Making the Most of Your Sudden Wealth. David J. Gordon, CFP, CIMA, ADPA Financial Advisor, Executive Director, Senior Portfolio Management Director

Transcription

1 Making the Most of Your Sudden Wealth David J. Gordon, CFP, CIMA, ADPA Financial Advisor, Executive Director, Senior Portfolio Management Director

2 Where Does Sudden Wealth Come From? Lawsuit Settlement Sale of a Business Inheritance Sale of Real Estate or Other Asset Lottery Winnings Equity Compensation/IPO Bonus Signing 2

3 Sudden Wealth Can Disappear Recent studies report that: 70% of inheritances are gone by the end of the second generation 90% of all inheritances are gone by the end of the third generation Source: New York Post. Most rich families will lose it all, April 24,

4 Sudden Wealth Can Disappear Recent studies report that: 33% 70% of lottery winners declare bankruptcy 1 of people who receive sudden wealth will lose it within a few years 2 Sources: 1. Fortune. Why So Many Lottery Winners Go Broke, January 15, Time. Here s How Winning the Lottery Makes You Miserable, January 12,

5 Making Your Sudden Wealth a Window of Opportunity EDUCATION LIFESTYLE CHOICES LENGTH OF RETIREMENT CAREER PATH FAMILY DYNAMICS PURCHASE DECISIONS LEGACY PLAN 5

6 Note: Bullet 3 is optional. Today s Agenda Preserving Your Sudden Wealth Do s and Don ts of Managing Your Sudden Wealth Inheriting a 401(k) or Other Retirement Plan How Morgan Stanley Can Help Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC ("Morgan Stanley"), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not "fiduciaries" (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account. 6

7 SECTION 1 Preserving Your Sudden Wealth Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.

8 Optional Slide: Can Be Removed for Non-Inheritance Sudden Wealth Audiences Preserving Your Inheritance: Estate & Inheritance Taxes Understand Tax Consequences FEDERAL ESTATE TAX STATE ESTATE TAX STATE INHERITANCE TAX Based on the value of decedent s estate. Federal exemption is $11,180,000. Only the portion of an estate above that size is taxable at 40%. Based on the value of decedent s estate In effect only in these states: CT, DC, HI, IL, ME, MD, MA, MN, NJ, NY, OR, RI, TE, VT and WA State exemptions range from $675,000 $5,490,000 Based on who receives the inheritance, where they live and what their relationship is to the decedent Applicable only if you live in IA, KY, MD, NE, NJ or PA Property passing to a surviving spouse is exempt Only the portion of an state exceeding the exemption is taxable at the state level Property passing to a child or grandchild is exempt in all states but NE and PA 8

9 Optional Slide: Can Be Removed for Non-Inheritance Sudden Wealth Audiences Preserving Your Inheritance: Estate Planning Take Measures To Help Parents and Other Benefactors Plan Their Estates It s possible that any estate tax owed will be paid before you actually receive your inheritance (except for state inheritance tax, where applicable). Proper estate planning can: Minimize tax consequences Maximize your inheritance Prevent family turmoil Make certain the estate owner has consulted with a knowledgeable attorney to create a customized plan. 9

10 Optional Slide: Can Be Removed for Non-Inheritance Sudden Wealth Audiences Preserving Your Inheritance: Income Taxes What about Income Tax? In general, inheritances are not considered income and as a result, they are not subject to income tax, except in the following instances: IRA, 401(K) OR OTHER RETIREMENT PLAN Any withdrawal you take is taxable at your tax rate STOCKS, REAL ESTATE AND OTHER ASSETS No tax due upon receipt Strategies are available to minimize taxes. Talk to your Financial Advisor Capital gains tax due when you sell the assets Cost basis is stepped up to the value of the assets on the day of the decedent s death or alternative valuation date Interest or dividends paid after death are income taxable at your tax rate 10

11 Optional Slide: Can Be Removed for Non-Inheritance Sudden Wealth Audiences A Tax Break on Inheritances: Step-Up in Cost Basis The cost basis of an asset you inherit is stepped up to what it was worth on the day of your benefactor s passing or on the alternative valuation date An Example: Uncle Jake buys 1000 shares of XYZ stock at $25 per share At Uncle Jake s passing, the stock is worth $75 per share Niece Amelia inherits the stock and eventually sells it at $100 per share Are Amelia s capital gains $75 per share or $25 per share? 11

