How to Initiate a Financial Conversation Between Family Membes

Financial Planning Investment Management Tax & Estate Services

Elmwood Quarterly Insights

July 2014

Elmwood Wealth Management 2027 Fourth St., suite 203

Berkeley, CA 94710 (510) 858-2723

[email protected] www.ElmwoodWealth.com

1) How to initiate a financial conversation between family members, including advice for both parents and children on how to get the conversation going.

2) Mid-year tax planning questions and

answers. We reveal the most common questions and answers clients ask us.

3) International conflicts: Friend or Foe? How concerned should we be with all the issues and negative headlines taking place overseas?

In This Issue:

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Elmwood Wealth Management

How to initiate a financial conversation

between family members

By Bob Gillooly, CFA

Whether you are a parent with grown children, or you

are the grown child and have a parent(s) in retirement,

talking about money is never an easy conversation.

There are many reasons why both parties should be

getting together to talk about their respective futures.

From the parents’ perspective, while they may not

need help now, there is a good chance that they could

need the help of their children for their living, medical,

and financial needs sometime in the future. If you are

the child, you may need important information about

your parents at a moment’s notice, should you need to

help out. This information may also be important in

planning your own financial future. And let’s not

forget about when we all inevitably will pass away,

because the last thing any of us wants to do is leave

our family members with an unorganized mess to

clean up.

First, there is a difference between how parents feel

they have communicated financial information to their

children, as apposed what their children think they

have received. In a recent Fidelity survey, 31% of

parents believe that that have had very detailed

conversations with their children about living, medical,

and financial information. When asked the same

question, only 16% of children believe they’ve had a

very detailed conversation. This communication dis-

connect is common and important to resolve. One way

to improve upon this is to put the details in writing and

document all the information that has been shared. A

great way of doing this is to keep a financial inventory

that details things such as assets and account numbers,

insurance policies, key third party contact information,

medical information, passwords, location of wills and

trusts, and anything else that may be important.

But what if both parties have not yet spoken on this

topic, or didn’t get very far when they did? Here are

some suggestions we have to help break the ice:

Quarterly Insights: July 2014

If you are the parent…

1. Ask your children if they have established an

estate plan (trust, will, etc.). If not, offer your

guidance and experience to help get this done.

2. Let your children know who will serve as

trustee(s) or executor of your estate. It’s better

not to surprise anyone on this front.

3. Ask your children to hold copies, or provide them

access to your important personal documents.

If you are the child…

1. Offer to help your parents create a financial

inventory document listing all their key

information in one place.

2. Share a recent experience of someone who un-

expectantly needed help from their spouse or

children.

3. Suggest a family meeting to talk about your

respective estate plans. Put forth an agenda prior

to the conversation to help keep on point.

It is in both parties’ best interest to begin talking and

planning for the future. Contact us for our financial

inventory worksheet and let us know if we can help

facilitate a conversation.




Mid-Year Tax Planning

By Shannon Lemon, CFP®

April has come and gone but that does not mean you should

stop thinking about your taxes; tax planning is an ongoing process. Being aware of the tax laws and the deductions and

credits that are available to you, it may help you lessen the

taxes you will face in 2015.

What expenses should I keep track of throughout the

year that may be deductible?

State and local income taxes, mortgage interest,

property taxes, medical expenses, theft or disaster

damages, un-reimbursed business expenses and

charitable contributions

When do I need to make estimated tax payments? Generally you may need to pay quarterly estimates if you

do not have taxes withheld from your income, from non-wage sources such as retirement accounts, rental income,

stock sales, interest, dividends, alimony, or you’re self-

employed. If you expect to lose a significant deduction or credit, you may be required to also pay estimates.

Should I maximize my 401(k) contribution? Contributing to a 401(k) is the easiest way to reduce your

taxes. You receive an immediate reduction in your gross

pay before your taxes are calculated. You can contribute up to $17,500 for 2014 and an additional $5,500 if you are

above age 50. Be sure to check to see if your employer will

match your contribution so you can start deferring early to maximize all contributions.

