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Market InSights:

Rudolph with Your Nose So Bright

Investing 2021

If you don’t recall the most famous reindeer of all, Rudolph, the Montgomery Ward creation possesses the special characteristic to guide Santa’s sleigh among a fog that would have otherwise canceled Christmas. Like Rudolph’s nose, I’m going to highlight a couple of macroeconomics bright spots that we like right now, that will surely support markets and guide us through the fog of 2021. Enjoy the holiday season and may you have a prosperous new year. 

Unemployment – I think it’s fair to say that the spike in unemployment (fastest spike ever) and the subsequent drop in unemployment (fastest drop ever) have given politicians the hyperbole they need, but the rate getting back to 6.7% means a couple of good things going forward. Firstly, the “easy to lose” and “easy to return” jobs were flushed out in the spike, and the jobs that could easily return have. This means that while each percentage point from here on out is going to be harder and harder, the headline risk of massive jobless swings has likely settled for now. Unemployment in the +6’s has been the recent peaks for prior negative economic swings. In 2003, we peaked at 6.3%, 1992 7.7% even the economic crisis in 2009 only saw a peak of 9.9%. So at least the unemployment figures have gotten back to “normal bad” and not “historically bad”. But here is the good news for 2021, from this point forward we will get positive headlines for employment. I think we have crested, the liquidity in the markets has helped, and near term the unemployment outlook is stable. This pandemic is different than a cyclical recession, this can be resolved as quickly as the damage was done, and for between 4-8 quarters we can see a routine and constructive print for joblessness. This will be a supportive series of headlines for markets. 

Inflation – Inflation will be a headwind for bonds and cash but will be constructive for some assets. Those invested in equities will see an increase in capital chasing the same number of assets. This inflation will be constructive for stocks and other hard assets from 2021 but will cut into the expectations for the buying power of dollars going forward. Expect long term dollar weakness. Additionally, we’re not alone, this pandemic is global and I anticipate every central bank to prefer adding liquidity to their economies over the risk of inflation. Expect countries that emerge from the pandemic quickly to see a major tailwind from global inflation, those whose course is slower and shutdowns longer to be hampered by it.  

Debt – Record low borrowing costs should tee up leveraged companies for success. This is absolutely a situation where “zombie” companies will be created, so investors should be aware of the health of companies they are buying, but long term, allowing companies that have been historically highly leveraged to restructure at amazing rates, or even granting companies that have healthy balance sheets more cheap capital to take on more cap-ex projects for the at least a decade or more will be supportive for the market on the whole. As I write this, the 2-10 spread is .8%, in my opinion giving corporate CFO’s carte blanche to begin issuing new debt and extending all maturities on existing debt. Seeing these companies become so tenacious in the debt market normally would spook investors, but it’s hard to imagine a more supportive environment for borrowers than sub-2% borrowing costs for AAA companies and sub-4% for high yield borrowers. Debt was low for the recovery after 2009 and is now bargain-basement prices. These are rates that are likely to persist through 2021 and with Janet Yellen (Dovish) at the treasury, and no change in the attitude of the Fed I’m not seeing a change in sight. This will likely mean yields will be below inflation for some time as central banks try to juice the recovery at the expense of inflation. 

Earnings – Companies have broadly been able to understate their earnings projections through the pandemic. The science of slow-rolling their debts, and lowering the expectations of analysts has been fantastic. Companies across sectors have been able to step over the lowered bar without major disruption this year. Now while, for the most part, the pandemic has given them top cover to have earnings below their historic figures, the companies in the S&P 500 have done a fantastic job this year of collectively using this window to reset the expectations of investors without sounding alarms. Managing expectations lower, then beating them has been a theme in 2020, that in 2021 will look like a great trajectory for earnings as we emerge from COVID-19. This is going to be a fantastic and virtuous atmosphere of rising earnings. The usual suspects for this earning improvement cycle will show up, banks, technology, and consumer discretionary investors will like this reset in the cycle and the aforementioned upswing in earnings these groups are poised for.

