Tag Archives: Financial Planning

Financial Planning and Market Volatility

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“The first rule of investment is ‘buy low and sell high’, but many people fear to buy low because of the fear of the stock dropping even lower. Then you may ask: ‘When is the time to buy low?’ The answer is: When there is maximum pessimism.”  Sir John Templeton

Market volatility is a fundamental part of trading and investing. When market volatility strikes, it’s common for investors to succumb to temptation and follow the herd to panic sell stocks.

Financial Planning is About Long-Term Goals

“All financial success comes from acting on a plan. A lot of financial failures come from reacting to the market.” Nick Murray

Setting financial goals—and sticking with your plan—is key to potential long-term success. Rather than letting market volatility change your long-term financial plans, it is important to stay focused on your long term goals and disciplined in your investment philosophy.

“Your financial goals aren’t set in stone,” according to Mark Gleason, senior manager of investment products and guidance at TD Ameritrade. “Circumstances change, and what you want might change. When that happens, it does make sense to change your approach.”

“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” Peter Lynch

Just remember, the time to make adjustments to your long term financial plan are due to changes in life circumstances and should not be in response to market volatility. Here are four reasons to adjust your financial plan:

  1. Change in risk tolerance. If something has happened to change your risk tolerance, making tweaks to your financial plan can make sense. When a recent shakeup forces you to confront where you stand, it might be time to adjust your approach.
  2. New life events. Perhaps there’s been a death in the family. Or you’ve added a new baby to the mix. Maybe you’re getting married or going through a divorce. All of these life events can indicate a change in your financial planning approach.
  3. Shifting to a new life phase. Sometimes your approach needs to change as you actually start approaching your long-term financial goals. When you move from preretirement to actual retirement, your strategy is likely to change. Likewise, if you’ve been growing your child’s 529 and you’re worried about potential market volatility, you might make a few tweaks to the portfolio.
  4. Setting new financial goals. Most people set different financial goals as they move through life. Maybe you decide that buying a home isn’t the goal now; you’d rather get an RV and travel. Perhaps your target retirement age has changed. Whatever the new goal, you might need different financial planning in order to meet it.

Stay disciplined when investing.

Market volatility can cause discomfort, but it is important to realize that market volatility is short term and should not impact your long term goals and financial planning. You’ve set long-term financial goals designed to help you reach certain life milestones—and you don’t want to undo all your progress just to feel better during a market downturn.

“Why is staying the course so important?  As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the U.S. stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Vanguard’s analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.” (Source:  Vanguard, https://investornews.vanguard/a-snapshot-of-investor-behavior-during-a-downturn/)

Reference:

  1. https://tickertape.tdameritrade.com/investing/financial-planning-setting-financial-goals-amid-market-volatility-18160
  2. https://www.livewiremarkets.com/wires/ten-quotes-on-volatility-from-the-masters-of-the-market
  3. https://investornews.vanguard/a-snapshot-of-investor-behavior-during-a-downturn/

Trading vs. Investing

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Trading and investing are two approaches to participating in the stock market. Each approach brings its own opportunities and risks

  • Investing involves buying an asset you expect will rise in value over the long term, with the goal of long-term gains.
  • Trading, on the other hand, is about timing market short term moves and buying and selling stocks within a short period for quick returns.

With trading, you’re hoping to earn quick returns based on short-term fluctuations in the market and stock price. Long-term investors, in contrast, tend to build diversified portfolios of assets and stay in them for the long term through the ups and downs (volatility) of the market.

Investing basics

Investing is geared towards managing and growing wealth in the market over a longer period of time like years or even decades. This means buying securities with a long-term outlook in mind and holding them through both market ups and downs until you reach your financial goal or are near the end of your investment time horizon.

Investing involves putting money into a financial asset (stocks, bonds, mutual or exchange-traded fund, etc). that you expect will rise in value over time. Investors generally have a long time horizon and predominantly look to build wealth through gradual appreciation and compound interest.

Diversification (owning a mix of investments) is important for investors as it can reduce their risk — mainly by mitigating the effects of volatility.

Trading basics

Trading is all about making frequent, short-term transactions with the goal of “beating the market,” or generating greater returns than you’d expect to receive by buying and holding over a longer time frame.

Trading involves buying and selling stocks or other securities in a short period of time with the goal of making quick profits. While investors typically measure their time horizon in years, traders think in terms of weeks, days, or even minutes.  

