Type of Insight: Articles

Can philanthropic generosity be a source of climate resilience?

There’s no denying the heartbreak we feel when climate disasters devastate communities around the world. Yet we also find hope in what often follows: an outpouring of giving. In the last few years, amid ongoing recovery from the pandemic and record-breaking climate events, we saw high levels of philanthropy focused on climate change mitigation in 2022.^1,2 When we direct donations to the communities harmed by climate disasters, we help them recover, rebuild, and adapt for the future.

If we are thoughtful about these contributions, we can help build resilience by ensuring that affected communities have more reliable recovery funding—not only immediately after an adverse event, but in the time afterward that it can take to re-establish themselves. Let me explain how.

---

An estimated $7.8 billion to $12.8 billion in philanthropy

focused on climate change mitigation in 2022.²

---

The importance of thoughtful, intentional planning

Many donations following disasters are unplanned, emotional reactions to communities in need. There is a special joy in—and great need for—spontaneous generosity. But these donations do not have to be separate from the philanthropic strategy we have in place that services our community and the intentional impact of our grant-making. Being strategic with one’s philanthropic endeavors—as opposed to just reactionary—incorporates intentionality and impact to enable systemic change.

That long-term thinking is so important. Hurricanes, floods, and wildfires are unpredictable, but what we can expect is to see more of them. With this in mind, we should consider how thoughtful planning can help direct giving to climate-impacted areas in a more sustainable way.

To make a meaningful contribution to climate resilience, we must rethink our long-term, strategic giving to complement our more responsive philanthropic endeavors. As you review your previous gifts and begin to evaluate how to allocate your charitable resources in the future, consider funding a dedicated disaster relief fund with a portion of your philanthropy budget.

Here are six things to consider when developing a disaster relief funding plan that can help communities build climate resilience and maximize your impact:

1. Understand the scope of the need

Better understanding the scale and patterns of recent disasters across the United States can help you decide where to direct your giving, how much you’d like to give, and when. In 2023, the US experienced 28 natural disasters that led to damages of $1 billion dollars or more, as depicted below.³

U.S. 2023 Billion-Dollar Weather and Climate Disasters

This map denotes the approximate location for each of the 28 seperate billion-dollar weather and climate disasters that impact the United States in 2023
National Centers for Environmental Information U.S. Billion-Dollar Weather and Climate Disasters

Over the last 30 years, both the number of disasters and the cost of the damages on an inflation-adjusted basis have been increasing. The costs of major natural disasters can be higher during the second half of the year due to a number of factors, from Atlantic hurricane season (June 1 to November 30)⁴ to peak wildfire season (July and August in the Northern Hemisphere)⁵. As you plan to support disaster relief, you may find more resources are needed in these months.

United States Billion-Dollar Disaster Events 1980-2024 (CPI Adjusted)

Updated: May 8, 2024
Source: https://www.ncei.noaa.gov/access/billions/state-summary/US

2. Purposefully allocate disaster relief funds

When you allocate resources for the year, have a conversation with those involved in your giving around disaster relief funding. Determining in advance how much to dedicate to this purpose will ease the process of allocating those resources as incidents happen throughout the year. It will also enhance decision-makers’ confidence, knowing the funds have been set aside for this important purpose.

During these conversations, consider putting parameters around how much to give to any one disaster, so there is pre-established guidance when it’s time to make decisions.

3. Do your due diligence on nonprofits now

When there are significant funds involved, it can unfortunately attract questionably-intentioned opportunists operating under the guise of doing good. By doing due diligence in advance on organizations focused on disaster relief early, you can be more confident that your funds will be used effectively and will yield positive results.

Ask organizations to send you information on how they approach disaster relief, what makes them different, and what impact they have made in the past. Having the organization complete a formal grant application can provide decision-makers with more information and help make side-by-side comparisons, giving them more confidence in their decisions.

4. Create a short list of approved organizations

Once you have compiled the names of a few organizations that align with your funding values and do effective work in disaster relief, include them on a short list of vetted and approved organizations for immediate funding. This preparation will enable you to deploy funds in a timely manner and with the confidence that your funds will be used wisely.

5. Plan repeat gifts to climate-impacted communities

The intensity and rapid scaling of disaster-relief giving happens within days after the event occurs, because we see people on our screens that need our help and they are in desperate circumstances. This drives response-based giving in the short-term, but it lacks the vision for the community’s long-term recovery and sustainability.⁶

As time goes by, the local community itself will likely have the best insight into what still needs to be done to get its residents stabilized and productive. For the second round of funding, consider a local community foundation, because they will likely best understand the need going forward.

