3 Investment Ideas for Retirees Right Now

Ah, retirement. Picture long, blissful walks on the beach. Or you’re watching the sunset from the balcony of your cruise ship and thinking: This is it – the way life should be. Then you casually check your smartphone to see how your investment accounts are doing and, gasp! You might not be as rich as you thought were.

Retirees are facing major headwinds right now when it comes to investing: Troubles in Ukraine, higher inflation and stock market jitters to name a few. If you are in or near retirement and wondering what you can do with your portfolio, here are three ideas I share with some of my clients:

1. Consumer defensive stocks

I want clients to be as diversified as possible. However, I may tilt their portfolio to consumer defensive stocks for retired or more conservative clients. Defensive stocks generally include utility companies like natural gas and electricity providers, healthcare providers and companies whose products we use day-to-day, like toothpaste companies or food and grocery stores.

According to the Center for Corporate Finance, a leading finance educator to financial professionals, defensive stocks tend to be less volatile than other types of stocks. Less volatility can mean less upside potential, but it can also mean less downside risk, which I find is what many retirees want – less downside (and hopefully better sleep at night).

2. Bonds for retirees – but not just any bonds

I like municipal bonds for retirees. Municipal bonds are issued by states, cities or local municipalities. There are many types of municipal bonds. General Obligation municipal bonds are backed by the taxing authority of the issuer – meaning the state or municipality uses taxes to pay the interest to bondholders. Revenue bonds are municipal bonds backed by a specific project. A toll road uses tolls as the revenue to pay bondholders.

Interest from municipal bonds is usually exempt from federal taxes (though there may be alternative minimum tax (AMT) considerations for certain types of investors). If you live in the state where the bond is issued, the interest may be exempt from state taxes as well.

I like tax-free interest for retirees for several reasons. Retirees may have other sources of taxable income, such as pensions, annuities or rental income, whose income may push them into a higher-than-expected income tax bracket. Retirees may also take money out of 401(k)s and traditional IRAs in retirement for required minimum distributions, which are taxable as ordinary income. Having some tax-free interest may prevent the retiree’s income from creeping up into the next higher tax bracket in retirement.

Findings from the 2019 Municipal Finance Conference suggest there is less risk of default with general obligation bonds than revenue bonds. This is because revenue bonds typically depend on the vitality of a project, which is more uncertain than the state or municipality’s ability to raise taxes to pay for a general obligation bond. For this reason, I may tilt a portfolio more toward general obligation municipal bonds than revenue bonds for retirees.

Municipal bonds are not without risk. There is no guarantee of principal and market value will fluctuate so that an investment, if sold before maturity, may be worth more or less than its original cost. Like any bond, municipal bond prices may be negatively impacted by rising interest rates. Also, municipal bonds may be more sensitive to downturns in the economy – investors may fear a struggling state’s economy may be unable to repay the bond.

For these reasons, I like to be as diversified as possible. I may use short-term muni bonds for more principal stability and less interest rate risk. I might also blend in intermediate-term municipal bonds for additional yield. If the portfolio is larger than $250K I prefer to buy individual municipal bonds for greater customization and tax-loss harvesting opportunities.

3. Beyond stocks and bonds

I like to sprinkle in small amounts of other investments. I call these my “satellites.” Depending on the client’s financial situation and tolerance for risk, I may add in real estate or small amounts of commodities, including coal, gold, corn and natural gas. I generally use mutual funds or exchange-traded funds for the diversification and the relatively low cost. I usually only buy small amounts, maybe 2%-5% of a portfolio, to help diversify the portfolio and provide an inflation hedge.

Inflation is a significant real enemy for retirees. Rising prices erode the purchasing power of a portfolio. One nice thing about owning real estate is the owner often can raise rents, which is a hedge against rising prices. I may buy Real Estate Investment Trusts (REITs) which pool together various properties. I may also use Private REITs, which are not traded on the public market, so they are less liquid, for more sophisticated investors. Private REITs are not suitable for everyone, as they tend to carry higher fees, don’t have published daily prices, but they often provide higher yield than publicly traded REITs.

For more on fighting inflation see my blog post Could Inflation Affect Your Retirement Plans?

Parting thoughts

Investing in retirement is different than investing while working. In retirement, an investor’s time horizon shrinks – they need the money sooner to live off and there’s no paycheck coming in to replenish the account. There is also less time for a retiree’s portfolio to recover from a stock market correction. Because of this, I find retirees fear losses more than they enjoy their gains.

Understanding these differences is important for successful investing in retirement. Using these three approaches – shifting slightly more to consumer defensive stocks, using municipal bonds to help prevent further taxable income, and adding small amounts of inflation-fighting investments like real estate and possibly commodities – in my opinion can all help smooth out the ride for retirees.

The author provides investment and financial planning advice. For more information, or to discuss your investment needs, please click here to schedule a complimentary call.

Disclaimer: Summit Financial is not responsible for hyperlinks and any external referenced information found in this article. Diversification does not ensure a profit or protect against a loss. Investors cannot directly purchase an  index. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors.  

CFP®, Summit Financial, LLC

Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC.  With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients.  Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.

Source: kiplinger.com

What Is Bond Valuation?

Bond valuation is a way of determining the fair value of a bond. Bond valuation involves calculating the present value of the bond’s future coupon payments, its cash flow, and the bond’s value at maturity (or par value), to determine its current fair value or price. The price of a bond is what investors are willing to pay for it on the secondary market.

