Losing your mind, stuck at home? Here’s how to find some sanity in the chaos

We, the writers of Women, Money & Mindset, agree that in order to make and manage money, you must adopt the right mindset. This means incorporating thoughts, attitudes and behaviors that support a healthy financial life.

The same rings true for all other areas of our lives.

This spring has challenged us with devastating events that have completely upended the way we conduct our work, relationships and our lives. These events have asked us to flex and pivot mentally, emotionally, and physically in ways that few of us have ever been called to do.

Many are experiencing what we would describe as an emotional shutdown. This is affecting the way we are able to go about our daily business and activities. When what is happening outside of us becomes too much for our own experience, we have a defense mechanism that protects us. This defense mechanism impels the mind to go into fight-or-flight mode. It’s as if the mind says, “Enough! I cannot assimilate all this at once. I am taking a brain break!”

That’s when we find it hard to focus or to think clearly. We may find it difficult to perform even the simplest of tasks. If you find yourself in such a state, it’s time to take some steps for radical self-care so that you can lower stress and give your brain the space it deserves to regroup.

Here are some basic steps to regain a personal sense of calm and control when the world seems to be falling apart.

Provide a sense of normalcy with routine and ritual.

Routines and rituals provide predictability, which lowers stress and gives us a sense of control. Heed to your normal rituals, such as how you make the bed and conduct your morning quiet time. This reinforces a sense of normalcy.

Keep a regular schedule, whether with work or other activities.

Identify three things you want to accomplish each day and schedule them. Break down projects into bite-sized tasks and congratulate yourself on completing each step, one step at a time.

Minimize shame by being kind to yourself.

Avoid judging yourself on what you aren’t accomplishing. These are unusual times. Instead, delight in congratulating yourself on small wins. Practice self-compassion.

Instead of telling yourself to “get a stiff upper lip” when things seem difficult, acknowledge that things are really difficult right now. Ask yourself how you can care and comfort yourself in these moments.

In short, treat yourself as you would (hopefully!) treat others in the same situation.

Energize by showing kindness to others.

Write a handwritten note saying you are thinking about someone and send it to them. Make a phone call to see how others are doing. Order an anonymous grocery delivery to someone you know has lost their job or suffered financial hardship.

While making a difference to others, this also reinforces to you the ability to make a difference. It also activates endorphins and good thoughts in you, helping to calm and regulate the nervous system.

Feed your brain – not your stress.

If you obsess over the news and social media, you are feeding stress and anxiety. Avoid opening “doom and gloom” YouTube videos and negative viral messages passed on by well-meaning friends and family members.

Ask yourself what you responsibly need to know to keep up to date with current events, and then identify a dependable source for this. Decide to check this once daily. Balance this with sites that remind us that good things are happening in the world.

Two sources I enjoy are “The Good News Network” website and John Krasinski’s “Some Good News” on YouTube.

Focus on what you can control.

The way we are able to operate right now has been minimized and redirected. We can easily feel defeated. So many things we counted on in times past are no longer available to us. This can cause turmoil and frustration.

Begin to identify the things you can control, and as you encounter limitations, congratulate yourself on learning any workarounds or other ways of accomplishing. Moving through this tumult requires that we flex and pivot.

Replace phrases such as, “I can’t because…” with “How can I?” or “What else might I do instead?”

Moving away from undue stress and feelings of being overwhelmed to more focus and clarity requires practice. This requires that we intentionally take small steps in practice each day if we are to be successful.

As each of us asks ourselves how we should respond to current events, it will be important to show up as our best selves by cultivating the right mindset in order to make the greatest difference.

Patti Cotton works with executives, business owners, and their companies, to elevate and support leadership at all levels. Contact her via email at Patti@PattiCotton.com

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Low interest rates present opportunities for your estate trusts

Last week we discussed some opportunities and incentives presented by The Coronavirus Aid, Relief and Economic Security Act (CARES) passed by Congress in late March 2020. This week we’ll focus on some opportunities presented by the historically low-interest rates that now exist.

When low rates are an advantage

Low-interest rates can be used for effective tax planning for higher net-worth individuals who need to remove assets from their taxable estates in a leveraged way and parents or grandparents looking to help their descendants in a tax-effective manner. The planning, however, can be complex and requires legal and tax advice.