Should I contribute to a Traditional IRA? If you are not covered by an employer’s 401k plan,

contribute to a traditional IRA on a pre-tax basis. The

contribution limits are $5,500 and $6,500 for those 50 and above. Contributions can be made up to the April 15th tax

deadline for the prior year. Anyone with earned income,

including alimony, is generally eligible to contribute to an IRA, even a child who has a job. Contribution are

deductible if your income is below $70,000 (single filers)

and $116,000 (married filing joint).

Can I contribute to a Roth IRA?


Contributions to a Roth IRA are never tax deductible. Eligibility depends on the amount of your income. A

contribution is allowed if your modified adjusted gross

income for 2014 is less than $129,000 (singles filers) or $191,000 (married filing joint).

Should I consider making a charitable donation to

reduce my taxes? Contributions to a charity reduce your taxable income and the amount of tax you pay but there are some rules.

Charitable 501c3 contributions are deductible up to 50%

of gross income. Most charities, schools, hospitals, churches and foundations are 501c3 charities. If you

donate to veterans organizations, fraternal societies or

private foundations, a maximum of 30% of gross income

can be deducted. If you donate appreciated securities, 30% of your gross income can only be deducted, even if it is a

50% 501c3 charity. For individuals who donate their

services, the IRS does not allow a deduction for donating your time.

Should I pay off my student loan debt? The ability to deduct student loan interest payments is

limited to people earning less than $75,000 per year (single filers) or less than $155,000 (married filing joint).

If you are close or slightly above the threshold, try to

reduce your taxable income by maximizing a 401(k) or

IRA contribution, or take capital losses to reduce taxable income. By doing so student loan interest up to $2,500

may be deductible. If your income exceeds the limits,

there is no benefit keeping student loans on your books.

Can I pay my children and deduct their wages? If you own a business and have children, consider putting

them to work. You will be able to deduct their wages, as

long as their pay is commensurate with what you would

pay nonfamily employees for the same services. For 2014, each child can earn as much as $6,200 and pay zero

income tax. A child who earns $11,700 and contributes

$5,500 to a traditional IRA will also pay zero income tax.

While we touched on a number of tax topics, it

undoubtedly only scratches the surface. The best way to stay on top of your taxes is to be pro-active and reach out

to your CPA a couple times a year, especially if you have

had changes in your income, the source of your income or

your family situation.



Quarterly Insights: January 2014

Source: JP Morgan




International Conflicts: Friend or Foe?

By Bob Gillooly, CFA

Numerous international conflicts that have erupted the

past few months. Russia-Ukraine, Israel-Hamas, and

the Iraq Sunni-Shiite issues have all made recent

headlines. All are serious situations and they also beg

the question as to why hasn’t the stock market gone

down due to all these negative headlines? There are a

few reasons to explain this. First, the United States

increasing independence of foreign energy and

secondly, due to our own economic stability and

prospects going forward.

“Buy on the sound of the cannon, sell on the sound of

the trumpet." is an old proverb from the Napoleonic

wars, attributed to London financier Nathan

Rothschild. It suggests that the start of a war is a good

time to buy stocks and then stocks should be sold once

the war is over. The rationale behind this advice is that

investors tend to overreact to the bad news of a coming

war, leading to underpricing. Similarly, investors

overreact to the good news of the end of a war, leading

to overpricing1. We are not suggesting here that war is

imminent in any of these cases we mentioned, rather

these conflicts may very well follow the same path of

past experiences. First, there is the surprise factor and

the fear of what may transpire between the two sides.

The press then always seems to build in the gloomiest

of scenarios, and this leaves room for great uncertainty

which the stock market never likes. Perhaps the sounds

of the cannons remove some of this uncertainty, which

then leads to a recovery or positive move in the stock

market.