When an investor buys a bond from the issuing company or institution, they typically buy it at its face value. But when an investor purchases a bond on the open market, they need to know its current value. Because a bond’s face value and interest payments are fixed, the valuation process helps investors decide what rate of return would make that bond worth the cost.

Here’s a step-by-step explanation of how bond valuation works, and why it’s important for investors to understand.

How Bond Valuation Works

First, it’s important to remember that bonds are generally long-term investments, where the par value or face value is fixed and so are the coupon payments (the bond’s rate of return over time) — but interest rates are not, and that impacts the present or fair value of a bond at any given moment.

To determine the present or fair value of a bond, the investor must calculate the current value of the bond’s future payments using a discount rate, as well as the bond’s value at maturity to make sure the bond you’re buying is worth it.

Some terms to know when calculating bond valuation:

•   Coupon rate/Cash flow: The coupon rate refers to the interest payments the investor receives; usually it’s a fixed percentage of the bond’s face value and typically investors get annual or semi-annual payments. For example, a $1,000 bond with a 10-year term and a 3% annual coupon would pay the investor $30 per year for 10 years ($1,000 x 0.03 = $30 per year).

•   Maturity: This is when the bond’s principal is scheduled to be repaid to the bondholder (i.e. in one year, five years, 10 years, and so on). When a bond reaches maturity, the corporation or government that issued the bond must repay the full amount of the face value (in this example, $1,000).

•   Current price: The current price is different from the bond’s face value or par value, which is fixed: i.e. a $1,000 bond is a $1,000 bond. The current price is what people mean when they talk about bond valuation: What is the bond currently worth, today?

The face value is not necessarily the amount you pay to purchase the bond, since you might buy a bond at a price above or below par value. A bond that trades at a price below its face value is called a discount bond. A bond price above par value is called a premium bond.

How to Calculate Bond Valuation

Bond valuation can seem like a daunting task to new investors, but it is not that onerous once you break it down into steps. This process helps investors know how to calculate bond valuation.

Bond Valuation Formula

The bond valuation formula uses a discounting process for all future cash flows to determine the present fair value of the bond, sometimes called the theoretical fair value of the bond (since it’s calculated using certain assumptions).

The following steps explain each part of the formula and how to calculate a bond’s price.

Step 1: Determine the cash flow and remaining payments.

A bond’s cash flow is determined by calculating the coupon rate multiplied by the face value. A $1,000 corporate bond with a 3.0% coupon has an annual cash flow of $30. If it’s a 10-year bond that has five years left until maturity, there would be five coupon payments remaining.

Payment 1 = $30; Payment 2 = $30; and so on.

The final payment would include the face value: $1,000 + $30 = $1,030.

This is important because the closer the bond is to maturity, the higher its value may be.

Step 2: Determine a realistic discount rate.

The coupon payments are based on future values and thus the bond’s cash flow must be discounted back to the present (thanks to the time value of money theory, a future dollar is worth less than a dollar in the present).

To determine a discount rate, you can check the current rates for 10-year corporate bonds. For this example, let’s go with 2.5% (or 0.025 as a decimal).

Step 3: Calculate the present value of the remaining payments.

Calculate the present value of future cash flows including the principal repayment at maturity. In other words, divide the yearly coupon payment by (1 + r)t, where r equals the discount rate and t is the remaining payment number.

$30 / (1 + .025)1 = $29.26

$30 / (1 + .025)2 = 28.55

$30 / (1 + .025)3 = 27.85

$30 / (1 + .025)4 = 27.17

$1030 / (1 + .025)5 = 1,004.87

Step 4: Sum all future cash flows.

Sum all future cash flows to arrive at the present market value of the bond : $1,117.70

Understanding Bond Pricing

In this example, the price of the bond is $1,117.70, or $117.70 above par. A bond’s face or par value will often differ from its market value — and in this case its current fair value (market value) is higher. There are a number of factors that come into play, including the company’s credit rating, the time to maturity (the closer the bond is to maturity the closer the price comes to its face value), and of course changes to interest rates.

Remember that a bond’s price tends to move in the opposite direction of interest rates. If prevailing interest rates are higher than when the bond was issued, its price will generally fall. That’s because, as interest rates rise, new bonds are likely to be issued with higher coupon rates, making the new bonds more attractive. So bonds with lower coupon payments would be less attractive, and likely sell for a lower price. So, higher rates generally mean lower prices for existing bonds.

The same logic applies when interest rates are lower; the price of existing bonds tends to increase, because their higher coupons are now more attractive and investors may be willing to pay a premium for bonds with those higher interest payments.

Is Investing in Bonds Right for You?

Investing in bonds can help diversify a stock portfolio since stocks and bonds trade differently. In general, bonds are seen as less risky than equities since they often provide a predictable stream of income. All investors should at least consider bonds as an investment, and those with a lower risk tolerance might be better served with a portfolio weighted highly in bonds.

Performing proper bond valuation can be part of a solid research and due diligence process when attempting to find securities for your portfolio. Moreover, different bonds have different risk and return profiles. Some bonds — such as junk bonds and fixed-income securities offered in emerging markets — feature higher potential rates of return with greater risk. “Junk” is a term used to describe high-yield bonds. You can take on higher risk with long-duration bonds and convertible bonds. Some of the safest bonds are short-term Treasury securities.

You can also purchase bond exchange-traded funds (ETFs) and bond mutual funds that own a diversified basket of fixed-income securities.

