s only paying one or 2%, when inflation is at 8%. Well, your purchasing power is falling dramatically behind inflation. It’s not keeping up because of those low interest rate bonds that you purchased before. Now, as I was saying, interest rates have ticked up, there does come a point if interest rates get high enough that bonds then do become somewhat attractive, long term. But I would say we’re not there yet. And I still think there are other negative reasons to be concerned about that.

Understanding Risk in Long Term Investing

Allison Dubreuil, Wealthway Financial Advisors:  I think it’s really a perception of risk. People view equities as risky, because they’re viewing it through a very short term lens. We view it through a long term lens. Because like you said, our clients and most investors should be investors for their entire life, which is virtually always long term. Even if you’re late in your life, you might be then investing for your heirs, which is long term. So long term, what is the bigger risk? Is it short term market movements of equities or is it purchasing power and inflation? We believe that inflation and the reduction of purchasing power is the greater risk. And that’s where we focus our efforts and our investments.

Kevin Zywna, Wealthway Financial Advisors: And it should be noted that if you have at least a 10 year hold period while you’re going to be an investor and if you’re an investor over your entire lifetime, you certainly have a 10 year or longer time horizon. There is very little risk that 10 years into the future from any point in time that your investment portfolio in stocks is going to be less than it was at the time that you purchased it 10 years into the past. 10 year hold periods a longer while it’s possible from a sort of broad market perspective to have, like one or 2% The S&P has been lower 10 years into the future than it is today. 98% of time, it’s always been greater. So that isn’t risk, then, it might be risky in that 10 year period, but you hold it longer than 10 years, there’s actually relatively little risk of having less money.

Allison Dubreuil, Wealthway Financial Advisors: Alright, so yes, we know most people don’t want to sit around thinking about their ultimate demise. Very often it’s uncomfortable, unpleasant. I think generally, as Americans, our society doesn’t like to go there very often. But it is very important.

Kevin Zywna, Wealthway Financial Advisors:  We are Americans, we are going to live forever.

What Is Estate Planning

Allison Dubreuil, Wealthway Financial Advisors:  It’s important to have an estate plan. Even if you think you are invincible, and you don’t think you are anywhere near passing away, you do need to put some thought into what should happen to your assets, or your family members, your children, if something were to happen to you. Having a comprehensive estate plan, and we’ll talk about what an estate plan is, can help you feel much more secure about everything and feel more confident that if something were to happen to you, your loved ones would be taken care of.

Kevin Zywna, Wealthway Financial Advisors: Right. Estate planning is important. If you want to provide support and financial stability to a spouse, if you want to preserve assets for future generations. Maybe you want to support a favorite charity or some other worthy cause. Estate planning is critical to ensure the efficient transfer of assets. If you want to make sure that all your assets will be distributed according to your wishes. A lot of times people have ideas in their head that they don’t fully articulate well. The estate plan helps you do that. Also, of course, so in certain circumstances, minimizing taxes and expense of the estate administration is important. So it’s important to have an estate plan if those are goals you want to accomplish. Ensuring that individuals you choose can make decisions on your behalf in the event of your incapacity is probably one of the most underrated uses of an estate plan. The power of attorney, a durable medical power of attorney to help make decisions while you’re alive if you can’t make them for yourself.

Who Needs An Estate Plan?

Allison Dubreuil, Wealthway Financial Advisors: I would add to that list, an estate plan is especially important if you have young minor children, because you’ll need to state who should be responsible for your children. So that’s a pretty broad list that covers most people. But I do want to bring up the question, Well, does everyone need an estate plan? Because we do get that question. If you’re young and don’t have much to your name, do you need an estate plan?

Kevin Zywna, Wealthway Financial Advisors: Well, everyone does have an estate plan, whether you know it or not, and it’s set up for you by the Commonwealth of Virginia. If you die without a personal estate plan, then the government has already created one for you. Your assets will be distributed according to the laws of Virginia. Maybe when you are young and have minimal assets, minimal money meant minimal bank accounts, you’re single you have no other family, depending on you, you make the case that maybe that is sufficient. But usually, once you get married, once you get hitched, certainly once you have kids, that’s when an estate plan certainly starts presenting itself as necessary.

Allison Dubreuil, Wealthway Financial Advisors: Right. If you pass away without an estate plan, that’s why we mentioned each state has their own estate laws, there are rules that will take in effect if you were to pass away without an estate plan. But it might not be the way you want it to be.

Kevin Zywna, Wealthway Financial Advisors:  Right. Certainly, once you get older, have family that depends on you have a house, have a mortgage, have cars, have jewelry, have furniture, have 401k have investment accounts, all of that, then usually, people will have specific wants, needs and wishes to see exercise in the event of their early demise. And that will generally not comport with the laws of Virginia.