Grantor retained annuity trusts

A Grantor Retained Annuity Trust (GRAT) works like the Charitable Remainder Trust we discussed last week, but the beneficiary is your child or another non-charitable person.

You create a trust — the GRAT — and transfer property to it. You receive the right to an annuity payment from the trust for a term of years. At the term’s end, what remains in the trust passes to your named beneficiary.

The gift of the remainder interest to your beneficiary is valued based on the present value of the estimated gift to the beneficiary, through a formula that includes a presumed interest rate known as the Section 7520 rate. The 7520 rate for the month of May is set at 0.80%.

In other words, you gift X$ into a GRAT and reserve the right to Y% annuity payments for 10 years, at which point the remaining trust assets are distributed to your beneficiary. The gift made is valued, for gift tax purposes, at $X less the Y% annual payments, assuming the trust funds grow at only 0.80%.

The GRAT yields an estate and gift tax savings if you survive the term of the trust and the trust property generates a return in excess of the 7520 rate (currently 0.80%). In other words, you pass along more value than that which was subject to gift tax. Gifting lower-value property (marketable securities or real estate which has recently declined in value) now to a longer-term GRAT that could yield a return in excess of the low 7520 rate, could result in substantial assets passing to your beneficiaries free of the estate and gift taxes.

This strategy works best when the 7520 rate is low, as it is now, and the grantor is likely to survive the chosen term of the trust.

Charitable lead trusts

Where a Charitable Remainder Trust can help you affect an IRA stretch as we discussed last week, a Charitable Lead Trust (CLT) can help you pass more assets to your heirs free of estate or gift tax, much like the GRAT.

In a CLT, the property is transferred to a trust you create that provides an annual payment to a charity for a specific term, with the remainder being paid to the named non-charitable beneficiary at the end of the term. You can get a charitable income tax deduction immediately, which is based on the value of the asset transferred to the trust, less the presumed value of what will remain in the trust at the term’s end thereby passing on to the non-charitable beneficiary.

With the 7520 rates being so low, the built-in presumption is that less will be available to your beneficiary and that results in a higher charitable deduction and a smaller presumed gift (hence lower gift tax or less gift tax exemption used up).

Sales to grantor trusts

Sale of partial business interests (perhaps discounted for minority interests and/or lack of marketability) to family members through an irrevocable grantor trust in exchange for an installment note is a common business succession planning technique. The lower interest rates, and perhaps lower values of real estate and/or business assets, make this an even more attractive tool.

The grantor trust is considered a separate entity for gift or estate tax purposes, but the income generated in the trust is passed through to the grantor (e.g. “mom and dad” who created the trust for the children’s benefit). The lower applicable federal interest rates (AFRs) allow for lower interest rates on the note and therefore, less income tax to the grantor. In addition, the post-sale appreciation on the transferred business interest passes to the children outside the estate of the parents, and therefore free of estate and gift taxes.

Intrafamily loans

A parent can loan assets or cash to a child or grandchild at the required AFR without making a gift, so long as the loan is honored and payments made as though the loan were between arms-length parties (i.e. non-relatives).

Often, the parent or grandparent will forgive the loan payments annually up to the annual gift tax exemption amount (currently $15,000). Currently, the AFR for a loan term of nine years or less is under 1%. The lower interest rates allow for more of the principal to be forgiven each year, and if the assets appreciate at a higher rate than the AFR, that return has been passed on to the child free of estate or gift tax.

The COVID-19 pandemic and the dire economic situation have certainly brought a lot of bad news. But with the incentives and opportunities discussed in our last several columns, there is at least a silver lining or at least some lemonade to be made, just in time for summer.

This is not legal or tax advice to you individually, and you should rely on your own attorney or tax advisor to guide you, particularly given the nuances of the various techniques described.

Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild” coming in Fall 2020.  You can reach her at Teresa@trlawgroup.net

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New limits on IRAs lead to other opportunities, incentives

As discussed in last week’s column, the Secure Act passed in December 2019 made some changes to IRAs that were not beneficial to those people hoping to pass their IRAs down to their heirs in a tax-efficient manner.