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Kevin Taylor

The Rules of Self-Directed IRAs

At InSight, our clients know that when you understand the rules you make better decisions. Our InSight-Full® plan is about marrying the goals that you have with the right Rules of Self-Directed IRAs and the right strategy. We cannot stress enough the importance of knowing the rules and how to avoid problems both now and in the future. By Kevin T. Taylor AIF® and Peter Locke CFP® The first rule is when you open a self-directed IRA you’re not the owner. The tax code requires the assets in a Self-Directed IRA (SDIRA) and its owner remain separate and not used in a way that one indirectly enriches the other (beyond permitted rules). When you think about investing into something using your IRA think of it as solely an investment and not for personal use.  The IRA owner and anyone else responsible for the account is prohibited from commingling their vested interests of the SDIRA with its owner or any “disqualified persons” which includes: The fiduciary of the account including the SDIRA owner Family member (ancestor, spouse, lineal descendant, or spouse of a lineal descendant Corporation, partnership, trust, or estate where 50% or more of the shares/profits/beneficial interests are owned by any of the above Officer, director, or 10% or more shareholder or partner of an entity above If someone is a disqualified person, they’re prohibited from directly or indirectly transacting between the SDIRA and the disqualified person in the following manners: Transfer, use, or benefit of the assets Lending or extending credit (both ways) Sale, lease, or exchange of property Furnishing of goods, services, or facilities Dealing assets for your own benefit as the fiduciary Personally receiving consideration as a fiduciary from a third party that engaged in a transaction with the IRA This means that if any of these transactions listed above with any disqualified person occur even if done at fair market value, will be subject to severe consequences. The standard penalty is 15% of the amount involved in the transaction which is imposed on any disqualified person engaged in the transaction. Furthermore, if it’s not resolved by the end of the year in which the violation occurred, the penalty is increased to 100% of the transaction amount. And to top it off, the entire account loses its tax-deferred status and is treated as if the entire account was liquidated and distributed as of the current year. The majority of clients for asset protection purposes and clean book keeping manage their self-directed IRA inside of an LLC. Don’t have your IRA own the property, have your IRA own an LLC that has a bank account that you’re the manager of.  Then the LLC is the owner on the contract. This like any other rental property gives you the ability to have limited liability in the event someone comes after your assets. These are investment assets not personal assets, this is definitely a breach of rules of self-directed IRAs. You cannot live there, your parents, kids, or grandparents cannot live there. You cannot sell your own property or buy a piece of property from yourself using the IRA. Don’t take a salary or commission (prohibitive transaction).  Any repairs or maintenance must be done by a third party. The reason is if you were to work on it on your own then you’re self serving and this could be viewed as a contribution to the IRA which is prohibited. Also, if you own a property management company and are a 50%+ owner, your company cannot do work on the property. The easiest thing you can do is separate yourself completely from the investment and let third parties do the work. If you follow through with the purchase, keep all accounting separate. You don’t want to accidentally make a mistake and disqualify yourself by accidentally mixing personal use assets with your Self-Directed IRA. For example, if you think you can use a credit card to pay for the repair of something you cannot. All expenses come out of the IRA not your bank account. Another prohibited transaction in this type of account is transacting with prohibited parties or disqualified persons such as kids, parents, spouse, grandparents, spouses of your kids and yourself. Although, siblings are allowed.  The rule specifies disqualified persons as ancestors. Keep your Self-Directed IRA separate from your business where you’re a 50% or more owner. In this case, your IRA is a prohibited party and therefore you cannot loan to an LLC that is associated with your business. If you’re not putting down the full amount to buy in this case a rental property, you’ll need to get a non-recourse loan. This means the bank will charge a higher interest rate but if you default then they will only take the property. Having a non-recourse loan in an IRA means you will be subject to unrelated debt taxable income (UDTI). UDTI is generated when you finance the purchase of property in an SDIRA. Unrelated Debt Financed Income (UDFI) and Unrelated Business Taxable Income both trigger UBIT (Unrelated Business Income Tax). To even the playing field for everyone (because using leverage in an IRA and collecting income is way to get huge contributions into your IRA which isn’t fair to non-exempt persons) the IRS made it so tax-exempt entities you must pay income tax on the income they realize from the UDFI that year at the Estate Tax level which is much higher than ordinary income levels. Lastly, invest in what you know. Don’t take unnecessary risk by breaking one of the Rules of Self-Directed IRAs, and don’t invest in your friend’s start-up that you know nothing about. If you know rentals buy rentals, if you know commercial real estate buy commercial real estate. Just like anything we do here at InSight, have the right people, process, and policies set up to hold yourself accountable so you make more informed investments.