Two of the most common forms of trading are day trading and swing trading. Day traders buy and sell a security within the same trading day; positions are never held overnight. Swing traders, on the other hand, buy assets that they expect will rise in value over a matter of days or weeks.

Trading can be a risky endeavor for the uneducated and unskilled trader. If a trade goes against you, you can lose a lot of money in a short period of time. If you have a low risk tolerance and want to avoid volatility, investing will be the way to go. But if you’re more of a risk-taker and would like the chance to earn bigger returns, trading could be appealing.

https://twitter.com/jrdorkin/status/1332382094048202753?s=21

Takeaway

Although the terms — trading and investing — are often used interchangeably: trading focuses on short-term buying and selling, while investing involves buying and holding securities for an extended period of time.

If you’re comfortable with the risks, trading a portion of your money can be rewarding and could lead to higher returns. If reducing risk and volatility are your main goals, then you’ll want to stick with long-term investing to build wealth.

References:

  1. https://www.ally.com/do-it-right/amp/investing/trading-vs-investing/?__twitter_impression=true
  2. https://www.businessinsider.com/trading-vs-investing

Becoming Financially Responsible | Vanguard

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  • Live within your means by earning more than you spend.
  • Prepare for both an income shock and a spending shock.
  • Build a strong credit history.
  • Continue to learn and grow your financial literacy muscle

Most people do fall somewhere on the spectrum of financial responsibility.

Keep income > spending

The math behind living within your means is simple: When you subtract what you spend from what you earn, the result should be positive. If it’s negative, you’re living beyond your means.

If you’re in the positive, keep it up. Try to save even more, if you can. If you’re in the negative, don’t panic. Take control:

  • Distinguish between your wants and needs. This may be easier said than done. If you don’t have easy access to another form of transportation, a car is a need. A nice car is a want.
  • Create a budget. Just having a general goal in mind for how much you can spend on certain expenses—food, entertainment, housing, transportation—over a certain time frame can help you make smarter spending decisions.
  • Avoid your spending triggers. Do your best to maintain your discipline, and try to resist temptation. If bargain shopping is your downfall, unsubscribe from promotional emails to reduce temptation. If you overfill your cart when you go to the grocery store before dinner, don’t shop on an empty stomach.

Prioritize your savings

Prepare for an emergency

Having emergency money means you’ll be less likely to need a loan from a friend, a family member, or an institution if your car breaks down or your roof leaks. Even if your emergency stash falls short, it can still lower the amount you have to borrow (and pay back, possibly with interest).

There are two types of emergencies you should prepare for: a spending shock and an income shock. A spending shock pertains to a onetime unexpected expense, such as paying for car repairs after an accident. An income shock represents a sudden loss of continuous income (for example, experiencing a layoff).

Getting started may feel daunting, but begin small and build your savings over time. We recommend setting aside at least $2,000 to prepare for a spending shock. Consider keeping this money in a low-risk investment like a money market fund. That way, your money will be easy to access and won’t change much in value over time.

For an income shock, aim to have at least 3 to 6 months of living expenses set aside. If you’re retired, try to have 12 months of living expenses saved. Don’t be afraid to start small and work your way up: Tally your unavoidable living expenses for one month. Divide the amount by 12. Save that amount each month. When you reach that savings goal in one year, do it again until you have a few months of savings to fall back on.

It is recommended to save money for an income shock in an easily accessible account like a taxable money market account.

Get ready for retirement

You’re responsible for your retirement savings. The details of your retirement—the age at which you stop working, where you live, and how—are up to you.

Here are the top 3 things you can do to prepare for retirement:

  • Enroll in your employer’s retirement plan if one is offered. (If you don’t have a retirement plan benefit, you still have options, such as an IRA.) 
  • Save, or work toward saving, 12%–15% of your gross (pre-tax) annual income, including any employer contributions.
  • Invest your savings in a diversified, low-cost portfolio that complements your time frame and risk tolerance.

You’ll need to consider your monthly expenses when you retire. Most of them will most likely stay the same, but you may need to review new items in your budget (such as Medigap or long-term care insurance) as well as expenses you’ll no longer need to consider (such as payroll taxes, clothes, and gas for work). You’ll also need to determine your monthly income from Social Security, pensions, or any other part-time work or passive income that you may be expecting in retirement.