The opportunity to stretch distributions from an IRA over a beneficiary’s lifetime (and therefore accrue tax-free income inside the trust for a longer period) was effectively done away with for all but spouses.

Then along came COVID-19 and the never-before-seen hit to the economy.

But things aren’t all bad. The Cares Act, passed by Congress in late March 2020, presents some tax planning incentives and opportunities, ranging from the simple to the more complex with greater benefits.

Charitable deductions

Taxpayers who do not itemize their deductions can now add an additional $300 deduction for donations of cash to public charities to the standard deduction, thanks to a provision in the Cares Act. And you’d rather give your money to charity than the government, right? This provision applies to 2020 and years thereafter.

Additionally, for 2020 there is no cap on the deductibility of cash contributions to charities. Thus, you can donate up to 100% of your adjusted gross income (vs. 60% previously) and receive a deduction of the full amount. For corporations, the charitable deduction limit of 10% of taxable income is raised to 25%.

IRAs and charitable deductions

Individuals over 70½ have been able to donate up to $100,000 in IRA assets directly to charities without taking the distribution amount into taxable income. These qualified charitable distributions (QCDs) result in no income tax, the assets are removed from your estate and therefore are not subject to estate tax, and other assets remain for your non-charitable beneficiaries.

Now that one can elect to deduct 100% of your AGI for cash contributions to charity, an individual over 59½ years of age effectively has the same opportunity. If you’re over 59½ you will not be penalized for “early distributions” of retirement funds. Thus, you can take a large cash distribution from your IRA, contribute it to a charity, and receive a charitable deduction of the entire amount.

This is a good strategy for someone between the ages of 59½ and 70½  who is not dependent on the retirement funds being donated, and either needs to move those assets out of their estate, would rather not pay income tax on the eventual minimum distributions required at age 72 and thereafter and/or has charitable intent. This strategy, however, only works in 2020.

Creating an IRA stretch

The use of the “IRA Stretch” (i.e. the beneficiary’s ability to defer income tax by stretching out the distributions over the beneficiary’s lifetime) for all but a spouse has been a big blow to those with large IRAs hoping to give their beneficiaries a leg up in retirement planning.

There are, however, methods that effectively re-create the IRA stretch.

Charitable remainder trusts: A CRT is a trust that is created during your lifetime to which you contribute property and from which you or your beneficiary receive the right to a stream of income over a set term or lifetime.

At the end of the term, what remains in the trust is distributed to a charity (named by you or your beneficiary). If you establish a CRT to receive your IRA at your death, the IRA will pay to the CRT, which will cash it out tax-free (since it’s a charity and does not pay income tax).

The CRT will then pay the distributions to your beneficiary over their lifetime (or a set term), effectively keeping the proceeds growing tax-free for a much longer period of time than the 10-year distribution requirement had you left the IRA directly to the child.

There are rules, of course. The beneficiary must receive a minimum of 5% annually and a maximum of 50%; the remainder that goes to charity must be a minimum of 10% of the present value of the gift at the time the CRT is funded, and the distributions paid to the beneficiary will be subject to income tax in part (as would the IRA proceeds had the IRA been gifted directly).

The pros to a CRT are the deferral of income taxes, an estate tax deduction, and an asset-protected stream of income to your beneficiary. (Creditors, including ex-spouses, cannot reach the CRT assets).

There are however cons as well. Setting up a CRT requires an attorney and a trustee; the trustee must file a special CRT return and give a K-1 to the beneficiary; and if a beneficiary (your child) dies prematurely, the remaining CRT assets go to the charity, not your grandkids.

Because the IRA stretch was eliminated, it’s a good idea to reconsider naming a CRT instead of a child as a beneficiary of large IRAs. This is a technique that works best for large IRAs (perhaps $1 million or more) and can be used in 2020 and later years.

Charitable gift annuity: This annuity is a contract with a charity whereby an asset is donated in exchange for a stream of annuity payments. This works like a CRT, but without a trust. Instead, there is a contract with a licensed charity. (Please note: Not all public charities are licensed to provide annuities. If your favorite charity isn’t licensed, check with your local Community Foundation).