12 How Is Non-Inheritance Sudden Wealth Taxed? ORIGIN OF SUDDEN WEALTH Sale of stock, real estate or other asset POSSIBLE TAX CONSEQUENCES Long-term capital gain, if held for over a year Life insurance payout Lawsuit damages Generally no income tax, but estate tax might be due, depending on the size of the insured s estate and who actually owns the policy Varies damages for physical injures are usually not taxable. Damages for discrimination, lost profits and other non-physical injury cases may be completely taxable at your individual tax rate 12

13 SECTION 2 Do s and Don ts of Managing Your Sudden Wealth Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.

14 Don t Change Your Lifestyle, Take Excessive Risks or Tell Everyone You Know about Your Good Fortune Buy a Beach House or a Bentley Quit Your Job Hot Tip from Your Uncle Give Money to Friends or Family Seed Money for a Startup Stock of Your Late Parent s Employer 14

15 Do Take a Cooling-Off Period and Develop a Comprehensive Financial Plan THINK BEFORE YOU SPEND Place assets from your sudden wealth in a money market fund or other liquid investment Work with a Financial Advisor, Tax Advisor and Legal Advisor to create a financial plan that: Reflects your new circumstances Provides you with strategies for preserving your assets and accomplishing your most important goals Helps you integrate your new wealth into your overall finances 15

16 Do Set Goals According to Your Needs Identify the goals most important to you and project what they will cost over time. Determine how close you are to reaching your objectives and create an investment strategy to get you there. EDUCATION LIFESTYLE CHOICES LENGTH OF RETIREMENT CAREER PATH FAMILY DYNAMICS PURCHASE DECISIONS LEGACY PLAN Early / Mid-Career Late Career Retired Goals Buy a home Have a child Build an emergency fund Protect family Goals Buy a larger home Send children to college Assist aging parents Plan for future healthcare Plan for retirement Goals Maintain lifestyle and sufficient income Meet healthcare and other unforeseen expenses Buy a vacation home Legacy planning Assets Liabilities Goals 16

17 Do Consider Funding Your Retirement Up the contribution to your 401(k) plan at work. Your inheritance may give you the opportunity to contribute the maximum. Consider investing your inheritance and using the income it generates to replace the additional dollars you re contributing to your 401(k). Whether you participate in a 401(k) or not, consider opening a Roth or traditional IRA and contributing the maximum allowed each year ($5,500; $6,500, if you re 50 years of age or older). 17

18 Do Consider Funding Your Child s or Grandchild s College Education Do consider contributing to a 529 Plan that offers: Tax-deferred growth Tax-free withdrawals when used for qualified expenses The ability to remove assets from your estate Investors should consider many factors before deciding which 529 plan is appropriate. Some of these factors include: the Plan's investment options and the historical investment performance of these options, the Plan's flexibility and features, the reputation and expertise of the Plan's investment manager, Plan contribution limits and the federal and state tax benefits associated with an investment in the Plan. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state's own Qualified Tuition Program. Investors should determine their home state's tax treatment of 529 plans when considering whether to choose an in-state or out-of-state plan. Investors should consult with their tax or legal advisor before investing in any 529 Plan or contact their state tax division for more information. Morgan Stanley Smith Barney LLC does not provide tax and/or legal advice. Investors should review a Program Disclosure Statement, which contains more information on investment options, risk factors, fees and expenses and possible tax consequences. 18

19 Do Create an Emergency Cash Reserve HOW WOULD YOU PAY FOR A $400 EMERGENCY EXPENSE? Borrow Liquidate a stock or other investment Write a check DON T BE ONE OF THE 47% (1) If you don t already have one, create an emergency cash reserve: 3 6 months living expenses Keep liquid in a money market fund or other cash vehicle