Give yourself credit

Your credit history refers to how you use money. Your credit report is a record of money-related activity (balances, charges, and payment history) on credit cards, some bills (such as utility bills), and loans associated with your name and Social Security number. A credit score is a number based on your credit report giving potential lenders a sense of how you handle debt payments and bills.

You need to establish a credit history to get credit. If you don’t have a credit history, it can be hard to get a job, a credit card, an auto loan, an apartment lease, or a mortgage. Before a potential employer, lender, or landlord takes on the risk of giving you something, they want to see evidence you can handle it. In the eyes of a potential lender, your credit report and credit score are good measures of how financially responsible you are. Having a strong credit history and a high credit score can also lower your cost to borrow by qualifying you for a lower interest rate.

For example, if you have excellent credit and qualify for a $20,000 auto loan with a 1.5% interest rate for 5 years, you’ll pay about $772 in interest over the course of the loan. If you have fair credit and qualify for a loan with a 3.5% interest rate for 5 years, you’ll pay over $1,800 in interest—a difference of over $1,000 that you could’ve saved or invested.

Review your credit report for accuracy each year. You’re entitled to a free copy of your credit report once a year, but there may be a charge for getting your credit score.

It’s go time

Smart money management skills can take time to develop. Start by holding yourself accountable for the financial decisions you make. You have a lot to gain by spending less than you earn, preparing for an emergency, taking control of your credit, and saving for retirement. But if you don’t take steps to be financially responsible, you also have a lot to lose.

References:

  1. https://investornews.vanguard/becoming-financially-responsible/

Financial Literacy – A National Priority

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Knowledge is your best financial asset

Financial literacy and money management skills require greater attention and urgency in the United States. According to a 2019 study by the FINRA Investor Education Foundation, there’s been a decrease in recent years of how much Americans know about interest rates, taxes, loans, and debt…the major money decisions that affect so much of our lives.

The study also showed that millennials have the biggest gap in money knowledge and skills as compared to other age groups. This is worrisome because they’re America’s largest generation, and millennialsare often shouldering outsized debts and limited economic mobility.

Moreover, George Washington University research showed that 1 in 5 American high school students lacked even basic financial skills — such as the ability to interpret a pay stub to determine how much money will be deposited into their bank account or the savvy to avoid being tricked into sharing an online bank account logon.

The average student debt in 2017 was about $29,000, according to the Institute for College Access and Success. About 1 million borrowers default for the first time on their federal student loans each year, a report from the Urban Institute found.

Learning about how to budget, how to wisely invest, and how to control your spendings can seem daunting, but money experts like Stefanie O’Connell, author of The Broke and Beautiful Life, have made it their mission to make finances empowering for everyone.

Think of it this way: The more you know about your own spending habits, the less likely you are to make a costly mistake.

https://youtu.be/vl2sasYSY4E

Financial literacy is the possession of skills that allows Americans to make smart decisions with their money, according to financial coach and guru Dave Ramsey. Financial literacy means people can regularly do the right things with money that lead to the right financial outcomes.

Financial literacy helps people develop a stronger understanding of basic financial concepts—that way, they can handle their money better, especially when you consider how the typical American handles money:

  • Nearly four out of every five U.S. workers live paycheck to paycheck.
  • Over a quarter never save any money from month to month.
  • Almost 75% are in some form of debt, and most assume they always will be.(1)

When you have financial literacy knowledge and skills, you’re able to understand the major financial issues most people face: emergencies, debts, investments and retirement. Financially literate people know their way around a budget, know how to use stocks and bonds for financial security, and know the difference between a 401(k) and a 529 plan.

References:

  1. https://www.apartmenttherapy.com/money-advice-financial-experts-give-friends-36838772
  2. https://www.tdameritrade.com/education/personal-finance.page?a=aqu&cid=PSEDU&cid=PSEDU&ef_id=fc4aabeabe19150570d4f44c54b1871a:G:s&s_kwcid=AL!2521!10!81501364379637!81501451536164&referrer=https%3A%2F%2Fwww.bing.com%2Fsearch%3Fq%3DFinancial%2Bliteracysearch%3Dform%3DQBLHsp%3D-1pq%3Dfinancial%2Bliteracysc%3D8-18qs%3Dnsk%3Dcvid%3D4F9192028F2446EAB4DC1C65810CC605
  3. https://www.daveramsey.com/blog/what-is-financial-literacy

Why so many Americans in the middle class have no savings

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“Millions of  Americans, and not just the working class and poorest among us, struggle to make ends meet.”  Neal Gabler

Middle class families in America are in rough shape. The typical middle class family, according to the Federal Reserve, have enough financial cash reserve to keep themselves afloat for about 3 weeks if they lose their primary source of income.  The biggest reason cited for this predicament is several decades of wage stagnation in the U.S. as worker productivity has increased, wages remained constant and corporate C-suite executives’ compensation have increase a thousand-fold in that same timeframe.