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Boulder Financial Planning, Financial Expertise
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Peter Locke

What is an Estate Plan?

Estate planning is one of the most skipped parts of peoples’ financial lives. Whether you’ve put it off because you didn’t know anything about it, it’s boring, expensive, or because you don’t think you have enough assets, I hope this guide will help you understand why you need a plan, common terms, and how to get started. What is an Estate Plan? Your estate is everything you own. It ranges from your business, house, money, and any other personal belongings. Even if you don’t own a lot of stuff, you still need a plan for where all of these things will go. However, your estate plan is more than just a map of where all your possessions will go. It helps dictate where your kids will go, who will take care of you if you’re unable to, who will handle all your affairs if you can’t, who will take your loved pets, etc. It’s a combination of how to pass down assets, to how the end of your life will be managed, and who will handle everything. Documents Included In An Estate Plan Everyone’s estate plan is slightly different, but there are a few specific documents that most have in common. Last Will & Testament – The goal of a will is to lay out your wishes for who will receive what after you pass away. Designation of Guardianship – This document designates who will look after and care for your children in the event you’re unable to. Living Trust – Very similar to a will where you outline the instructions of who gets what. The difference with a trust is that these assets are placed in there while you are still alive. Once you pass away, these assets will be moved without needing probate. Living Will – This document focuses on your preferences concerning medical treatment if you develop a terminal illness or injury that causes you to lose brain activity. Includes things like, feeding tube, assisted breathing, resuscitation, etc. It may also outline your religious or philosophical beliefs and how you would like your life to end. A living will is only valid if you are unable to communicate your wishes Financial Power Of Attorney* – The financial POA is a document that allows an individual to manage your business and financial affairs, such as signing checks, filing tax returns, and managing investment accounts when and if the latter becomes unable to understand or make decisions. Healthcare Power of Attorney* – Designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity. *Power of Attorney’s can be divided into several different categories. General power POA (gives the agent the power to act on behalf of any matters), Limited POA (gives the agent the power to act on behalf of specific matters or events for a specific amount of time) and Durable POA (remains in control of certain legal, property, or financial matters specifically spelled out in the agreement, even after the principal becomes mentally incapacitated.). What actually happens to an estate after you die? Most people have no idea what the process looks like after someone passes away. Those that do, typically understand why these documents are so important. So let’s dive into this so you get a real-life understanding. Everything you own at the time of your death is part of your estate. Your estate then goes through probate. Probate is the process where the court decides what happens to your assets now that you are gone. This is where having estate planning documents becomes so helpful. If you have a will, the court uses this as their guide to splitting up your estate. If for some reason you don’t have one, you are considered to have died intestate and the court uses local laws to decide who gets your assets. Honestly, you don’t want them deciding who gets your stuff! Not only that, probate can cost anywhere from 2-5% of the value of your estate so having a will helps ensure everything goes to the right people. The best way to avoid probate is by naming beneficiaries on all your important accounts like life insurance, retirement accounts, transfer on death accounts (investment accounts), Payable on Death (bank accounts), beneficiary deeds (real estate). Who handles your estate? When you create your will, you get to name someone as the executor of your estate. This person manages your estate through the probate process. They handle unpaid bills, taxes, debt, and anything else that relates to your estate. They also help distribute your estate to all the right people. Typically, people pick their kids, spouse, or siblings to do this for them as it is not a quick and easy job. You definitely want someone you trust to be your executor. If you do not name someone before you die, the judge will choose someone as your administrator (usually spouse then parent or next in kin) Taxes On Your Estate Many people worry about estate taxes, but it only really applies to people with significant wealth. In 2023, the first $12.06 million of your estate is exempt from federal taxes. The only way you have taxes is if you have more wealth than that or if you live in one of the 12 states that have a state estate tax. These states are: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington. Some of these states have a lower exemption than the federal one so you may have to pay state tax even if none is due federally. You definitely want to be aware of this and plan for it! Your executor is the one who will help handle all the tax bills that could be due. They will use money in the estate to help pay these bills and if they need to liquidate to help pay for taxes, they will. When Do I Need A Trust? Most people have heard

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