20 Do Pay Off High Interest Debt FREE YOURSELF FROM: Credit card balances Car loans Personal loans Student loans DON T NECESSARILY PAY OFF YOUR MORTGAGE Compare your current rate to rates available from various investments If your rate is low, you may be better off maintaining your mortgage and investing the assets you were going to use to pay it off Mortgage interest is tax-deductible (up to $750,000 for a married couple filing jointly in 2018) you may not want to lose this tax benefit 20

21 Don t Place Your Sudden Wealth in a Joint Account No one plans to get a divorce, but in case you do Assets in a joint account may be subject to divorce negotiations Even in a community property state, inheritances are considered your property, unless they are commingled in a joint account Note: If the source is not inheritance and is a financial win, such as lottery winnings, then the spouse may have an interest whether or not the funds are in an individual account. 21

22 Optional Slide: Can Be Removed for Non-Inheritance Sudden Wealth Audiences SECTION 3 Inheriting a 401(k) or Other Retirement Plan Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.

23 Optional Slide: Can Be Removed for Non-Inheritance Sudden Wealth Audiences Inheriting a 401(k) or Other Retirement Plan Your parents plan may have more restrictive rules than the IRS: Under ERISA and the Internal Revenue Code, the plan must be left to the spouse unless the spouse signs a waiver of interest Some plans prevent a spouse from receiving assets in a lump sum Some plans force a spouse to receive assets in the form of annuity payments Some plans require non-spouse beneficiaries to receive assets in a lump sum All distributions are generally subject to income tax at your tax rate, except the extent the distribution is treated as a return of your after-tax contributions (if any) Annuities are offered in conjunction with Morgan Stanley Smith Barney LLC's licensed insurance agency affiliates. 23

24 Optional Slide: Can Be Removed for Non-Inheritance Sudden Wealth Audiences An Inherited IRA May Offer Greater Flexibility You may be able to rollover your 401(k) or other retirement plan inheritance to an Inherited IRA. By doing so, you generally must: Withdraw a certain amount every year, based on IRS life expectancy tables Begin taking withdrawals the year after the donor s death Surviving spouses have an additional option. They can: Rollover plan assets to an existing or new IRA in their own name Postpone distributions from the IRA until they reach age 70½ Arrange for the plan trustee to transfer funds directly to the Inherited IRA 24

25 SECTION 4 How Morgan Stanley Can Help Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.

26 Receiving an Inheritance Our FAs will work with your tax and legal advisors to help ensure you are educated about estate and income taxes at all levels At Morgan Stanley, we can help you prepare for, preserve and enhance your inheritance by: Avoiding the common mistakes that can jeopardize your inheritance Taking proactive measures to integrate your inheritance with your overall financial strategy 26

27 Wealth Management Discover Create Act Adjust Our relationship begins with a discussion of your overall finances and what you want to accomplish with your new wealth. We strive to understand who you are as a person, as well as an investor, so that we can create a plan to address the issues most important to you. We develop a comprehensive plan that integrates your new wealth into your overall finances and provides tangible recommendations for achieving goals and preserving your wealth. We implement your plan, using the vast resources of Morgan Stanley to help you minimize taxes, maximize philanthropic pursuits, leave a meaningful legacy and make informed investment decisions. We help monitor your progress and make adjustments as life evolves, markets and tax laws shift and priorities change. Morgan Stanley Smith Barney LLC ("Morgan Stanley"), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters. 27

28 Goals Planning System GPS Our integrated platform ties goals to implementation, leveraging the intellectual capital and sophisticated institutional capabilities of Morgan Stanley DISCOVER ADVISE IMPLEMENT TRACK PROGRESS Start with a conversation to uncover your goals and understand your entire financial picture Work with you to assess various scenarios and advise you on the appropriate strategies designed to meet those goals Look across multiple accounts/ products to identify the combination to help meet spending needs and invest taxefficiently Periodic review of your financial situation with the ability to make adjustments according to your needs, life events and changing market conditions 1 1. This functionality is currently limited and will expand with future phases of the tool. 28

29 Don t Go It Alone Do Consult with a knowledgeable Financial Advisor David J. Gordon, CFP, CIMA, ADPA Financial Advisor, Executive Director, Senior Portfolio Management Director david.j.gordon@morganstanley.com 111 S. Pfingsten Road Suite 200 Deerfield, IL CRC /