The Federal Reserve conducted a survey to “monitor the financial and economic status of American consumers.” The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all.


(As part of a collaboration between The Atlantic and the PBS NewsHour, Judy Woodruff looks at why Gabler and so many other Americans are struggling with savings.)

Additionally, the Federal Reserve asked Americans if they could come up with $2,000 in 30 days if they had to in case of an emergency. As many as 40 percent of American families can’t, despite the once pre-COVID improving economy.

Owning Stocks, Bonds and Mutual Funds essential to accumulating wealth

In 2020, a Gallup poll finds 55% of Americans reporting that they own stocks, based on polls conducted in March and April. However, a closer look into the numbers reveal that the top 1% of wealthiest Americans own 50% of household equities (stocks, bonds, and mutual funds).  And, the top 10% own a staggering 80% of household equities.

Stock ownership is strongly correlated with household income, formal education, age and race.  In 2020, the percentages owning stock range from highs of 85% of adults with postgraduate education and 84% of those in households earning $100,000 or more to lows of 22% of those in households earning less than $40,000 and 28% of Hispanics.

When you own stock, you own a piece of the company. This means you own a share of the company’s profits and assets. When you own stock, you can grow your money and wealth! There are two ways you can make money with a stock. First, the value of your ownership stake can go up or appreciate in value. Second, some stocks pay dividends too. Dividends are company profits that some companies distribute to their shareholders.

Why Own stocks

Stocks are one possible way to invest and grow your hard-earned money. And, according to Morning Star, savvy investors invest in stocks because they provide the highest potential returns. And over the long term, no other type of investment tends to perform better.

On the downside, stocks tend to be the most volatile investments. This means that the value of stocks can drop in the short term. But you can minimize this by taking a long-term investing approach.  Yet, there’s also no guarantee you will actually realize any sort of positive return.

By educating yourself and increasing your investing knowledge, you can make the risk acceptable relative to your expected reward. And, investing in stocks is well worth it, because over the long haul, your money can work harder for you in equities than in just about any other investment.

Financially Unstable

“Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants and debt is the money of slaves.”  Unknown

Financial illiterate pay a hefty price for not having basic financial knowledge.

  1. https://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/
  2. https://ritholtz.com/2020/01/stock-ownership/
  3. https://news.gallup.com/poll/266807/percentage-americans-owns-stock.aspx

Kevin O’Leary: Financial Freedom

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Dividends have produced forty percent (40%) of market returns.

The Ten Steps to Financial Freedom, according to Kevin O’Leary, Chairman of O’Shares ETF, and better know as “Mr. Wonderful”,  are::

  1. Get committed to a plan. Start by coming up with a clear “why”. Know your purpose and incentives for wanting to achieve financial freedom.
  2. Know your numbers. You must create a budget.
  3. Cost planning. Live within your means. Think twice before spending. Cut cost in order to save 10% to 15% of every paycheck.
  4. Go to war against debt and never surrender. Debt is the opposite of passive income; it erodes your asset base while you sleep. Don’t indulge your inner spending.
  5. Income plan. Focus on increasing income more than decreasing spending. Earning more is key. Before you spend, save. Invest surplus cash before you spend. Purchase assets that pay cash flow like dividend stocks, bonds or rental real estate.
  6. Emergency planning. Your the CEO of the business of your own life. Have cash reserve of three to six months of essential expenses. Remember, your psychology is always working against you and achieving financial freedom.
  7. If it matters, measure it. Know your expenses and income. Keep track of everything to ensure you can course correct if something goes wrong.
  8. Tax planning. Think about how much money you can save with simple tax planning. Use traditional IRA or Roth IRA. Also, consider donating to charities.
  9. Financial advisor. Hire a financial coach to help manage your money.
  10. Freedom formula. Freedom is when you have enough passive income generated from your assets to cover your essential expenses.

https://youtu.be/HsUQoEOu_bE

5 ways to win your financial marathon | Regions Private Wealth Management

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Sponsored content from Regions Private Wealth Management
Jan 31, 2017, 4:41pm EST

By making a regular habit of saving and monitoring progress toward your financial goals, you can build stamina to reach the finish line and bask in the glow of a race well-run.