The Takeaway

Bond valuation is the process of determining the fair value of a bond after it’s been issued. In order to price a bond, you must calculate the present value of a bond’s future interest payments using a reasonable discount rate. By adding the discounted coupon payments, and the bond’s face value, you can arrive at the theoretical fair value of the bond. A bond can be priced at a discount to its par value or at a premium depending on market conditions and how traders view the issuing company’s prospects.

Owning bonds can help add diversification to your portfolio. Many investors also find bonds appealing because of their steady payments (one reason that bonds are considered fixed-income assets). When you open an online brokerage account with SoFi Invest, you can build a diversified portfolio of individual stocks as well as exchange-traded bond funds (bond ETFs). You can also invest in a range of other securities, including fractional shares, IPOs, crypto, and more. Also, SoFi members have access to complimentary professional advice. Get started today!

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

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Source: sofi.com

How to Invest in Agriculture

Many people think of investing in agriculture as owning farmland and operating a farm. Many investors overlook this business area when deciding where to put their money because they don’t see themselves toiling the land. But there are various options to invest in agriculture without being a farmer.

Farmland investing is just one way to invest in agriculture. Additionally, investors can invest in farming-related exchange-traded funds (ETFs) and real estate investment trusts (REITs) or trade commodities to take advantage of the agricultural markets.

What Are Agriculture Investments?

Investing in agriculture is more than just owning some farmland and working the land. Agriculture can be an alternative investment that diversifies an investor’s portfolio. Investors can get exposure to agriculture and farming by investing in businesses involved in the whole farming process, from the seeds in the ground to the distribution of products to grocery stores.

4 Ways to Invest in Agriculture

1. Agriculture Stocks

Investors can put money into various publicly-traded companies that provide services in the farming industry. These agribusiness firms range from those involved in actual crop production — though many crop producers are privately held — to companies in the farming support businesses. The farming support businesses include companies that make fertilizer and seeds, manufacture farming equipment, and process and distribute crops.

Companies in the agriculture industry include, but are not limited to:

•   Archer Daniels Midland Company (ADM): A large food processing and commodities trading firm

•   Deere & Company (DE): Known as John Deere, this company manufactures agricultural machinery and heavy equipment

•   Corteva, Inc. (CTVA): An agricultural chemical, fertilizer, and seed company

•   The Mosaic Company (MOS): A large company that produces fertilizer and seeds

•   AppHarvest Inc (APPH): A small-cap company involved in indoor farms and crop production

2. Agriculture ETFs and Mutual Funds

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to the agricultural industry. Agriculture-focused mutual funds and ETFs invest in a basket of farming stocks, commodities, and related assets, allowing investors to diversify farming exposure.

3. Farm REITs

Farm and agricultural real estate investment trusts (REITs) own farmland and lease it to tenants who do the actual farming. REITs that invest in farmland can be a good option for investors who want exposure to farmland without actually owning a farm.

This type of investment can provide investors with various benefits. For example, a REIT is a type of liquid asset, meaning an investor can quickly sell the investment on the stock market. In contrast, if an investor were actually to own farmland, trying to sell the land could be a drawn-out and complex process. Other benefits include regular dividend payments and geographical and crop diversification.

Recommended: Pros and Cons of Investing in REITs

4. Commodities

Agricultural commodities are the products produced by farms, like corn, soybeans, and wheat.

Trading commodities can be a profitable, though risky, endeavor. Investors who trade commodities look to take advantage of the market’s volatility for short-term gains. Usually, this is done by trading futures contracts, though large investors may actually purchase and sell the physical commodities.

Commodity trading can be risky, especially for a novice investor. ETFs with exposure to commodities may be better for investors with lower risk tolerance.

Recommended: Why Is It Risky to Invest in Commodities?

Benefits and Risks of Investing in Agriculture


One of the significant benefits of agriculture investments is that people always need to eat, so there will usually be some demand support for businesses in the industry. Because of this, some investors view the sector as somewhat recession-proof and a good way to diversify a portfolio.

Another benefit is that farmland REITs and certain agriculture stocks can provide passive income through regular dividend payouts. Additionally, farmland investments can provide a hedge against rising inflation.


The agricultural and farming sector can be fickle, as it’s subject to various risk factors that can impact investments. Uncertainties stemming from weather to government policies to the global commodities markets can cause volatile swings in prices and income that affect investments in the sector.

Here are some risks facing agricultural investments:

•   Production risk: Major weather events, crop diseases, and other factors can affect the quantity and quality of commodities produced.

•   Market risk: The global markets for commodities can affect farming and agricultural business as prices can swing wildly, making crop production and agribusiness demand uncertain.

•   Financial risk: Farms and related businesses often use debt to fund operations, so rising interest rates and credit tightening can hinder companies in the industry.

•   Regulatory risk: Changes in taxes, regulations, subsidies, and other government actions can impact agricultural businesses and investments.

Are Agriculture Investments Right for You?

It might seem like agriculture investments are risky, but with that risk comes reward. If an investor’s risk tolerance allows for it, agricultural investments can provide diversification in a portfolio.

The Takeaway

Fortunately for investors who want to put money into the agriculture sector, they don’t necessarily need to buy a farm. Several investment vehicles can fit their needs to get exposure to farming. Farmland REITs, agribusiness stocks, and farming and commodity ETFs can be options to build wealth in the farm business.

Investing in agriculture doesn’t have to be as hard as owning a farm and working the land. Investors can start investing in agriculture by trading stocks and ETFs for as little as $5 with SoFi Invest®.

Check out how to start investing with SoFi today.


Is agriculture worth investing in?