What Are The Components Of An Estate Plan

Allison Dubreuil, Wealthway Financial Advisors: Let’s talk about the pieces of an estate plan. And then we can circle back around to which ones might be appropriate for you. A basic estate plan is comprised of a will, a general power of attorney, a power of attorney for health care, and an Advanced Medical Directive or what some people call a living will. So that’s the basics, a will, a general power of attorney, medical power of attorney, and living will. Now some people think estate plan means trust. And we can talk about that we want to address what a trust is, and if a trust would be appropriate to you. But when we talk about basic estate planning, it’s the first four that I mentioned. The will is the basic document that states what assets should go to whom and who is going to be in charge of making sure that happens. Who is going to be the executor that will have to go through the probate process and distribute all of your assets? The will is also the place where you designate who would be in charge of your children, if they were minors, and you passed away. Who would be the physical guardian and who would be their financial guardian and would handle their financial affairs because it might not be the same person. All those things are covered in a basic last will and testament. You do have to go through the probate process with a will and a lot of times that is a fear of many people. They want to avoid probate. Probate might not necessarily be a bad thing. Probate is the process of distributing assets according to a will, it can take a long time, it can be costly, it is public. But there are ways of arranging your affairs so that there’s hardly anything that actually would be probated via the will at the end of the day.

Kevin Zywna, Wealthway Financial Advisors: Yes, and I’ll make an editorial comment that we hear sometimes from clients is, well, “why do I really need to go to the trouble to even have an estate plan? I mean, the kids are just going to get it all anyway. And when I’m gone, they can just fight it out. There’ll be plenty of money and what am I going to care right?” Sort of a nonchalance to the whole affair. The problem with that is, we often sit with the surviving adult children, and so often if mom and dad did not have an estate plan of some sort, even just a basic will, for people who have gone through it, they know how dirty, messy, complicated, unequal the whole estate distribution process can be. And when there’s substantial sums of money, well it doesn’t even have to be substantial, little sums of money, doesn’t matter the size, it’s when money is involved within families, it’s a highly emotionally charged event. And if somebody ends up with some more money than another, or a certain type of personal effect, like the mom’s engagement ring, or a locket, or dad’s hunting rifle, or something like that, and without knowing why it got passed, it can create all kinds of confusion, resentment, heartache, and conflict among the survivors. So, if you care enough about your family and relatives to want to give them something, pass something via an inheritance, then you should also want to care enough to ensure that that distribution works efficiently and that there are no hard feelings about who got what, and why. And that a lot of that gets cleaned up in the estate planning process.

The Importance Of Communicating Your Estate Plan

Allison Dubreuil, Wealthway Financial Advisors: Skipping ahead though, one of the important steps of estate planning is not only having it drafted, but actually executing it so that it works properly, and then communicating it to your family. So the very last step is communicating things to your family. We find people hesitate because they don’t want to give too much information away or they want to maintain control or some privacy. But in the absence of direction or communication that can also cause hurt feelings, confusion, and uncertainty for the family when moving forward.

Kevin Zywna, Wealthway Financial Advisors:  Yes. Take the time to verbally communicate while you’re here on Earth with your loved ones about why you’re doing what you’re doing and have a pragmatic conversation. And I can tell you the relief that that provides to the rest of the family is substantial, because without their knowing they’re left to try to figure out what would dad have wanted me to do with this money. A lot of times that’s paralyzing. They don’t know what to do, because they don’t know what dad wanted, because dad didn’t tell them. He just left them $350,000. That’s all they know. But I want to honor dad and his wishes, I don’t even feel like I deserve it. It’s not mine, I shouldn’t have it. And my brother didn’t get as much. And now you’ve got conflict that could have been avoided with proper communication.

Allison Dubreuil, Wealthway Financial Advisors:  All right. So that is why we stress having at least a basic estate plan. And we talked about the will the other pieces of the estate plan are just as important, if not more important, and one of the main reasons we encourage people to do this planning. The durable or general power of attorney is the document that states who can handle your financial affairs if you are no longer able to do so. So this is talking about cases where you are still very much alive. But for whatever reason can’t handle your financial affairs, whether you are temporarily unable to because you’re in the hospital for some reason, or if there’s a case of something like a long term illness where you’re no longer to handle affairs, this states who can step in. Without this, it’s not an enjoyable process without a power of attorney, it means typically going to court to have them elect someone which is costly and difficult to do emotionally draining painful.

What Is A Power Of Attorney For Health Care?

Allison Dubreuil, Wealthway Financial Advisors: And so likewise, there’s also the power of attorney for health care, which designates who can make your medical decisions if you are unable to and that is equally important. For the same reasons that if you don’t have this person named, it doesn’t automatically mean your chosen person can step in. People may think that they have the right to make decisions for their adult children. Maybe your child turned 18 or 19 is in college and you think, “no problem I’m their mom or dad I can still step in and make decisions.” That’s not automatic. It is not always the case. You need to have a power of attorney for healthcare in place.

Kevin Zywna, Wealthway Financial Advisors:  We’re hearing more and more that health care professionals are demanding, comprehensive up to date documents as well. These things do sort of stale date with changes in laws. So just because you had one drafted 10 years ago might be time for a refresh.

Allison Dubreuil, Wealthway Financial Advisors: Right. We’ve had recent law updates with HIPAA requirements. Power of Attorney documents that are more than probably eight years old need to be reviewed and updated. We are finding that they’re not being accepted if they’re more than five to eight years old.