Thus, you can also gift your IRA to a charity in exchange for an annuity payable to your beneficiary, and again effectively create an IRA stretch.

Taking advantage of low rates: The historically low interest rates also can be used for effective tax planning for higher net-worth individuals who need to remove assets from their taxable estates in a leveraged way.

Grantor retained annuity trusts: GRAT works like a charitable remainder, but the remainder beneficiary is your child or another non-charitable person. You transfer property to the GRAT and receive the right to an annuity payment for a term of years.

At the term’s end, what remains in the trust passes to your named beneficiary. The gift you make to the trust is based on the present value of the estimated gift to the beneficiary, through a formula that includes a presumed interest rate known as the Section 7520 rate, which as of May is set at 0.80%.

In other words, you gift X dollars into a GRAT and reserve the right to 8% annuity payments for 10 years, at which point the remaining trust assets are paid to your beneficiary. The gift made is equal to $X less the 8% annual payments, assuming the trust funds grow at only 0.80%.

The GRAT yields an estate and gift tax savings if you survive the term of the trust and the trust property generates a return in excess of the 7520 rate (currently 0.80%). In other words, you pass along more value than that which was subject to a gift tax.

Gifting lower-value property (marketable securities or real estate which has recently declined in value) now to a longer-term GRAT that could yield a return in excess of the low 7520 rate could result in substantial assets passing free of the estate and gift taxes.

Legal and tax advice: The above discussion is not legal or tax advice for you specifically, readers, so be sure to rely on an attorney or tax adviser, particularly given the nuances of the various techniques.

Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild” coming in Fall 2020.  You can reach her at Teresa@trlawgroup.net.

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Does cost of living matter in retirement? Well, it matters when ranking best places to retire

So why do rankings of all sorts often vary widely?

View the creators of all those data-driven rankings like a chef.

Sure, selection and quality of ingredients matters — or, in this case, choosing the underlying economic and demographic stats that build a ranking’s metrics.

But it’s the recipe — how the ingredients are mixed — that can truly impact the final result. You know, a dash here. Or a pinch there.

Take retirement. How the complex concept of personal finances figures into a person’s location choice for their golden years is by no means a set number.

Did you save enough? Are you a heavy spender? What might medical costs be? All are fairly unique parts of any household’s happy-retirement recipe.

But recent, noble efforts of data crunchers at WalletHub, Bankrate and Kiplinger’s to gauge the states in terms of retirement livability factors help show how the statistical mix can alter a ranking’s outcome.

I used my trusty spreadsheet to combine this trio’s retirement rankings in order to give a composite picture of strengths vs. weaknesses. I reassembled their published ranking data — overall scores, subindex grades and related data — into three categories: cost-of-living; character (culture and climate); and care (healthcare and healthiness).

Imagine making the costs measurement doubly as important as the other two metrics. That’s probably good for folks who are carefully watching their retirement pennies.

Florida and South Dakota were the top two. Utah was third followed by Wyoming and Tennessee.

California was the ninth-worst state for retirement when personal budgetary items were given high importance. And New York and New Jersey were worst-to-retire-to states by this math.

On the other hand, there are folks who don’t worry much about money. Perhaps they have generous pensions or saved smartly (or were simply lucky).

Also, note what many studies of retirees’ views on their quality of life after employment reveal. Life’s intangibles — friendships, families, and health — are far more critical to seniors’ happiness than many of factors frequently used to study best-place locations.

So, what if costs weren’t part of the retirement math, just the character of a state and the quality of its senior care?

According to this formula, the top three states shift to Vermont then Hawaii and Maine. Vermont was No. 40 when costs were a double factor.

Meanwhile, Florida and South Dakota fall into a tie for eighth place when costs aren’t part of the recipe. Tennessee drops to No. 40.

And California, minus its well-known high expenses? The 15th-best state for retirees.

Have you checked out Bubble Watch …

Bubble Watch: Are house hunters shying from newly built homes?

Bubble Watch: Is California’s anti-business vibe killing the state’s economy?

Bubble Watch: Home-equity loans back at pre-recession levels

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California ranks sixth-worst state to retire to — or 15th best

California is the sixth-worst state to retire in.