6. Consider aligning your investments with disaster relief

It’s prudent to consider how you might be inadvertently profiting from organizations contributing to climate change. If you are a shareholder of or a lender to organizations that do not have a strategic plan to be environmentally friendly or carbon-neutral, you could find yourself profiting from poor environmental policies in your investment portfolio while supporting recovery efforts from natural disasters. Aligning your investments with your philanthropy can increase your ability to make a sustainable impact on our planet and its inhabitants.

---

The Sustainable Investment Forum (US SIF) identified $8.4 billion in

total U.S. sustainable investment assets under management

in 2022 — 13% of total U.S. assets under management.⁷

---

By planning ahead, your disaster relief giving can help communities both recover and become more resilient. In the future, disaster relief will likely be a key component of our philanthropy, and it deserves a purposeful plan of action within your overall philanthropic endeavors.

At BMO, we work alongside individuals and families to foster thoughtful conversations and actionable outcomes, so philanthropy can have the client’s intended impact. Please reach out to your BMO wealth advisor to learn more about they can provide guidance with both your philanthropy and your investments.

_____________________________________________

1. Resilience. Center for Disaster Philanthropy.

2. Funding trends 2023: Climate change mitigation philanthropy. Climateworks Foundation.

3. U.S. struck with historic number of billion-dollar disasters in 2023. National Oceanic and Atmospheric Association.

4. Tropical cyclone climatology. National Hurricane Center and Central Pacific Hurricane Center.

5. Northern Hemisphere wildfires: A summer of extremes. Copernicus Atmospheric Monitoring Service.

6. From Relief to Recovery: A Strategic Approach to Disaster Philanthropy. Center for Disaster Philanthropy.

7. US SIF “Trends Report” Documents Sustainable Investment Assets Of $8.4 Trillion. US Sustainable Investment Forum.

As a business owner, you wouldn’t operate without a clear vision and strategic plan. You wouldn’t embark on a new initiative without first reviewing your cash flow and income statement to know how realistic your plans are. And certainly, you wouldn’t make long-range plans if you didn’t feel you had the best team to execute them.

Looking at family wealth through a similar lens can be instructive. Treating your wealth as a business, with the same cadence, infrastructure and strategic approach, can help you achieve your wealth goals and objectives.

First, though, you may need to overcome some mental hurdles.

Business owners are used to being in charge—but they may not feel the same level of control in managing their personal wealth as they do in running a business, which can be unsettling.

If you’re a business owner who can relate, consider framing wealth in the language of business in order to see that you’re still at the helm.

 

Business Principle #1: Start with values, vision and mission

Before you get down to brass tacks, you need to tease out what matters most to you and your family: your values, vision and mission. In other words, what are your family’s goals and objectives? What does success, happiness and legacy mean to you and your family? Your answers to these questions should serve as your guiding principles behind decisions related to investing, philanthropy and wealth transfer.

This goal-oriented approach is likely similar to the process you underwent when you first launched your business. The more concrete and measurable you can make your vision and mission, the easier it will be to judge your progress. Everything else flows from this foundation.

Once you’ve agreed upon and articulated what you’d like to achieve as a family, it’s time to develop a family blueprint. A family blueprint begins by describing the goals and objectives, values, vision and mission of your family. It also incorporates the family tree, family entities, as well as family members’ roles and responsibilities.

Next, delve deeper by spelling out an inventory of family assets and their corresponding owners. A family blueprint should present the family balance sheet by outlining assets includible and non-includible in the estate, cash flow, tax projections and a plan for estate disposition. Your blueprint can be an evolving vehicle to measure strategic success.

Business Principle #2: Assemble the right team

Talent is the backbone of success: Businesses are only as good as the talent they attract and retain. You can think of managing your personal wealth in similar terms.

If you consider yourself the head of the family, you might cast yourself in the role of president and chief executive officer: You are the person who takes a big-picture view of your family’s overall wealth.

Next, seek out a “chief investment officer” to oversee investments and conduct due diligence and research on them. A “chief financial officer” and “chief operations officer” for the family’s assets can take responsibility for putting together a reporting platform and providing regular status reports. These people make sure that the operations of the family wealth run smoothly.

You might need to add additional roles depending on your family’s needs. For example, some families may need a “communications officer” or a “chief learning officer” for coordinating family meetings or financial training, respectively.

Naturally, not every family has all the skillsets among its own members to manage their wealth most effectively. If this is the case, do what any savvy business owner would do in that situation: hire non-family members or outsource. Seek out professionals who have the expertise to allow you to build the best team.

Business Principle #3: Discover and cultivate your family’s philanthropic identity

More businesses today are tying their philanthropic and impact investment activities to their corporate mission. You might feel similarly about aligning your personal philanthropic endeavors with your own mission and vision. To do that, consider developing a strategic overview document covering your future philanthropic and impact investment intent, in order to guide others in carrying out your wishes now and beyond your lifetime.