Agricultural investments can help diversify a portfolio. Depending on what areas of the agriculture business you invest in, the assets can produce steady income and long-term capital gains.

How much should I invest in agriculture?

Determining how much you should invest in any asset class depends on your financial goals and personal risk tolerance. It would be best if you didn’t put too much of your money into the agriculture sector; you want a diversified portfolio.

How do I invest in a farm?

Buying a farm can be difficult; you would need a lot of capital for a down payment, just like any other piece of real estate. If you want exposure to farmland, agriculture and farm-related REITs can be a good option, especially for retail investors.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

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Source: sofi.com

What Is a Trust Fund – How It Works, Types & How to Set One Up

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When most people hear “trust fund,” they think of wealthy people living in fancy estates using them to pass immense amounts of wealth to their heirs. But that isn’t always the case.

A trust fund is simply a legal entity that holds assets of value like property or stocks and bonds on someone else’s behalf (in trust). They’re useful for numerous reasons, including estate planning, protecting assets, avoiding complications during probate, and minimizing taxes.

Trust funds are helpful for estates of varying sizes. But before you set one up, it’s best to understand what it is and what it can and can’t do.

What Is a Trust Fund?

A trust fund is a legal entity that can hold valuable assets on behalf of an individual person, group, or organization. There are many different types of trust fund, each designed to achieve a different goal.

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Trusts give the person establishing them more control over their estate than a will does. They can also provide legal protections or tax benefits that reduce the taxes the person establishing the trust or its beneficiaries may owe.

How a Trust Fund Works

Establishing a trust fund requires three parties:

  1. The Grantor. The person who establishes the trust and places assets into that trust is the grantor. They determine the beneficiaries and any rules or stipulations they wish to put in place, such as only allowing the beneficiary to use the money to pay for college.
  2. The Beneficiary. The person, people, or organization that benefits from the trust is the beneficiary. They don’t own the assets but will benefit from them, often by receiving access at some point or getting monetary distributions from the trust.
  3. The Trustee. The person or organization responsible for managing the trust and its assets is the trustee. They must act as a fiduciary for the beneficiary and follow the rules or stipulations laid out in the trust documents.

To establish a trust, the grantor typically works with a lawyer to draw up a document outlining the terms of the trust, the beneficiaries, the trustee, and the details of how the trust will work. 

For example, a grandparent might establish a trust for their grandchildren, name their children as trustees, and stipulate that they must use the money for their grandchildren’s college education.

One perk for beneficiaries is that they do not pay taxes on their distributions. Instead, the IRS taxes the trust directly.

Trusts are a popular estate planning tool because they’re more binding than something like a will. In the example, the grandchildren must use the trust fund to pay for college costs. If the grandparent instead distributed that money in a will simply noting they want it to go toward college costs, the grandchildren don’t have the same legal obligations to use it for that. 

Types of Trust Funds

One of the benefits of trusts is their flexibility. You can establish one for almost any purpose. And there are many types of trust funds available to suit various needs. 

Living Trusts

Living trusts are trusts that you create while you’re alive. The benefit of a revocable trust is that they let the assets in the trust avoid probate, the process by which the executor of the estate determines how to distribute the property left behind. Probate can be a lengthy process, which living trusts let families avoid.

They come in two primary forms: revocable and irrevocable.

A revocable trust gives the grantor more power over the trust’s assets. The grantor can amend the trust documents at any time after creating a revocable trust, changing the terms of the trust, or naming different beneficiaries. 

Once the grantor dies, a revocable trust becomes an irrevocable trust and cannot be altered.

In contrast, irrevocable trusts are more permanent. Once the grantor establishes an irrevocable trust, they cannot make changes to it or name different beneficiaries without the consent of the current beneficiaries.

An irrevocable trust has additional tax benefits for the grantor. Because they can’t make changes or remove assets after forming the trust, any assets placed in the trust are no longer the grantor’s property.

That means the grantor can take advantage of the annual gift tax exclusion by making gifts to an irrevocable trust.

Testamentary Trust

You can also create a testamentary trust through your last will and testament. Essentially, it instructs the executor to create the trust after your death.

While that means testamentary trusts don’t provide all the benefits of avoiding probate you could get from a living trust, they still carry other benefits. For example, it allows the decedent to establish another kind of trust, like an educational trust, for an heir. It also lets them place more restrictions on how their heirs use the money left behind.

Educational Trust

An educational trust simply specifies the beneficiary must use the assets for educational purposes. It can be revocable or irrevocable.

Depending on the grantor’s wishes, the trust can specify where the beneficiary has to study, what subjects they need to study, how frequently it will make distributions, and what types of expenses it will cover.

For example, it could state that it will only cover the beneficiary’s tuition costs or make a lump-sum distribution each year the beneficiary is in school and leave it to the beneficiary to decide how best to spend the money for education.

Of course, these restrictions could have consequences. If the beneficiary doesn’t go to college or leaves money in the trust once they leave school, you need a plan for what to do with it.

Special Needs Trust

A special needs trust is a trust designed to help care for someone who is disabled or otherwise requires accommodations without disqualifying them from receiving government assistance.

Many government assistance programs require aid recipients to have a limited income or limited assets. If their income rises or they receive a large gift, it can stop them from receiving essential government aid.

A special needs trust can hold assets on behalf of someone receiving government care and ensure the trustee uses those assets to help the beneficiary.

The rules for these trusts can vary from state to state, but they must typically be irrevocable and give the trustee significant control over how to use or distribute the assets.

