Trends – Roth&Co

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If you’ve worked a lifetime to build a large estate, you undoubtedly would like to leave a lasting legacy to your children and future generations. Educating your children about saving, investing and other money management skills can help keep your legacy alive.

Teaching techniques

There’s no one right way to teach your children about money. The best way depends on your circumstances, their personalities and your comfort level.

If your kids are old enough, consider sending them to a money management class. For younger children, you might start by simply giving them an allowance in exchange for doing household chores. This helps teach them the value of work. And, after they spend the money all in one place a few times and don’t have anything left for something they really want, they (hopefully) will learn the value of saving. Opening a savings account or a CD, or buying bonds, can help teach kids about investing and the power of compounding.

For families that are charitably inclined, a private foundation can be a vehicle for teaching children about the joys of giving and the impact wealth can make beyond one’s family. For this strategy to be effective, children should have some input into the foundation’s activities.

Timing and amounts of distributions

Many parents take an all-or-nothing approach when it comes to the timing and amounts of distributions to their children — either transferring substantial amounts of wealth all at once or making gifts that are too small to provide meaningful lessons.

Consider making distributions large enough so that your kids have something significant to lose, but not so large that their entire inheritance is at risk. For example, if your child’s trust is worth $2 million, consider having the trust distribute $200,000 when your son or daughter reaches age 21. This amount is large enough to provide a meaningful test run of your child’s financial responsibility while safeguarding the bulk of the nest egg.

Introduce incentives, but remain flexible

An incentive trust is one that rewards children for doing things that they might not otherwise do. Such a trust can be an effective estate planning tool, but there’s a fine line between encouraging positive behavior and controlling your children’s life choices. A trust that’s too restrictive may incite rebellion or invite lawsuits.

Incentives can be valuable, however, if the trust is flexible enough to allow a child to chart his or her own course. A so-called principle trust, for example, gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals. But no matter how carefully designed, an incentive trust won’t teach your children critical money skills.

Communication is key

To maintain family harmony when leaving a large portion of your estate to your children, clearly communicate the reasons for your decisions. Contact your estate planning advisor for more information.

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If you’re married, you may wonder whether you should file joint or separate tax returns. The answer depends on your individual tax situation.

In general, it depends on which filing status results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. That means that the IRS can come after either of you to collect the full amount.

Although there are “innocent spouse” provisions in the law that may offer relief, they have limitations. Therefore, even if a joint return results in less tax, you may want to file separately if you want to only be responsible for your own tax.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately can save $2,499 on their 2021 taxes, when they file this year.

Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when people save tax by filing separately. For example:

One spouse has significant medical expenses. Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.

Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. And you can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.

Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).

Circumstances matter

The decision you make on filing your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately.

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Footnotes appear at the end of a company’s audited financial statements. These disclosures provide insight into account balances, accounting practices and potential risk factors — knowledge that’s vital to making well-informed lending and investing decisions. Here are examples of key risk factors that you might unearth by reading between the lines in a company’s footnotes.

Contingent (or unreported) liabilities

A company’s balance sheet might not reflect all future obligations. Auditors may find out the details about potential obligations by examining original source documents, such as bank statements, sales contracts and warranty documents. They also send letters to the company’s attorney(s), requesting information about pending lawsuits and other contingent claims.

Detailed footnotes may reveal, for example, an IRS inquiry, a wrongful termination lawsuit or an environmental claim. Footnotes may also spell out the details of loan terms, warranties, contingent liabilities and leases. Liabilities may be downplayed to avoid violating loan agreements or admitting financial problems to stakeholders.

Related-party transactions

Companies may give preferential treatment to, or receive it from, related parties. It’s important that footnotes disclose all related parties with whom the company — and its management team — conducts business.

For example, say a retailer rents space from its owner’s grandparents at below-market rents, saving roughly $240,000 each year. If you’re unaware that this favorable related-party deal exists, you might believe that the business is more profitable than it really is. When the owner’s grandparents unexpectedly die and the rent increases, the company’s stakeholders could be blindsided by the undisclosed related-party risk.

Accounting changes

Footnotes disclose the nature and justification for a change in accounting principle, as well as that change’s effect on the financial statements. Valid reasons exist to change an accounting method, such as a regulatory mandate. But dishonest managers can use accounting changes in, say, depreciation or inventory reporting methods to manipulate financial results.

Significant events

Footnotes may even forewarn of a recent event — including something that’s happened after the end of the reporting period but before the financial statements were issued — that could materially impact future earnings or impair business value. Examples might include the loss of a major customer, a natural disaster or the death of a key manager.