When done correctly, philanthropic planning can help your family answer the question: “What outcomes we want our wealth to change in our community/world?” For many families, philanthropy and impact investment becomes such a big part of their identity that it takes on a life of its own, with some families even choosing to form a philanthropic entity to meet these objectives.

A philanthropic entity can have businesslike qualities and can offer a powerful way for a family to express their values across future generations.

The philanthropic vehicle or vehicles that best suit you will depend on the mission, goals and values that you set earlier—in addition to your other financial, tax and estate planning needs. Input from your advisory team can help make sure your philanthropic endeavors align with all these considerations.

Do you have a risk mitigation plan?

We all like to hope for the best, but planning for the worst is just common sense. That’s why businesses use commercial insurance, life insurance and hedging instruments to mitigate the risks they face.

For your personal wealth, rather than insuring equipment and inventory, consider insuring assets that are more personal in nature: Think homes instead of production plants, or cars, boats and planes instead of equipment.

You’ll also want to consider robust property and casualty, life, cybersecurity and kidnap/ransom insurance to cover the major risks that families of wealth may encounter. In addition, consider using insurance to provide for potential tax liabilities; taxes can be one of the biggest risks to asset preservation for future generations.

Make sure to have sufficient life insurance so your heirs have the necessary liquidity they’ll need to pay estate taxes. This will help them avoid having to sell illiquid assets—possibly at a discount—to cover taxes.

Lastly, think about succession risk. Just as a business needs to plan for the continuity of its leadership and operation in the event of the retirement, illness or death of its owner, a family must make a roadmap for how its wealth will be managed after the passing of the senior generation.

Final thoughts

Of course, there are some cases where the metaphor of treating your family wealth like a business won’t hold; for example, family wealth won’t center on the next big product launch. Yet overall, the approach can still be highly effective in helping you achieve your objectives and increase the chances of success for the next generation.

By couching your wealth in business terms, you can see the many similarities and how to approach your wealth in a similar way. Connect with a team that has experience in working with wealth owners, so you can put all the pieces in place.

Feel confident about your future

BMO Wealth Management—its professionals, its disciplined approach, its comprehensive and innovative advisory platform—can help financial peace of mind. For greater confidence in your future, call your BMO Wealth Management Advisor today.

As we approach the end of 2024 and start to think back on the year’s global, national, and local events, do not forget to reflect on your personal highlights, accomplishments, and aspirations. Consider whether the planning opportunities and strategies outlined below may contribute to your financial well-being this year and help you achieve your goals in the years to come.

Time for a financial check-in

How did you feel about 2024? Were you comfortable with the fluctuations in your investments, the income received and diversity of income sources, and your overall spending? Regardless of your answer, the end of the year presents an opportune time for reflection and planning. Consider how 2024 differed for you from prior years, and whether you anticipate any significant changes in 2025. If you have upcoming big-ticket purchases, liabilities, or plans, work closely with your advisors to ensure everyone is prepared to meet your liquidity needs and understand how that may impact your financial goals for 2025 and beyond.

Tax-loss harvesting

Despite seeing new market highs in 2024, a detailed dive into your investment holdings may reveal assets with unrealized losses. Instead of focusing on the less-than-stellar performance of these assets, consider realizing the losses to offset other income and reduce your overall tax bill. Realized capital losses first offset capital gains, and up to $3,000 of excess capital losses may offset ordinary income in 2024. Any unused capital losses may be carried forward into future tax years. Be mindful of the wash sale rule, which could prevent the realization of the loss if a “substantially identical” security is purchased within 30 days before or after the sale that generated the loss. If you have more than one investment manager, ensure that the actions of one do not negate the actions of the other. Always remember to rebalance your total portfolio after tax-loss harvesting to help stay on track with your investment goals.

Retirement planning and accounts

As we near the end of 2024, consider whether you can make additional pre-tax or post-tax contributions to retirement accounts.

Maximizing contributions to tax-deferred accounts may lower your 2024 tax bill while allowing you to benefit from tax-deferred growth for years to come. For 2024, employees may contribute up to $23,000 into 401(k)s, 403(b)s, and most 457 plans, and those 50 and older may make a “catch-up” contribution of an additional $7,500. Lower contribution limits apply to traditional and Roth IRAs: $7,000 with an additional $1,000 catch-up contribution permitted for those 50 and older. Income limitations may impact the deductibility of contributions to a traditional IRA and limit your ability to contribute to a Roth IRA. If your income prevents you from contributing to a Roth IRA, talk with your tax advisor to determine if a “back-door Roth” strategy may be right for you. If you are in a lower tax bracket in 2024, consider taking the opportunity to convert part or all of your traditional IRA to a Roth IRA.