Whether preparing for your first marathon or your fourteenth, you know that you can’t finish the race without preparation and discipline. With 26.2 miles to cover, it’s most certainly not a quick sprint. The same can be said for financial goals.

It doesn’t matter whether you’re establishing relatively short-term goals, such as paying down credit card debt by year-end, or taking a longer view and planning for a first home, child’s college education or retirement, Regions Bank has some healthy financial habits that can move you closer to the finish line.

1. Create a plan

Going from couch potato to long-distance runner won’t happen overnight. Just as you’d need to plan a training regimen and determine milestones before tackling a long race, you’ll need to do some research and planning to figure out how to best reach your financial target.

Maybe your goal is to buy a first home, so start with some research to determine exactly what dollar amount you’ll need and when. Online savings calculators can provide details on how much you need to set aside each month to reach your goal. Once armed with that information, develop a budget around that goal and track your spending to be sure you stay on course.

2. Create a support network

A training partner can offer motivation and support before and during a race, and it’s no different with household budgets. Spouses should work together to keep tabs on their spending and savings, as teamwork can help everyone stay on track and focused on the ultimate goal.

Even kids can play a role, such as by helping to grow a college fund. By setting aside birthday or babysitting money, children can learn about the importance — and the rewards — of sacrifice and hard work.

3. Be flexible and change things up

Training with the same workout every day can not only result in losing interest, but it can make progress stagnate. If a budget is too restrictive and resulting in frustration, then it may be time to take another look. If you’ve focused on belt-tightening, think about how you can bring in additional cash to allow for some breathing room and an occasional treat. Consider working extra shifts, selling unneeded belongings, or renting out a room or parking spot.

Once you’ve made progress, look for other ways to supplement your savings. If you’re maintaining investment portfolios to help reach your goals, periodically rebalance them to make sure they reflect changing risk environments and to free up capital to take advantage of any new opportunities.

4. Adjust for the final stretch

As a big race approaches, it’s important to maintain conditioning while being wary of regimens that could bring on an injury from which you may not have time to recover. Similarly, with savings goals, as the need becomes more immediate, your savings and investment accounts will have less time to recover from a sudden dip in value, whether it’s from a market downturn or an emergency withdrawal.

For instance, when saving for retirement while in your 20s and 30s, higher-risk investments may provide greater growth potential over time. As you near retirement, however, you’ll want to start protecting the growth achieved and consider lower-risk holdings that can help preserve value.

5. Prepare for the unexpected

Life throws us curves, and it’s not unusual for a training program to get off-track for any number of reasons. Our financial goals can also be at risk, such as from unexpected home or auto repairs, a job loss or an injury. To be able to meet these challenges head-on, prepare an emergency fund to cover expenses. Experts at Regions Bank recommend saving enough to cover three to six months of expenses. If you’re not at that level yet, consider adding this purpose to your monthly budget.

By making a regular habit of saving and monitoring progress toward your financial goals, you can build stamina to reach the finish line and bask in the glow of a race well-run.

References:

  1. https://www.regions.com/Insights/Wealth?WT.ac=VanityURL_wealthinsights
  2. https://www.bizjournals.com/bizwomen/channels/cbiz/2017/01/5-ways-to-win-your-financial-marathon.html?page=all

Growth vs. Value

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“Empirical evidence suggests that value stocks outperform over the long term, even if growth has out performed value in recent years.” Bankrate

Recently, growth stocks, such as Microsoft, Amazon, Tesla and Apple, have handily outperformed value names. But it’s not always that way, and many seasoned investors think value will once again have its day, though they have been waiting on that day for more than a decade.

The difference between the two approaches are:

  • “Growth investors look for $100 stocks that could be worth $200 in a few years if the company continues to grow quickly. As such, the success of their investment relies on the expansion of the company and the market continuing to value growth stocks at a premium valuation, as measured by a P/E ratio maybe, in later years if the company continues to succeed.”
  • “Value investors look for $50 stocks that are actually worth $100 today, not in a few years, if the company continues its business plan. These investors are typically buying stocks that are out of favor now and therefore have a low valuation. They’re betting on the market’s opinion changing to become more favorable, pushing up the stock price.”

“Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return,” says Wes Crill, senior researcher at Dimensional Fund Advisors in Austin, Texas. “That’s one of the most fundamental tenets of investing.”

Growth investing and value investing differ in other key ways, too, as detailed in the table below.

Many of America’s most famous investors are value investors, including Warren Buffett, Charlie Munger and Ben Graham. Still, plenty of very wealthy individuals own growth stocks, including Amazon’s founder Jeff Bezos and hedge fund billionaire Bill Ackman, and even Buffett has shifted his approach to become more growth “at a reasonable price” oriented as of late.

Yet, sometime in the future, and unfortunately no one can forecast when, it appears guaranteed that value will outperform growths as an investment for a long period of time.

Typical investing wisdom might say that “when the markets are greedy, growth investors win and when they are fearful, value investors win,” says Blair Silverberg, CEO of Capital, a funding company for early-stage firms based in New York City.

If you’re an individual retail investor, it is wise to stick to fundamental investing principles or otherwise consider buying a solid index fund, such as the S&P 500 that takes a lot of the risk out of investing.

References:

  1. https://www.bankrate.com/investing/growth-investing-vs-value-investing/

First-Time Investors should Stop Chasing Hot Stocks | TheStreet

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“Your savings rate is…the biggest determinant of how you do financially over time.” Christine Benz, the director of personal finance for investment research firm Morningstar

As the stock markets plunged across the globe in March, a wave of Americans saw an opportunity to start investing. But chasing hot stocks like Apple, Tesla or Amazon, according to financial experts, is akin to making the same old ‘tried and true’ investment mistakes as our forefathers and foremothers.

“Individual stocks are terrible investments for people just starting out,” according to Christine Benz, the director of personal finance for investment research firm Morningstar.

Active investing strategies, such as buying and selling individual stocks on trading platforms like Robinhood, often underperforms over the long-term versus more passive investment strategies, such as investing in low cost index funds that simply follow a stock market index like the S&P 500.

While chasing hot stocks may seem thrilling in the short-term while you’re winning, the keys to financial success and security are incredibly mundane. They include:

  • Creating and following a financial plan;
  • Disciplined and deliberate savings;
  • Investing for the long-term;
  • Time in the market beats timing the market;
  • Investing in market index mutual funds and ETFs; and
  • Diversification and asset allocation.

Read more: https://www.thestreet.com/personal-finance/first-time-investors-stop-chasing-hot-stocks-do-this-instead-nw

Wealth accumulation can create estate tax issues

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Financial security is a goal for us all, but with wealth comes complexity. An increase in wealth not only typically causes an increase in annual income taxes, but it may also beget estate and gift taxes. Current federal law allows each citizen to transfer a certain amount of assets free of federal estate and gift taxes, named the” applicable exclusion amount.

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In 2020, every citizen may, at death, transfer assets valued in the aggregate of $11.58 million ($23.16 million for married couples), free from federal estate tax. For gifts made during one’s lifetime, the applicable exclusion amount is the same. Therefore, every person is allowed to transfer a total of $11.58 million during their life or at death, without any federal estate and gift tax. (This does not include the annual gift exclusion, which applies as long as each annual gift to each recipient is less than $15,000.)

Therefore, generally, only estates worth more than these amounts at the time of death will be subject to federal estate taxes. But this wasn’t always so. From 2001 to 2009, the applicable exclusion rose steadily, from $675,000 to $3.5 million. 2010 was a unique year, in that there was no estate tax, but it was brought back in 2011 and then made permanent (unless there is further legislation) by the American Tax Relief Act of 2012 at an exclusion amount of $5 million, indexed for inflation. The Tax Cuts and Jobs Act passed in December of 2017 doubled the exclusion amount to $10 million, indexed for inflation ($11.58 million for 2020). However, the new exclusion amount is temporary and is scheduled to revert back to the previous exclusion levels in 2026.

Outdated estate documents may include planning that was appropriate for estates at much lower exemption values. Many documents have formulas that force a trust to be funded up to this applicable exclusion amount, which may now be too large or unnecessary altogether, given an individual’s or family’s asset level.

Take the time to review the formulas in your estate documents with your attorney and tax professional to determine whether the planning you have in place is still appropriate.

https://www.fidelity.com/insights/personal-finance/estate-planning-pitfalls?ah=1