Charitable Remainder Trust

Charitable remainder trusts allow the grantor to benefit from charitable contribution tax deductions while still receiving income from their assets. In exchange, the funds remaining in the trust go to a charity once the grantor dies.

For example, Brianna could establish a charitable trust and name a local museum as the charity of her choice. If she places $100,000 in the trust, the trust might give her (or another named beneficiary) an annual payment of $5,000 each year until she dies.

When Brianna establishes the trust, she receives a tax benefit for making a charitable contribution to the museum. However, she does have to pay taxes on the distributions she receives.

Once Brianna dies, whatever money she left in the trust goes to the museum.

Charitable remainder trusts can be highly complex when it comes to taxes, so it’s essential to work with a tax professional when considering whether one is right for you.

Common Collective Trust Fund

A common collective trust fund is a trust fund managed by a bank or trust company. It combines assets for multiple investors, often pooling assets from things like profit-sharing, pension, and employee stock bonus plans. 

These funds are very similar to mutual funds and are commonly held in employer retirement plans.

Perpetual Trust Fund (Dynasty Trust)

A perpetual trust fund, also called a dynasty trust, is a trust that aims to pass wealth to future generations while avoiding taxes like the estate tax, gift tax, or generation-skipping transfer tax. A properly designed dynasty trust can last for many generations, creating a family dynasty of wealth.

These trusts usually include clauses to change their beneficiaries over time. For example, it might start benefiting the grantor’s children, then change to benefit the grantor’s grandchildren once they reach a certain age or all of the grantor’s children die.

Because the goal of dynasty trusts is to last for a long time or even forever, the grantors of these trusts typically name a financial institution or bank the trustee.

Assets in the trust aren’t the property of any of the beneficiaries, so they can avoid taxes like capital gains and estate taxes. However, they do have to pay income tax on distributions.

Spendthrift Trust

A spendthrift trust is one designed to protect the beneficiary from creditors and their own poor financial habits. These trusts typically give the trustee more control over the assets in the fund.

The effect is that the beneficiary can’t sell the trust’s assets or access significant amounts at once to squander. But neither can creditors if the beneficiary racks up considerable debt.

Social Security Trust Fund

The Social Security Trust Fund is the trust fund the Social Security Administration uses to hold all the assets used to pay benefits like Social Security and disability. It’s not a trust you can create, but almost every American pays into it and hopes to benefit from it someday, so it’s important to know how it works.

The trust fund owns interest-bearing government securities, such as bonds, and gets its funds from payroll tax deductions paid by both employees and employers.

When the benefits paid out by Social Security exceed the income received from payroll taxes, money from the trust fund pays those benefits. When payroll taxes exceed benefits paid, the additional revenue goes into the trust.

As of the Social Security Administration’s 2021 report, the Social Security Trust fund held $2.908 trillion in assets.

Advantages & Disadvantages of Trust Funds

Trusts have many tax benefits and can give the person establishing the trust more control over how the beneficiary ultimately uses their money. However, they’re not perfect for every situation.

Advantages of Trust Funds

Trusts can give their grantors control over their hard-earned money in life and in death, ensuring more of it goes to their beneficiaries than the government. A trust’s many benefits include: 

  1. Grantor Control. The person establishing the trust can set rules for how beneficiaries should use the funds in the trust, and the beneficiary must follow those wishes, even after the grantor dies.
  2. Tax Incentives. Various types of trusts can help the grantor and beneficiary avoid or reduce taxes like capital gains and estate taxes.
  3. Probate Avoidance. When someone dies, their estate goes through probate, a legal process by which the state or executor distributes assets, whether or not they have a last will and testament. Assets in a trust can skip this process, meaning loved ones can access the assets sooner. It also reduces the chance of the grantor’s wishes being ignored.
  4. Privacy. The probate process is public, which means the estate and wishes of someone who dies become public record. Trusts offer a more private option.

Disadvantages of Trust Funds

Though there are advantages to trusts, they aren’t right for everyone. Carefully consider these disadvantages before setting one up.

  1. Limited Benefit for Small Estates. One of the reasons to establish a trust is to avoid taxes. But smaller estates are unlikely to face taxes, anyway. For 2022, the estate tax exclusion is $12.6 million federally, though some states have lower limits. For example, Massachusetts and Oregon have the lowest exclusions as of this writing, taxing estates that exceed $1 million.
  2. Cost. Setting up a trust means working with expensive professionals like lawyers and tax professionals. The cost may exceed the benefit for some.
  3. Finding a Trustee. Establishing a trust means finding a trustee to manage it. You either have to ask a friend or relative to take on this task, which might be a large one depending on the trust’s assets, or pay a professional to handle the work.
  4. Loss of Control. While trusts give the grantor more control in some ways, setting up an irrevocable trust means losing control in others. Once you establish an irrevocable trust, you can’t make changes, which means losing some level of control over your assets.

How to Set Up a Trust Fund

Setting up a trust fund is a multistep process. If you’re looking to create a simple trust, you could finish in a few weeks. If you want to construct a more complicated one with many restrictions and beneficiaries and a large number of assets, you should expect a monthslong process. But the steps you take are the same either way.

1. Figure Out the Goals of Your Trust

The first step to set up a trust fund is to figure out your goals for establishing the trust.

Do you want to use the trust to have more control over how your beneficiaries use your assets after your death? Is avoiding taxes your primary goal? Do you want a way to donate money to charity but retain a stream of income for retirement? 

You can use a trust to accomplish each of these goals, but each requires a different type of trust.