If you are subject to Required Minimum Distributions (RMDs) from any retirement account, be sure to take the required distribution by yearend to avoid excise taxes. If you gift to non-profits, consider using a Qualified Charitable Distribution (discussed in the Philanthropic Goals and Contributions section below) to help pursue your philanthropic goals while fulfilling your RMD.

Inherited IRAs

For those with inherited IRAs, be mindful of rules regarding the timing of distributions. If the IRA owner died before January 1, 2020, continue using the same distribution method previously selected. If the IRA owner died on or after January 1, 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act impacts the distribution options. Check with your wealth advisor about the distribution options available to you.

If you inherited a traditional IRA from someone who died on or after January 1, 2020, and selected the 10-year payout option, regulations finalized in 2024 may impact how you must take distributions during that 10-year period. If the IRA owner died before the Required Beginning Date (RBD), then distributions may be taken at any time during the 10-year period, as long as you withdraw the entire IRA balance by December 31 of the tenth year after the IRA owner’s death. If the IRA owner died on or after the RBD, you must take distributions of the annual life expectancy amounts for the first nine years, with a full distribution by December 31 of the tenth year after the IRA owner’s death (note that this does not apply to inherited Roth IRAs, which simply must be withdrawn before the end of the tenth year after death).

Failure to take the annual life expectancy payments (or any RMD) may result in excise tax. In light of the lack of final regulations on the 10-year payout requirements until 2024, the IRS has provided penalty relief for certain impacted beneficiaries who failed to take required distributions in years 2020 through 2024. If you inherited an IRA in 2020 or later and selected the 10-year payout option, work with your wealth advisor to ensure that you take RMDs going forward to prevent the application of penalties starting in 2025.

 

---

Tax planning is an ongoing process. Speak with your wealth advisor and tax advisor about opportunities to take advantage of the current tax laws and be prepared to take advantage of future tax opportunities, whether next year or beyond.

---

Employee benefits

Did you take full advantage of tax-saving opportunities provided by your employer in 2024? Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) for healthcare or dependent care provide tax-advantaged opportunities to set aside and access funds for medical and dependent care purposes. If you enrolled in an HSA or FSA for 2024, be sure that you have maximized your contributions.

If you did not enroll in an HSA or FSA for 2024, be alert for your opportunity to enroll for 2025.

HSAs offer multiple tax benefits, including tax deductible contributions (and avoiding any related FICA taxes when made via payroll deductions), tax deferred growth, and tax-free withdrawals if used for qualified medical expenses. For 2024, individuals may contribute up to $4,150 and families may contribute up to $8,300. Individuals 55 and older may contribute an additional $1,000. Amounts contributed to your HSA by your employer count toward the total contribution.

For those without access to an HSA, healthcare FSAs provide similar tax benefits. Healthcare FSA contributions are capped at $3,200 for 2024. Unlike HSAs, healthcare FSA funds must be used in the year of contribution (or in some cases within a short time into the next calendar year, as set forth in the FSA plan document), so make sure that you have utilized funds in your FSA before time runs out.

Participants in a dependent care assistance program should similarly confirm that they have maximized their contributions and used their contributions by year end. Contributions for 2024 are limited to $5,000 per household ($2,500 if married filing separately).

Family businesses and entities

Does your family have an operating business or entity? If so, you may be subject to reporting requirements under the Corporate Transparency Act (CTA), a body of federal law aimed at combating money laundering and other financial crimes. The CTA requires certain businesses and entities to report information about the beneficial owners (i.e., the individuals who own or control the business or entity) to the Financial Crimes Enforcement Network (FinCEN). While some exceptions exist, if your business or entity is an LLC, corporation, or was otherwise created in the U.S. by filing documents with a state’s Secretary of State or a similar office of the state or an Indian tribe, you may be subject to reporting requirements. Similarly, if your business or entity is a foreign company registered to do business in the U.S. or with an Indian tribe by such a filing, you may be subject to reporting requirements.

Businesses and entities subject to the reporting requirements and formed or registered before January 1, 2024, must submit their initial report to FinCEN no later than January 1, 2025. If registered on or after January 1, 2024, the initial report to FinCEN must be submitted within 90 days after formation. The CTA imposes a short 30-day window to submit any changes to the reported information to FinCEN. Several lawsuits regarding the CTA have been brought, but as of this writing, the CTA and its reporting deadlines remain intact. For more information, including tools to assist you in determining whether the CTA applies to your business or entity, see FinCEN’s dedicated reporting website (https://fincen.gov/boi) and speak with your legal advisor.

Gifting and estate planning

Annual gifting can transfer significant assets over time and remove the future growth of the transferred assets from your estate, possibly helping to reduce your future estate tax liability.