Further to the uncertain nature of these types of events,

past problems in these geographies have always raised

the question and fear of a disruption in oil flow. This

worry still holds true in all three cases here, but

perhaps the difference this time is that the U.S. is

clearly making strides in becoming more energy

independent.

Rapid adoption of green technology coupled with the

boom in domestic oil and natural gas production has

lowered the level of oil imports as shown in the chart

above.

Also worth pointing out is that the U.S. clearly has

one of the strongest economies in the world right

now. In the U.S., for example, earnings are projected

to increase 21% over the next 12 months as opposed

to falling 7% in the Emerging Markets. That leads us

to believe that even if these international conflicts

persist, our domestic economy is on solid ground and

will attract funds into both the stock and bond

markets.

In conclusion, international conflicts can have a

negative impact on the stock market, but more often

than not the effect on the market is short lived even if

the conflict itself wears on. The United States has put

itself in a strong position of energy independence and

economic stability which may mute any negative

impact of such events over the longer term. As we

watch and monitor these situations from afar, our

strategy will be one of patience, with an eye toward

using any significant disruption as an investment

opportunity.

Footnote: 1. The war puzzle: contradictory effects of

international conflicts on stock markets. Brune, Hens, Rieger, Wang 2012

Chart source: JP Morgan





Investment Theme: U.S. Energy Resurgence – Not only has there been a tremendous amount of natural gas discovered in America, but new technology has led to a boom in new oil discoveries as well. The abundance of new energy will mean our country must invest in virtually every aspect of our energy infrastructure to make this resource available.

Elmwood’s Strategy: We are investing in companies that have large underground reserves of both natural gas and oil. We are also taking advantage of less obvious ways to exploit this theme. For example, companies which help clean up gas and oil wells, and transportation companies that move both supplies and the commodity itself across the country.

Investment Theme: Total Return Equity Investing – investing in companies that take into consideration both price appreciation and dividend payments. Companies are increasingly raising dividends and buying back stock as a return to shareholders.

Elmwood’s Strategy: Invest in companies that have the cash flow to both buy back their own stock and increase their dividend. If a company bought back 2% of their outstanding shares annually and paid a 2% dividend yield, your total return would theoretically be 4%. This is a great backdrop in any circumstance.

Investment Theme: U.S. Health Care Needs – With new health care legislation now in place, approximately 40 million individuals will become eligible for health care coverage. This fact, coupled with the aging baby boomer demographic will create substantially more demand for health care going forward.

Elmwood’s Strategy: An increase in both the number of participants and the frequency of accessing health care inevitably will drive up the cost to cover this phenomenon. By investing in companies that will benefit by serving a larger number of participants, and able to help reduce the cost of service. Insurance and benefit management firms look to benefit.

Elmwood’s Strategy: Taking active approach to our bond portfolio, we are buying high current income corporate bonds (6-7%) with good credit quality, relatively short maturities that will likely be sold before maturity. We are also using higher income paying preferred stocks (6%) that offer more favorable tax treatment as a substitute for longer maturity bonds.

Investment Theme: High Current Bond Yields – Yields for most good quality bonds are extremely low. Yet there is a segment in the market where you can buy both high quality and high current interest paying bonds.

Investment Theme: Developed Foreign Equities – The emerging markets have been a hot place to invest for over a decade now, but their relative growth is slowing. The risk/reward tradeoff is no longer attractive as their higher inflation and political instability are cause for concern.

Elmwood’s Strategy: Investors have been reluctant to invest in both the European and Japanese markets for years, especially in the case of Japan which has been out of favor for decades. Easy monetary policy and the plain fact that their economies are improving argue for exposure in these areas.


Elmwood Wealth Management 2027 Fourth St., suite 203

Berkeley, CA 94710 (510) 858-2723

[email protected]

www.ElmwoodWealth.com

Elmwood is committed to making life easier for

you while maximizing your investment potential.

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4829-7471-3628, v. 1

Economy & Finance

How to Initiate a Financial Conversation Between Family Membes