2. Find a Trust Professional

Once you know your goals, you’re ready to sit down with a professional. Most major financial institutions offer fee-based trust services if you have sufficient assets with them. For example, Fidelity manages trusts of $1 million or more. Fees start at 0.45% of the invested assets, but the percentage decreases as you add funds. You can work with the professional to hammer out details.

3. Choose a Trustee

You also have to determine who the trustee and the beneficiary will be. For some types of trusts, such as a dynasty trust, you need a professional trustee, like a bank or financial institution. Other trusts, like educational trusts or spendthrift trusts, more naturally lend themselves to having a family member serve as trustee.

4. Make the Trust Official

Once you’ve worked out the details, your estate planning attorney, the trustee, and any financial advisors will help draft the trust documents. You just have to sign on the dotted line to make it official. 

5. Fund the Trust

Once you’ve signed the paperwork, you’re ready to start funding the trust. You can put pretty much any asset of value into the trust, including cash, real estate, and stocks.

6. Register the Trust

You must register your trust with the IRS so it can get a taxpayer identification number and file tax returns. If you’re working closely with a financial institution to manage the trust, your trustee can help. Otherwise, the tax professional, lawyer, or brokerage company holding the trust’s assets can help register it.

Trust Fund FAQs

Trusts are complicated, and there are many ways to set them up. But first, it’s essential to understand how they work and how you can use them to accomplish your financial goals.

What’s the Difference Between a Trust & a Trust Fund?

People often use the terms trust and trust fund interchangeably, but they’re slightly different things.

A trust fund is the legal entity that contains assets or property for the benefit of someone else. A trust is a legal document outlining the rules of who the trust fund benefits and how the beneficiary can use assets in a trust fund.

How Is a Trust Fund Handled in Probate?

One of the most popular reasons to set up a trust is to avoid the probate process, which can be lengthy and prevent your loved ones from accessing the money you leave behind when you die.

Any assets in a trust avoid probate court and can skip the normal legal process.

Who Should I Make My Trustee?

Naming your trustee can be difficult because you’re trusting that person with managing your assets and following the wishes you outlined in the trust. 

Some types of trusts naturally lend themselves to making a family member the trustee. For example, if you establish a trust to benefit your grandchild, it makes sense to name their parents (your own child) as the trustee.

Longer-term trusts may require a financial institution or a long-lasting entity to serve as the trustee. But that can mean paying management fees.

How Does a Trust Fund Affect Estate Taxes?

You can use a trust fund to reduce or avoid estate taxes to some degree. The IRS considers money placed in an irrevocable trust a gift in the year you place it in the trust.

Each year, taxpayers may make gifts up to a certain amount ($16,000 in 2022) without it counting against their lifetime gift limit. That means the grantor of a trust can add $16,000 to the fund each year and pay no taxes on that amount, reducing their potential estate tax liability.

What Is a Trust Fund Baby?

A trust fund baby is a pejorative term used to describe a young person whose parents or family established a trust fund for them. This trust provides them with a sufficient income to live comfortably without having to work or find significantly gainful employment.

The common image of a trust fund baby is that of a privileged young adult coasting their way through life with little to no responsibilities.

These situations certainly exist, but the term doesn’t accurately describe most people benefiting from trust funds. Trust funds are simply a legal tool people can use to protect their assets and ensure their beneficiaries follow their wishes. 

Many middle-class families use trust funds for reasons as simple as avoiding probate or keeping assets safe from creditors, not to let their children live a life of luxury without having to work.

Final Word

Trust funds are a powerful legal tool you can use for reasons ranging from estate planning and tax avoidance to caring for a loved one. Though they may have a negative reputation as a toll available only to the wealthy, many groups can benefit from using them.

If you’re thinking about setting up a trust fund, it’s also a good opportunity to think about taking inventory of your finances and ensuring everything is in order. You might also consider talking to an estate planning attorney to draft a will if you don’t already have one. Being prepared only benefits your family in the long run.

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he’s not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.

Source: moneycrashers.com

BlackRock Event Driven Equity Profits from Corporate Change

Coloring outside the lines isn’t just for kids in school—adding some color to the edges of your core portfolio can brighten returns. Investors adopted that strategy in 2021, pouring a record of nearly $4 billion in new money into so-called event-driven funds, or funds that invest in companies undergoing fundamental changes, such as a merger or acquisition. BlackRock Event Driven Equity (BALPX) received $2.3 billion of the inflow. 

Event-driven funds typically have little relation to stock and bond market ups and downs, so that even in down markets they tend to remain flat or lose less than standard stock or bond fund peers, says Morningstar analyst Bobby Blue. If you’re looking for diversification, a small allocation to an event-driven fund can hedge against volatility elsewhere.

The BlackRock fund is a standout. So far in 2022, the S&P 500 index is down 5.5%. Over the same period, the fund has gained a flat-ish 0.1%.  

Mark McKenna, the fund’s lead manager, works with a team of 12 other analysts. The team leverages BlackRock’s extensive network and resources to gain direct access to company executives in order to better understand the changes afoot at their firm. 

Those changes can include a range of company events. So-called “hard” events may refer to announced takeovers, for example, or company spin-offs. The fund holds shares in Danaher, for instance, which acquired General Electric’s biopharma business in March 2020. “Soft” events might include management changes or a stock being added or taken out of a particular index. Coty earned a spot in the fund in part because of new initiatives, including a product line revitalization. 

McKenna also devotes a small portion of the fund to distressed credit opportunities—specialty finance events, according to Blue, in which a company negotiates directly with BlackRock for financing, whether through a bond underwriting or holding IOUs directly for a short period. 