In 2024, each taxpayer may gift $18,000 to an unlimited number of recipients tax-free without having to file a gift tax return. A married couple with two children and four grandchildren, for example, could gift a total of $216,000 in 2024 to these six family members tax-free ($18,000 x 2 x 6). If the couple’s assets were to later be subject to the 40% federal estate tax at their deaths, that gift could yield $86,400 in estate tax savings, even before taking into consideration the future growth of the gifted assets.

Consider using gifts to 529 accounts to combat the increasing cost of education. Gifts to 529 accounts may be front-loaded with up to five years of $18,000 tax-free gifts; be sure to check the appropriate box on your gift tax return. In addition, if a child has earned income from a job, consider gifting to facilitate Roth IRA contributions. This will help jumpstart their retirement savings, provide them with tax-free growth over the years, and may even give you an opportunity to educate them about finances and the power of investing. Remember that all gifts from one taxpayer to an individual must be aggregated for purposes of the $18,000 annual gift tax exclusion.

Gifting cash is easier and faster than gifting securities. If you plan to gift securities, coordinate with your wealth advisor and the gift recipient well in advance of year-end. If you are approaching the December 31 deadline, consider gifting cash instead to ensure the gift is completed by year-end. If gifting by check, make sure that the recipient deposits the check into his or her account by December 31 for it to count as a 2024 gift.

For those with family or friends facing large medical bills or tuition payments, note that you may pay certain medical or educational providers directly without having those payments count as a gift to the person who incurred the bill, or against the applicable annual exclusion amount in the year of the direct payment.

With significant gift and estate tax changes on the horizon, now is the time to discuss planning opportunities. Absent Congressional action, the federal estate and gift tax exemption is scheduled to plummet from $13.61 million per person in 2024 ($27.22 million per married couple), to approximately one-half of that value (projected to be approximately $7.15 million per person, depending on inflation) as of January 1, 2026. In simplified terms, this amount represents what a person can give away during life and at death (combined) without incurring additional gift or estate tax (currently 40%).

If the pending reduction of the federal estate and gift tax exemption concerns you, consider implementing gifting strategies to take advantage of the current exemption amount. For those comfortable parting with assets, consider gifting assets to irrevocable trusts for your children or grandchildren. A married person who would like to utilize the current exemption amount but would prefer their spouse to have access to those assets could consider establishing an irrevocable trust for the spouse, commonly referred to as a Spousal Lifetime Access Trust (SLAT). Talk to your wealth advisor about your options.

Regardless of whether you want to implement strategies to take advantage of the current estate and gift tax exemption, the end of the year is a great time to review your existing estate plan, including wills, trusts, medical and financial powers of attorney, and medical directives to confirm that they still reflect your intent. Don’t forget to check your beneficiary designations on retirement accounts, life insurance policies, and annuities.

 

---

CONSIDERATION: Gifting likely becomes a more important strategy if the federal estate and gift tax exemption sunset occurs.

Absent Congressional action, the federal estate and gift tax exemption is scheduled to be cut in approximately half from today’s $13.61 million per taxpayer ($27.22 million per married couple), to an estimated $7.15 million per taxpayer ($14.3 million per married couple), depending on inflation calculations, as of January 1, 2026. Enacting gifting strategies before the end of 2025 may help you take advantage of the higher exemption amount while you still can.

---

Philanthropic goals and contributions

Non-profits always appreciate contributions. Help yourself while doing good by structuring your giving to maximize tax benefits. To take an income tax deduction in 2024 for a charitable contribution made by check, the check must be post-marked by December 31 if using the USPS. Note that if you send the check via a private delivery service, such as FedEx or UPS, you may only take an income tax deduction in 2024 if the non-profit receives the check on or before December 31 (regardless of when the check was surrendered to the private delivery service). If donating by credit card or debit card, the charge must occur no later than December 31, regardless of when you pay the credit card bill.

Consider donating appreciated assets to non-profits rather than cash. You not only avoid reporting any gain on the asset on your income tax return, but your income tax deduction may be based on the asset’s value at the time of donation, rather than the value you originally acquired the asset for. Furthermore, a non-profit’s tax-exempt status generally allows it to sell the appreciated asset without paying tax on gains.

If you are at least 70½, consider fulfilling your philanthropic goals via a Qualified Charitable Distribution (QCD) from your IRA. In 2024, you may donate up to $105,000 directly from your IRA to one or more qualified charities. Note that a QCD cannot be used to fund a Donor Advised Fund (DAF) or many private foundations. The amount gifted by QCD applies against your Required Minimum Distribution (RMD) while avoiding inclusion of the amount of the QCD on your income tax return. Since the QCD is not reported as topline taxable income, this method is more tax efficient than itemizing the same contribution amount as a charitable deduction for many taxpayers. Be sure to coordinate the QCD early to ensure the distribution can be made timely.