Kevin Zywna, Wealthway Financial Advisors: Right now we’re going to go on out to Chesapeake and speak with Theresa. Good evening, Teresa, you’re on Dollars & Common Sense.

Caller: Hi, it’s great to speak with you. My husband and I have been married for 44 years. And he has two children from a previous marriage. We do not have an estate plan or a will even partly because we can’t agree on some things. I thought I had read somewhere that in Virginia, if there are children from a previous marriage, they get two third if there is no will. Is that correct?

Allison Dubreuil, Wealthway Financial Advisors: I don’t want to speak off the top of my head, Theresa, but I do believe the estate is split between the current spouse and the children. I just can’t speak to the percentage that it defaults to off the top of my head.

Kevin Zywna, Wealthway Financial Advisors: Yes, we would also want to be careful because we are not attorneys. We don’t draft legal documents. That specific question might be a little bit out of our purview. But we do know that with a blended family. Estate planning gets more complex before just such as the reasons that you bring up because there are rules in effect that would govern the transfer of assets. And it might not necessarily favor the second spouse.

Allison Dubreuil, Wealthway Financial Advisors:  Don’t feel like you have to have it all worked out though, before you go through the process. A good Estate Planning Attorney can help you navigate those decisions and help you craft a solution that might make both of you happy. So just don’t feel like you have to have it all decided before you go to speak with someone.

Caller:  So that’s not something you do. Do know somebody?

Kevin Zywna, Wealthway Financial Advisors: Yes, we don’t. We are not estate planning attorneys. We do not draft the documents. We do advise at a high level, it’s part of the financial planning process to have an estate plan. We’re always reminding our clients about that. Then we refer them to other qualified competent estate planning attorneys here in Hampton Roads. I don’t want to do that on the air. If you want to give us a call at the office, though, later on this week 757-456-2200 or you can get our contact information on our website . www.wealthwayadvisors.com.

Caller:  Okay, great. Yes, I think it’s time to move forward and get something done. I appreciate it. Thank you.

Kevin Zywna, Wealthway Financial Advisors:  All right. You’re welcome. Theresa. I’m glad we motivated somebody.

Doug in Norfolk, you’re on Dollars & Common Sense. Thanks for the call.

Caller: Good evening. I’ve been married before. I have two children, but I am getting remarried in June. We both have rental properties. We both have retirement accounts. We both have our own checking. But we’re interested in some financial planning where we could, consolidate, reduce our tax burden, plan for retirement. And then on the end of that, a little bit of estate planning as well. Just wanted to see if all those things were right up your alley.

Kevin Zywna, Wealthway Financial Advisors: They absolutely are and you are thinking properly that when you get married later in life with blended families, things become more complex and it’s pretty common that you get used to your own bank account, your own spending decisions, not having to answer to somebody. Then all of a sudden you do. Conflict and friction can result. So, it is helpful to have an objective third party help you blend those two lifestyles together so that it’s one cohesive, finely tuned operating machine. If you want to give us a call at the office or check out more information about us that’s www.wealthwayadvisors.com.

Caller: She’s military. I’m not. That’s something I believe you guys are familiar with as well. And then I have listened before. I’ve already spoken about, we both have multiple accounts, but we’re going to, we want to reduce down to the three the primary checking, and then we each have our own little bit of spending money.

Allison Dubreuil, Wealthway Financial Advisors: Did you listen to our Valentine’s Day show?

Caller:  No, I’ve heard before. Okay. Sounds like a good idea. But I just wanted to see if that’s what you guys were about before I give you a call in and make an appointment?

Kevin Zywna, Wealthway Financial Advisors: Yes, you’re right, you’re thinking along the right way there, Doug. Is that the ideal setup? Certainly, when you’re just starting out again, later in life it is a little bit more complicated. Might be a little deviation from this. But starting out, we think the ideal arrangement from a banking standpoint is three bank accounts, his bank account, her bank account, and our bank account, a majority of all the money of the earned income goes into the joint bank account. And then to the two individual accounts gets funneled a little extra spending money or allowance money or whatever you want to call it. Then those individual accounts, you’re allowed to sort of do with what you choose and buy whatever sort of conveniences and luxuries that you enjoy without having to answer to the other spouse. That goes a long way to keep harmonious relations in the family.

Caller:  Oh, great. I appreciate your time. Thank you.

Kevin Zywna, Wealthway Financial Advisors: All right, Doug. Thanks for the call. We appreciate it.

Allison Dubreuil, Wealthway Financial Advisors: All right. Well, we didn’t get to the conversation about trusts tonight, we’ll have to carry that over to a future show. Just know that there can be some pros and cons to having a trust. Not everyone has to have a trust. You can at least just get your basic estate plan drafted, a will, power of attorney, and a living will which states your end of life care wishes and that will get you a long way to having a solid plan.

Kevin Zywna, Wealthway Financial Advisors: A lot of people think that a trust is what you need when it comes to estate planning. A lot of times they can be helpful, but they come with a lot of work and administration. So just be prepared for that. We’ll come back another time and talk about it.