Critical piece of the financial reporting puzzle

Footnotes offer the clues to financial stability that the numbers alone might not. But drafting footnote disclosures requires a delicate balance. While most companies want to be transparent when reporting their results, indiscriminate disclosures and the use of boilerplate language may detract from the information that’s most meaningful to your company’s stakeholders. Contact us to discuss what’s right for your situation.

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For most business leaders, managing employee frustration and resentment is a normal and common part of the job. The reality is that when a company brings together many different employees with different personalities, at some point they are bound to clash with each other or with the company’s culture.

Anger and frustration in the workplace is nothing new, and has been around since people started working together. The pandemic has certainly added new frustrations to the workplace, but Gallup’s State of the Global Workplace Report highlights that the daily rates of anger, stress, worry and sadness among American workers have been rising over the past decade.

Of course, the past couple of years have brought unique frustrations for employees and leaders, but the strategies that great managers use to navigate these challenges haven’t changed and will be used long into the future. As a business leader, it isn’t your responsibility to keep everyone happy all the time, but you are responsible for building a culture of trust and respect so that your employees can be as productive as possible. Here are some recommendations from a recent Harvard Business Review article on how to handle employee frustration:

Balance Your Emotions Before Reacting

The most important step is to be sure that before reacting to your employees’ frustration, you stabilize your own mood. Business leaders are not robots and feel the same frustrations and uncertainty as their employees. It is only natural for people to react defensively when confronted by anger or resentment, but it is important for leaders to not act impulsively.

Perceive your employees’ frustration as data, not danger. Accepting feedback that your team is frustrated without judging them – or yourself – can help you address concerns with an open and clear mind.

One of the best tricks as manager is to give yourself time before responding. For example, if you receive a frustrating email, don’t respond impulsively. Write a response, but wait to send it. Give yourself time to stabilize your own mood – an hour, a day – whatever you need. Then go back and read your response to see if you still want to send it. Most of the time, you’ll end up deleting your draft and sending something completely different.

Learn What’s Causing Their Frustration

After making sure you are in the right frame of mind to respond, ask for more information about your team’s frustration. This demonstrates that you care enough to acknowledge and empathize with them.

Offer your employees a safe space to vent to you without shame or fear of retribution. Then thank them for coming forward and sharing their concerns. Encourage them to partner with you to explore new solutions that benefit everyone.

Redesign Goals Together

After de-escalating emotions and learning about the source of your employees’ frustration, you can now try to channel their anger towards a more constructive outcome. Work with your employees to create shared goals that will address their frustration. By jointly creating goals, you can help turn frustration from a negative emotion to a positive and productive one. According to a study in the Academy of Management Review, employees can become more proactive and increase motivation when redirecting frustration towards a battle that benefits others. Helping your team regulate and pivot their emotions not only helps everyone feel better, but can spark more creativity to address and begin making changes.

Anger and resentment from your employees can make an already stressful leadership job feel even worse. But the way in which you respond to your employees’ frustrations can make you a better leader, your employees happier, and your company more productive. By following these recommendations, you can turn an angry employee into an engaged employee, and improve your company’s operation at the same time.

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It’s been almost two years since “patient zero” was officially diagnosed in the United States, and times have been trying, to put it mildly.

While the virus was wandering in China, even before it hit our shores, the market and the economy jittered around. A combination of the quickest 30% drop in stock market history, government-imposed closures of world commerce, and governments setting their money-printing presses on overdrive, has created a volatile backdrop for the financial system.

What will the stock market do next? Will high inflation endure? Will the unemployment level ever come back to pre-Covid levels?

These are some of the many questions we’ve fielded on a regular basis. Our clients, friends and other concerned investors turn to us as licensed advisors and we’ve responded by sharing potent and valuable communications to address these concerns.

We have always tried to remain even-keeled and level-headed, not getting overly bearish on the bad days or overly excited on the good ones. It wasn’t always easy. For about a year, good advice simply wasn’t working. People who were new to investing were quitting their jobs and making lots of money trading. Margin balances in accounts were up and the put-all-my-eggs-in-one-basket method was working out. Throughout those difficult times, we tried to keep our cool and advise others to stick with the models that have been working for many decades.