Donor Advised Funds (DAFs) make charitable giving simple and, once funded, allow you to avoid the stress of mailing checks to non-profits. A gift to a DAF in 2024 results in a charitable deduction for 2024, even if the funds are not distributed from the DAF to your selected charities until later years. This offers a great solution when a deduction would be valuable, but you have not completed your research on charities, formulated your overall giving plan, or simply are not yet ready for the ultimate gift to the non-profit. Giving to a DAF presents an opportunity to “bunch” several years of philanthropic giving into one year, increasing the deduction in the year of the gift to the DAF. If you do not currently have a DAF and would like to donate to one in 2024, be sure to talk to your wealth advisor far enough in advance of year end to set up and fund the account.

 

---

CONSIDERATION: If you think you may fall into a higher tax bracket in 2025, it might be more beneficial to defer deductions to next year because the value of your deductions will be greater under a higher tax rate.

---

Looking ahead

As you consider your planning opportunities, remember that in addition to the scheduled estate and gift tax exemption reduction, absent new federal legislation, several income tax changes will also occur on January 1, 2026, when income tax brackets and rates will revert to those in place before 2018. This would mean tighter tax brackets and a higher maximum income tax rate than those currently in place. Consider how that may impact your tax picture based on your anticipated income and any planned shifts, such as a retirement, attaining RMD status for your retirement accounts, or a liquidity event. While the standard advice of “defer income and accelerate deductions” may still work for you, talk to your BMO Wealth Management advisory team about these changes and whether you may be better off accelerating income into 2024 or 2025.

Year-end planning, especially when future tax legislation is unknown, can be a great time of opportunity.

BMO Wealth Management — its professionals, its disciplined approach, its comprehensive and innovative advisory platform — can help by providing strategic wealth planning specific to your unique goals and objectives. For greater confidence in navigating these complexities, call your BMO Wealth Management Advisor today.

 

Stoker Ostler Wealth Advisors, Inc. (Stoker Ostler) and their partners care about your well-being. That includes your knowledge of and experiences with Medicare.

Decisions you make with respect to Medicare can affect you for years to come, in various ways:

• Emotionally
• Physically
• Financially

Our goal is to work together to ensure your interactions with Medicare insurance are positive ones.

Three ways to incorporate health into your wealth plan, and prepare for the unexpected.
A strong correlation exists between your health and your financial well-being. With good health, you may work longer, travel more, and engage in activities that improve your quality of life and personal well-being. These things, in turn, affect your earnings power and savings potential.

However, even if you have a healthy lifestyle, an unexpected health event could derail your financial plans. That’s why planning ahead for a medical event is just as important as striving to remain healthy. This article highlights the effect that health decisions can have on long-term wealth and offers three strategies to help protect your wealth plan in case there is a turn in your health or the health of a loved one.

 

Start by aiming for a healthy lifestyle

Building wealth affords you the opportunity to pursue interests
you enjoy, and good health helps make that possible. For example:
• Lowering financial stress results in less risk of a heart attack,¹ while reducing debt can reduce the risk of depression and anxiety disorders.²
• Getting adequate sleep can lead to stronger decision making, memory and reaction time.³
• Exercising regularly improves cognitive function and drive.⁴

It makes sense then that good health may help you to perform better at work, which may lead to advancement opportunities and higher lifetime earnings. One study showed that those who exercise regularly tend to earn about $25,000 more per year than those who don’t exercise regularly.⁵ Another concluded that a higher body mass index led to lower pay, particularly among women.⁶

Meanwhile, the cost of poor health can add up over a lifetime and can greatly reduce overall wealth. For instance, a study revealed that among 65-year-old males with a high school diploma, the median wealth of the healthy is almost twice that of the unhealthy.⁷

Also, poor health was associated with a reduction of more than $200,000 in household net worth over a 16 year period.⁸ One reason could be that declining health leads to more doctor visits, which can mean lower productivity and less career advancement, resulting in lower earnings and higher debt levels. This is wealth that you could have used to support your lifestyle or passed down to your family or community.

 

Be prepared by planning ahead

While good habits can help prevent negative health events, nothing is guaranteed. It’s important to have plans in place to mitigate the stress that can result from a change in your physical or mental condition. Here are steps you can take to be better prepared.

 

1. Assign Powers of Attorney.

Who do you trust to manage your finances if you become incapacitated? Have you told anyone how you would want your affairs managed? Powers of Attorney (POA) are documents that appoint someone to make decisions on your behalf if you are unable to do so. There are two types of POA that may be in place: Financial POA and Health Care POA. A Financial POA designates someone to make specific financial decisions, while a Health Care POA names an agent to make health care decisions and can provide direction around your wishes for your care.