The fund’s hefty expense ratio of 1.57% is still less than the category average of 1.96%. Though the fund charges a load, it trades fee-free at several brokerage firms, including Fidelity and Schwab.

Source: kiplinger.com

5 Different Types of Taxes and How to Minimize Them

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Additional Resources

Income taxes may be on your mind during this time of year, but they’re not the only taxes you’re required to pay. Americans are on the hook for several different types of taxes throughout the year.

While most of us would prefer to minimize the taxes we pay — or not pay any taxes at all — the truth is that paying taxes confers several important benefits. Still, nobody wants to pay more than their fair share. Fortunately, there are opportunities to reduce your tax burden and spread out the impact taxes have on your overall financial picture.

Here are five types of taxes you may be subject to at some point, along with tips on how to minimize their impact.

1. Income Taxes

Man Filling Out Tax Forms

Most Americans who receive income in a given year must file a tax return. Only if you earned less than the IRS-designated gross income limits can you forego filing a federal income tax return. For the 2021 tax year (returns filed during 2022), the gross income limits are as follows:

  • Single: $12,550 ($14,250 if age 65 or older)
  • Head of Household: $18,800 ($20,500 if age 65 or older)
  • Qualifying Widow(er): $21,500 ($26,450 if age 65 or older)
  • Married Filing Separately: $5
  • Married Filing Jointly: $25,100 ($26,450 if one spouse is age 65 or older; $27,800 if both spouses are age 65 or older)

Many taxpayers who file a return are lucky enough to receive a refund on their taxes because they overpaid as a result of paycheck withholding. Of course, it’s also possible to owe more money at the end of the year, in which case you may need to adjust your withholding so you don’t find yourself in the same position next year.

Although writing a check to the IRS is never fun, keep in mind your taxes serve a purpose. The funds you pay are an important source of revenue for federal, state, and local governments because they’re paid regularly throughout the year, thus helping to balance budgets and keep smaller governments from having budget crises.

So the next time you’re feeling down about how much you’re paying Uncle Sam, consider the roads you travel to work each day, the military members who protect our country, and your grandparents who depend on their Social Security check each month. That’s your tax dollars at work.

What You Can Do to Ease the Burden

If you’re looking for ways to reduce your federal income tax bill, you have several options.

Tax Credits & Deductions

One of the most effective ways to lower your tax bill is by taking advantage of tax deductions and tax credits.

Although not everyone qualifies for credits, and the tax breaks you’re eligible to claim may change from year to year, they’re worth looking into or asking your tax preparer about.

Some of the more popular tax credits include:

Some of the more popular tax deductions include:


Another way to offset your income tax burden is to make tax-advantaged investments. The Tax Code incentivizes investing in several ways:

  • Capital Gains. If you’ve invested before, you’re probably familiar with capital gains, or the profit you make when selling appreciated stocks, bonds, and property. If you hold an investment for one year or more, any gain you make on the sale is taxed at long-term capital gains tax rates. For 2022, those rates are zero, 15%, or 20%, depending on your taxable income. That’s significantly less than the highest marginal tax bracket on ordinary income, which is 37% in 2022. If you sell an asset you’ve owned for a year or less, any gain is considered short-term and is taxed at your ordinary income tax rate.
  • Capital Losses. Not every stock pick is a winner. And while nobody wants to lose money on their investments, at least you can use those losses to lower your tax bill. When you file your tax return, you can use long-term losses to offset long-term gains and short-term losses to offset short-term gains. If you have more gains than losses, you can deduct up to $3,000 of capital losses from ordinary income, such as wages or profit from a business. Any remaining losses can be carried forward to the following year.
  • Dividends. If you invest in stocks and mutual funds, you’ve probably received a Form 1099-DIV at year-end that breaks down your dividend income into qualified and ordinary income. Did you know you might pay a lower tax rate on those qualified dividends? Qualified dividends come from shares of domestic corporations and certain qualified foreign corporations that you’ve held for at least a specified minimum period. These dividends are taxed at long-term capital gains tax rates, while ordinary dividends are taxed at ordinary income tax rates.
  • Tax-Exempt Interest. Some investments pay interest that’s exempt from federal income taxes. The most common way to earn tax-exempt interest is to invest in municipal bonds. Keep in mind, though, that interest from municipal bonds may be subject to the alternative minimum tax (AMT) and may be taxable at the state level.

State Income Taxes

Speaking of state income taxes, you can avoid them entirely if you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming. While you can’t escape federal income taxes no matter where you live, these seven states levy no state income tax on their residents. However, they might make up for it with higher sales taxes, property taxes, and excise taxes.

Two other states, New Hampshire and Tennessee, have no taxes on income from wages. However, these states do tax interest and dividend income.

2. Excise Taxes

Excise Tax Letters Blocks

Speaking of excise taxes, you pay these when you purchase specific goods, and they’re often included in their cost. So if the product you buy is also subject to sales tax, you might be paying tax on a tax. A common example is the federal gasoline excise tax of 18.4% (24.4% on diesel fuel). States also impose taxes on gasoline, the highest being California at 66.98 cents per gallon. The lowest is Alaska at 14.98 cents per gallon.

Excise taxes are also charged on products such as tobacco and alcohol and activities such as wagering, road use by trucks, and tanning salons. Some states charge an excise tax on the sale of a home, which is usually paid by the seller. Excise taxes are not sales tax, so you can’t claim them as an itemized deduction on your federal tax return.