These days, though we aren’t ready to do a victory lap just yet, we will allow ourselves the proverbial pat on the back. While many rowdy traders got blown out of the water, our traditionalist, long-term approach has held up and worked to our clients’ advantage. The YOLO trade which had people betting it all on one stock or option, eventually came to a crashing halt, leaving many of those high-flyers down more than 80%. To get an idea about how our judicious approach played out over the course of the last few tumultuous years, here are some excerpts from our past articles:

“Investing in the market is for the long-term, not on each day’s news. If you are a net-buyer, cheer! You have an opportunity to buy these investments at a much better price.” (03-09-2020)

“As we write this, the Dow is -29% off its highs. Odds of better returns should follow. That doesn’t mean we won’t go down another 20% or need to endure nasty volatility. But that is a feature of the market, not a bug. In order to take part in the market returns, you need to sign up for the volatility.” (04-03-2020)

“Panic buying is a recipe for regret. Mean reversion is a powerful force. So, what is the proper strategy? You’ve got to have a plan and stick to it. That means having an emergency fund, investment plan and retirement plan in place.” (06-11-2020)

“Again, we don’t predict. But we do need to prepare. And how do we do that? Well, first and foremost, we want to have an all-weather portfolio. That is, a properly diversified portfolio where you have a mix of asset classes and proper asset allocation.

At Equinum, we have made some changes to our clients’ accounts. We have swapped some of the government bonds in our portfolios to TIPS, which are inflation protected. So, if inflation gets out of control, clients won’t lose purchasing power. We added some real assets to portfolios, like precious metals and real estate. These tend to do well in cases of inflation. Income producing companies can also be a good hedge as well. One more thing to the renters out there: It might be a prudent idea to consider purchasing a home. If we do have a pickup in real inflation, your rent can double over the next decade or so. But if you lock in a mortgage, your price is locked. To sweeten the deal, mortgage rates are the lowest ever recorded by Freddie Mac in a series that goes back to 1971.” (10-13-2020)

“We’re not saying that investors shouldn’t trade the market at all. We’re just saying that you need to understand what the market risks are. While you may have a friend who’s really good at the game now, if history serves as any guide, we can assume that the nature of today’s game is temporary. Leaving a steady income to get involved in speculation is a risky (read: bad) idea. If you want to take a small portion of your invested assets and speculate, it may well be worthwhile. But the bulk of your assets should be properly invested with a long-term approach in a well-diversified portfolio.” (03-22-2021)

“We all know that substantial investment risks will always be present in a portfolio. Some risks just can’t be removed. And if you follow markets, you understand that there is always a reason to sell, because the market is either at or near an all‐time high, or in a drawdown. Many will maintain that, when we’re at all-time highs, the market is extended and it’s time to opt out. And when we are in a drawdown, there is usually a reason for it. Which means that many are calling for markets to unravel.

What we to do for our clients may not always look exciting, but it helps them reach their goals. Discussing asset allocation, inflation hedges, insurance levels or estate planning will not excite most people. But when we focus on our clients’ total picture and keep them calm, we are creating legacies.” (07-30-2021)

It wasn’t easy begging people not to panic-sell during the drop, or to convince people not to panic-buy during the crazy rise. Advising on inflation hedges, well before it was covered on the nightly news, was no picnic – like when we advised clients to purchase a house (Brooklynites and Lakewooders out there). Throughout this turbulent time, we stood firm in our approach, despite the fact that the markets were going against our advice. Ultimately, remaining calm and positive, and sticking with the core principles of investing, usually works out for the best.

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Ever since the Affordable Care Act was signed into law, business owners have had to keep a close eye on how many employees they’ve had on the payroll. This is because a company with 50 or more full-time employees or full-time equivalents on average during the previous year is considered an applicable large employer (ALE) for the current calendar year. And being an ALE carries added responsibilities under the law.

What must be done

First and foremost, ALEs are subject to Internal Revenue Code Section 4980H — more commonly known as “employer shared responsibility.” That is, if an ALE doesn’t offer minimum essential health care coverage that’s affordable and provides at least “minimum value” to its full-time employees and their dependents, the employer may be subject to a penalty.

However, the penalty is triggered only when at least one of its full-time employees receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).

ALEs must do something else as well. They need to report:

Whether they offered full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan,
Whether the offered coverage was affordable and provided at least minimum value, and
Certain other information the IRS uses to administer employer shared responsibility.

The IRS has designated Forms 1094-C and 1095-C to satisfy these reporting requirements. Each full-time employee, and each enrolled part-time employee, must receive a Form 1095-C. These forms also need to be filed with the IRS. Form 1094-C is used as a transmittal for the purpose of filing Forms 1095-C with the IRS.