The powers can be as broad as you decide and can cover many aspects of your personal and financial life. For example, you can name an agent to:

• Manage your investment and bank accounts
• File tax returns
• Manage your real estate
• Make gifts on your behalf to loved ones or charities you support
• Make health care decisions for you

When choosing an agent, consider the person’s physical location, particularly for health care decisions in an emergency. For financial agents, consider someone who is financially responsible and who will execute your wishes. Work with your attorney to put documents in place that conform to your needs and to your state’s statutes.

 

2. Protect your business.

If you’re a business owner, have you named someone to keep your business running if you have a serious health event? Oftentimes, life and disability insurance, when strategically designed, can be used as an effective funding vehicle for buy/sell agreements and key person coverage. They provide a smooth transition of power at agreed upon terms to ensure your business continues to operate without significant disruption if you are unable to carry out your responsibilities.

Buy-sell agreements spell out terms to transfer ownership of a business in the case of specific triggering events, such as death, disability or incapacity. For example, if you become ill and could no longer make financial decisions, the buy-sell terms could “trigger” and other owner(s), or key employees, could purchase your interest (“cross purchase”) or the company could do so (“entity purchase”), at the agreed upon price and terms in the document. This allows the company to continue to run smoothly.

Think carefully about what circumstances would cause a buy-sell agreement to trigger for your business and clearly outline them. For example, define the length of any incapacity that would place the agreement in force and whether it applies to mental health, physical health or both. Review the conditions with your attorney and business partners to ensure everyone is in agreement.

In addition to buy-sell agreements, review Operating Agreements (which govern the operations of a business and may include the terms of a buy-sell agreement), Trust Documents and POAs with your attorney to ensure they are in alignment and named Agents and Trustees are the most appropriate to take over your duties. If you have a Revocable Trust in place, discuss with your attorney if your Trust should be named as owner of your business interest, which could allow for smoother transition to your heirs through your estate plan. Additionally, if you are a sole proprietor, your Trust or POA is much more applicable, as the named agents, or successor Trustees would take over the management of your business if you could no longer do so.

 

3.Understand the impact of changes in your income.

Could you manage the loss of income and increased expenses caused by a health crisis? The steps below can help you determine if you can adequately cover additional expenses or lost income, or if you need to explore alternatives to avoid a significant disruption in your lifestyle.

 

Both your physical health and your financial well-being are connected to good habits and hard work, as well as access to information and support from professionals.

 

First, calculate how much your lifestyle costs today and then identify all sources of income to support it, including employment wages, earnings from investments, business income, etc. Work with a wealth planner to project costs and income for the long term, being sure to adjust for inflation, along with the anticipated growth of your savings and investment assets.

Next, earmark which assets would be available to support your needs and how you would spend those down. Consider these strategies to ensure you spend down assets tax efficiently:

• Tap health care policies first, then after tax accounts, and finally retirement or other tax-preferred accounts.
• Work with your wealth planner and CPA to determine the optimal time to access Health Savings Accounts. These accounts continue to grow tax deferred, but can be withdrawn tax-free when used to pay for qualified medical expenses. Depending on your tax situation, assets available and level of expenses, you may want to pay for medical costs with a balance of taxfree and taxable money, or let these accounts grow and use after tax money. This can also change year to year depending on circumstances.
• Work with your CPA to manage tax deductions and the timing of expenses. You may be able to maximize the deductibility of medical expenses by paying them in one year, when possible, instead of spreading them over multiple tax years.
• Focus on prudent savings, creating a balance between pre-tax retirement, Roth and taxable accounts, to ensure you have the means to support any other unknowns that life may present.

Finally, if you determine that your asset base is significant enough to support a loss of income, consider the impact to your heirs. Perhaps you had planned to provide education funding for your children or grandchildren. Or you may have wanted to support your community through philanthropic endeavors. Would the loss of income that is currently supporting growth of your assets, along with additional health-related costs of potentially $50,000–100,000 per year, impact your ability to help these individuals? If yes, you may want to consider other ways to bolster that part of your savings.

Both your physical health and your financial well-being are connected to good habits and hard work, as well as access to information and support from professionals. As you take steps to protect your health, it’s just as important to have a clearly defined plan that can give you peace of mind knowing that you’re prepared for any event. Ask a financial professional whether your wealth plan adequately incorporates provisions for your health.

 

Do you need long-term care insurance?

Although seniors are most often affected, the need for long-term care can come at any age due to illness or an accident. For couples, a serious health event that requires nursing home or assisted living care for one person may result in the need to budget for two households.