Or 15th best.

That’s the confusing message from three recent state-by-state, best-to-retire rankings based on a myriad of economic and demographic stats.

Data crunchers at Bankrate and Kiplinger’s both ranked California No. 45 among the states for desirability as a place to live out one’s golden years. But statisticians at WalletHub placed California 30 notches higher!

How do you explain the gap? Well, let’s look at how California’s grades varied by those doing the rankings.

Remember, when it comes to rankings, beauty is in the eyes of the grader. My trusty spreadsheet — filled with retirement data and rankings of WalletHub, Bankrate and Kiplinger’s — found that even population counts display a deep statistical divide.

Yes, California has 5 million people aged 65 or older, the largest number of seniors in the nation. Certainly, that means something. But that flock equals only 12.9 percent of all Californias, the sixth-smallest share of 65-plus residents nationally. Are we young? Or unattractive to retirees?

Then look at the ranking divergence when it came to expenses. Yes, California’s expensive … but just how much pricier vs. other states is up for debate.

Bankrate found California third worst for cost-of-living and third-worst for its tax rates. But WalletHub scored California 14th worst for “affordability.” And Kiplinger’s noted California’s 65-plus households had a $65,904 average income, sixth-best among the states.

As for scoring conditions for care for seniors, Bankrate ranked California No. 19 for healthcare quality and No. 14 for well-being. WalletHub gave the state a No. 16 ranking for healthcare. And Kiplinger’s cited average healthcare costs for a retired couple of $430,867. That’s above a national average of $423,523 and 10th highest among the states.

Of course, California “cool” scored well. Bankrate gave the state a No. 14 ranking for the weather, No. 20 for culture, but 19th-worst for its crime. WalletHub ranked the state third-best for quality of life.

California appeared trickier to grade than other states as the three rankings had some agreement on the where-to-retire extremes.

Best states? Well, South Dakota made the top three among each surveyor: For Wallethub it was Florida, Colorado and South Dakota; Bankrate was South Dakota, Utah and Idaho; and Kiplinger’s list was topped by South Dakota, Hawaii and Georgia.

Worst states? New York and Maryland got double dings in the bottom-three grades: Wallethub (Kentucky, New Jersey, and Rhode Island); Bankrate (New York, New Mexico, and Maryland); and Kiplinger’s (New York, Massachusetts, and Maryland).

Here’s how the 50 states ranked in this trio of gradings for retirement quality, listed in alphabetical order …

State Wallethub Bankrate Kiplinger’s
Alabama 41 24 28
Alaska 30 36 42
Arizona 10 29 17
Arkansas 46 46 49
California 15 45 26
Colorado 2 17 11
Connecticut 34 35 20
Delaware 25 19 13
Florida 1 5 1
Georgia 37 37 45
Hawaii 42 11 5
Idaho 8 3 12
Illinois 31 44 46
Indiana 32 22 43
Iowa 4 16 9
Kansas 17 25 23
Kentucky 50 30 48
Louisiana 44 47 50
Maine 23 22 14
Maryland 38 48 41
Massachusetts 19 12 8
Michigan 29 14 21
Minnesota 11 28 19
Mississippi 47 10 36
Missouri 18 15 24
Montana 13 6 7
Nebraska 33 9 22
Nevada 16 42 38
New Hampshire 7 4 3
New Jersey 49 32 35
New Mexico 43 48 47
New York 40 50 40
N. Carolina 28 6 15
N. Dakota 24 20 27
Ohio 20 38 32
Oklahoma 36 40 44
Oregon 26 39 31
Pennsylvania 14 31 16
Rhode Island 48 34 34
S. Carolina 27 41 39
S. Dakota 3 1 2
Tennessee 35 21 30
Texas 22 17 29
Utah 9 2 6
Vermont 39 26 10
Virginia 5 13 4
Washington 21 43 33
W. Virginia 45 33 37
Wisconsin 12 26 25
Wyoming 6 8 18

Have you checked out Bubble Watch …

Bubble Watch: Are house hunters shying from newly built homes?

Bubble Watch: Is California’s anti-business vibe killing the state’s economy?

Bubble Watch: Home-equity loans back at pre-recession levels

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