3 key deadlines

If your business was indeed an ALE for calendar year 2021, put the following three key deadlines on your calendar:

February 28, 2022. This is the deadline for filing the Form 1094-C transmittal, as well as copies of related Forms 1095-C, with the IRS if the filing is made on paper.

March 2, 2022. This is the deadline for furnishing the written statement, Form 1095-C, to full-time employees and to enrolled part-time employees. Although the statutory deadline is January 31, the IRS has issued proposed regulations with a blanket 30-day extension. ALEs can rely on the proposed regulations for the 2021 tax year (in other words, forms due in 2022).

In previous years, the IRS adopted a similar extension year-by-year. The extension in the proposed regulations will be permanent if the regulations are finalized. No other extensions are available for this deadline.

March 31, 2022. This is the deadline for filing the Form 1094-C transmittal and copies of related Forms 1095-C with the IRS if the filing is made electronically. Electronic filing is mandatory for ALEs filing 250 or more Forms 1095-C for the 2021 calendar year. Otherwise, electronic filing is encouraged but not required.

Whether you’re a paper or electronic filer, you can apply for an automatic 30-day extension of the deadlines to file with the IRS. However, the extension is available only if you file Form 8809, “Application for Extension of Time to File Information Returns,” before the applicable due date.

Alternative method

If your company offers a self-insured health care plan, you may be interested in an alternative method of furnishing Form 1095-C to enrolled employees who weren’t full-time for any month in 2021.

Rather than automatically furnishing the written statement to those employees, you can make the statement available to them by posting a conspicuous plain-English notice on your website that’s reasonably accessible to everyone. The notice must state that they may receive a copy of their statement upon request. It needs to also include:

An email address for requests,
A physical address to which a request for a statement may be sent, and
A contact telephone number for questions.

In addition, the notice must be written in a font size large enough, including any visual clues or graphical figures, to highlight that the information pertains to tax statements reporting that individuals had health care coverage. You need to retain the notice in the same location on your website through October 17, 2022. If someone requests a statement, you must fulfill the request within 30 days of receiving it.

Identify your obligations

Although the term “applicable large employer” might seem to apply only to big companies, even a relatively small business with far fewer than 100 employees could be subject to the employer shared responsibility and information reporting rules. We can help you identify your obligations under the Affordable Care Act and assess the costs associated with the health care coverage that you offer.

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Roth&Co’s latest video series: Real Estate Right Now.

Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co Real Estate Department, this series covers the latest real estate trends and opportunities and how you can make the most of them. This last episode in our valuation metrics mini-series discusses one final metric: Discounted Cash Flow.

Watch our short video:

DCF, or Discounted Cash Flow, is used to determine the total monetary value of an asset in today’s dollars and is a powerful tool for valuing businesses, real estate investments or other investments that project to generate profits and cash flow.

DCF studies a potential investment’s projected future income and then discounts that cash flow to arrive at a present, or current, value. It adds up the property’s future cash flow from the time of purchase until the time of its sale and all the activity that happens in between. It takes into account the property’s initial cost, annual cost, estimated income, operating costs, renovations, changes in occupancy and its future selling price, among other factors. At the end of the assumed investment period, an exit price is determined using the building’s metrics in the year of disposition. The entire cash flow stream, including the forecasted profit from the investment’s sale, is then discounted back to the current period using a discount rate.

The discount rate represents the rate of return that is required of the investment based on its risk. The higher the risk, the higher the return required by the investor, and the more we have to discount the investment’s value. A higher discount rate implies greater uncertainty, and that means a lower present value of our future cash flow. On the flip side, the lower the perceived risk in an investment, the lower the discount rate.

The DCF metric is an influential tool, but it has its drawbacks. The upside of the DCF model is that it is very customizable and able to be tailored to the facts and circumstances, such as projected renovation costs or market changes. The downside is that the model is very sensitive to changes in its variables. For example, a change in the discount rate of less than 1% can have a 10% effect on the value of the investment. There is a lot of assumption and estimation involved, and small changes can have a big impact on the end-result.

Whereas it may not always be accurate or applicable for every situation, the DCF calculation remains a formidable tool in the investors’ arsenal and, combined with other important metrics, allows the investor to assess the present value, risk and potential profitability of a real estate investment.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

Educate Your Children About Wealth Management

Married Couples Filing Separate Tax Returns: Why Would They Do It?

Audit Disclosures: Why the Fine Print is Important

How To Better Manage Employee Frustration

Hard Times: A 2-Year Review

2022 Deadlines for Reporting Health Care Coverage Information

Video: Real Estate Right Now | Valuation Metrics (Part 3)