What You Can Do to Ease the Burden

Excise taxes are difficult to avoid, and they’re not usually apparent because they’re included in the price of the product. If you’re not interested in tobacco, alcohol, wagering, or tanning salons, you can avoid federal excise taxes on these products and activities. Driving a hybrid or electric car, relying on public transportation, or switching to a bicycle will help you avoid excise taxes on gasoline, at least in part.

Some states also impose an excise tax on public utilities, which the utility companies pass along to consumers. Unless you want to move to a cabin in the woods with no power, phone, or running water, you’ll have a tough time avoiding these taxes entirely.

3. Sales Tax

Small Grocery Cart And Money

Otherwise known as consumption tax, sales tax tends to affect the wealthy more because the more you consume, the more you are taxed. Because sales tax is assessed as a percentage of a product or service’s sales price, it’s a simple equation: The more you buy, the more you pay.

The federal government doesn’t get involved in setting sales tax rates. Instead, each state and local government sets its own. If you’ve traveled the country at all, you may have noticed that sales tax varies from place to place. Every state except Delaware, Montana, New Hampshire, and Oregon assesses sales tax.

While the income tax is considered a progressive tax (the higher your income, the higher your tax rate), sales tax is considered a regressive tax (the tax rate is higher for those with lower income). To illustrate, consider the following example:

Consumer #1:

  • Income: $500 per week
  • Groceries: $150 per week
  • Sales Tax on Grocery Purchases: $9.00
  • Sales Tax as a Percentage of Income: 1.8%

Consumer #2:

  • Income: $1,500 per week
  • Groceries: $150 per week
  • Sales Tax on Grocery Purchases: $9.00
  • Sales Tax as a Percentage of Income: 0.6%

For Consumer #1, who has an income that’s one-third that of Consumer #2, the amount of sales tax they pay, expressed as a percentage of their income, is three times higher than Consumer #2’s for the same purchase amount. That’s what is meant by a regressive tax: It falls more heavily on lower-income earners.

In most states that have a sales tax, prescription drugs are excluded to reduce the overall tax burden on essential items, as well as to reduce the regressive effect. The only exception is Illinois, which taxes prescription drugs at the state level but at a reduced rate of 1%. Even there, all prescription and over-the-counter medications are tax-exempt at the local level.

Most states also exclude groceries, but the sales tax treatment of groceries varies from state to state. Some fully exempt groceries; some exempt most groceries but tax candy and soda. Some have tax credits or rebates to offset the tax on groceries, and some tax groceries at a lower rate than other goods.

What You Can Do to Ease the Burden

Unfortunately, there aren’t too many ways to escape sales tax apart from making fewer purchases, shopping at garage sales, or using the barter system.

However, you might be able to get a tax deduction for the sales tax you pay. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) made permanent the provision to claim general sales taxes instead of states’ income taxes as an itemized deduction. 

This may be especially helpful to taxpayers who buy a new car, boat, or home addition and end up paying more in sales taxes than in state income taxes in a given year. It’s also a benefit for people who live in those states with sales tax that don’t have a state income tax.

4. Property Taxes

Piggy Bank And Miniature House

Property taxes, also called real estate taxes, are one of the oldest forms of taxation. In the United States, the funds typically go toward local concerns, such as sewage treatment, road maintenance, drinking water, and schools.

Property taxes are calculated based on the value of your property, which includes the value of the land itself plus the value of any buildings you have on it. Property taxes go up by predetermined amounts set by your county assessor or equivalent office.

Property taxes vary widely from state to state and are most often expressed as a percentage of property value. New Jersey, for example, has the highest median property tax rate at 2.47%, while in Hawaii, the median rate is just 0.27%.

What You Can Do to Ease the Burden

You could rent instead of buying a home, but you’ll still pay property taxes indirectly through your rent. If you’re considering buying a home but are flexible about where you live, it makes sense to do your homework and find out where the lowest property tax rates are. 

No matter where you own a home, you may be able to save money on property taxes by appealing your home’s assessment. You may need to get your home appraised by a professional appraiser to prove that it’s not worth the value the county is using to calculate your tax bill. The process for appealing your taxes varies from state to state, so check with your local tax assessor or board of equalization.

Also, don’t forget you can claim your property taxes as an itemized deduction on your federal income tax return. However, keep in mind the Tax Cuts and Jobs Act of 2017 (TCJA) limited the deduction for state and local taxes to $10,000 ($5,000 if married filing separately). That includes deductible state income taxes, property taxes, and sales taxes.

5. Estate Taxes

Estate Tax Gavel Scale Planning House

Federal estate taxes are one area in which most people can rest easy.

For 2022, the estate tax exclusion amount is $12.06 million per person. That means a person who dies in 2022 can leave up to $12.06 million to their heirs tax-free. A married couple gets twice that amount. Any money inherited beyond this amount is taxed at a top tax rate of 40%.

Of course, through gifting, trusts, and other estate planning strategies, many wealthy individuals structure their estate in such a way that they’re subject to very little estate tax.

What You Can Do to Ease the Burden

If you’re lucky enough to be worried about passing more than $12.06 million on to friends and family, it’s time to involve a professional. You can avoid or at least minimize the impact of estate taxes through estate planning, such as establishing a trust or taking advantage of the gift tax exclusion.

Final Word

Remember, the tax filing deadline in April isn’t the only day you’re taxed as an American citizen. By learning more about the types of taxes you pay, you can reduce the amount you pay all year long. Get educated and maximize your savings.

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Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)

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Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.

Source: moneycrashers.com