The average annual cost of assisted living is $54,000, while a private room in a nursing home costs $108,405 per year. These costs continue to rise by 3–4% per year and vary among states.⁹

Long-term care (LTC) insurance policies can help manage these costs. Policies include:
• Permanent life insurance with a LTC rider. Leave a legacy but also have a cushion of cash value to use for health care costs, if necessary.
• Hybrid LTC policies. Pay a single sum or a series of payments into a policy that provides an immediate pool of funds to cover qualified health care costs. There is also a death benefit if you don’t use the LTC coverage in your lifetime.
• Traditional LTC coverage. Pay annual premiums to a policy that will cover solely long-term care needs. There is typically no death benefit. The number of insurers providing this type of policy is decreasing.

No one enjoys end-of-life planning. But properly designed, completed and executed estate plans that include wills, powers of attorney and trusts are crucial to protecting your legacy and ensuring the seamless transfer of assets to your heirs.

Today, that includes providing family members with access to or control of your information, including your digital and online property. These assets range from your social media accounts and electronically stored photos and videos, to domain names and blogs, to blockchain assets such as cryptocurrency, non-fungible tokens (NFTs) and central bank digital currencies (CBDCs). Just like you would for your house, your retirement savings and that special family heirloom, you can arrange to have your digital property managed, safely administered and smoothly passed to your beneficiaries. Estate plans can also designate a digital trustee to oversee your online accounts and direct executors on locating and securing your online account information and access credentials.

 

What do I need to know about protecting my digital property?

At the time of this writing, digital assets have surpassed a $2 trillion market cap with a staggering number of Americans investing in, trading or holding cryptocurrencies, which has inspired President Biden to sign an Executive Order1 identifying priorities for the regulation of this innovative space.

Most states have enacted laws to address access to someone’s digital assets after death or incapacitation and have adopted a version of the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA). The 2015 RUFADAA gives executors and trustees access to digital assets, subject to some limitations. Still, legislation governing digital assets varies at the state level, and some crossborder differences exist. Some digital platforms (such as Apple, Google and Microsoft) now allow users to set “Legacy Contacts” and to decide who can access your account assets — photos, notes, mail and more — after you pass away. Social media platforms such as Meta (formerly Facebook), Twitter, LinkedIn and Pinterest do something similar. Upon first creating their accounts, most consumers accept a platform’s longwinded terms of service agreements and privacy policies without even glancing at them. This leaves open the possibility you’ve signed away the rights to transfer your assets or to memorialize your online presence.

 

What can I do to protect my digital assets?

For executors, a challenge is often just determining whether digital assets are in the decedent’s estate, and then determining the powers and terms for accessing and administering them on the beneficiaries’ behalf. When it comes to blockchain technology, executors need to know the whereabouts and details of the private key(s). Some good first steps in planning for these assets are to:

Take inventory

To understand your broad-based digital footprint, take inventory of your digital assets, including:

• Personal emails and account sign-in information (e.g., iCloud and Google)
• Social media account information, including your business accounts (e.g., LinkedIn, Facebook and Instagram)
• Data or documents stored on your electronic devices, including phones and computers
• Domain names
• Blog content or podcasts
• Bitcoin or other cryptocurrencies
• Credit card points
• Frequent-flyer miles and other travel points
• Loyalty program benefits (e.g., wine clubs, Starbucks rewards)
• Digital photos and videos
• Your literary, musical or other works
• Digital eBooks you’ve purchased
• Digital music you’ve purchased through iTunes, Spotify or Pandora
• Digital online betting accounts
• Online credits with Venmo, Amazon, eBay or other online purchasing entities
• Virtual and smart property, such as online gaming avatars, that exists in the metaverse, where unique digital assets are bought and sold for cash or NFTs

Get help from planning experts

Once you’ve inventoried your digital assets, have a proactive conversation with your BMO Private Wealth Advisor, who works closely with the firm’s trust and estate planning experts, who have substantial knowledge and experience in this area. We will help you develop this comprehensive digital asset inventory and, for each asset, harness the opportunities, understand the limitations and engage the best strategies for protecting them.

Planning “actions” must be performed while you are alive, from setting up cybersecurity protocols, antivirus subscriptions and access planning guides to legal authorizations, consents for release of electronically stored information, powers of administration/disposition and other legally binding documents.

Say you’re in the process of drafting a novel, and the file is saved in the cloud. That draft not only has emotional value but also potential financial value to your family should you pass away before completing it. The same holds true for family photos, an online diary or other tokenized assets, access to which you likely would want to control. Expert digital assets estate planners have several tax-efficient solutions and tools they can stress test, custom design and implement, where appropriate, to meet your intention and goals.

 

Conclusion

Without proper planning, digital assets could be lost. The more prepared you are, the stronger your estate plan will be, enabling you to avoid the pitfalls we see time and again. The key to success is early discussions with your BMO Private Wealth Advisor. Together, with your independent tax and legal advisors, our wealth planning team can help determine the appropriate estate planning strategies for you.