Type of Insight: Articles

Wealth Planning Update: Exploring Charitable Giving

An update on donor-advised funds vs. private foundations

Several months ago, we compared donor-advised funds to private foundations in an issue of Financial Planning Update that has become quite popular. Changes in the tax code since then warrant an update.

Whether the goal is to improve a local community or support a more far-reaching cause, charitable giving is an important goal for many investors.  With donations of cash or other assets, you can support a specific nonprofit organization’s mission, while also teaching future generations about empathy and generosity. According to the National Philanthropic Trust (NPT), in 2016, individuals donated more than $280 billion, about 72% of overall giving.1 There are a variety of ways to support the causes you believe in, including the following:

 

Donate directly. Donate cash or other assets to a charity’s general fund for unrestricted use, or to a restricted fund for a specific project.

Donate through your will or trust. Make testamentary gifts to charities in your will or trust by giving a set dollar amount or a portion of your estate or trust.

Designate a charity as the beneficiary of your Individual Retirement Account (IRA) or 401(k). Charities do not pay income tax on donations they receive from these accounts. However, you may need spousal consent in the case of a 401(k); check your state’s laws.

Establish a donor-advised fund (DAF) or your own private foundation (PF). Both offer an immediate income tax deduction in the year of the gift and allow you to distribute the funds over an extended period of time.

 

The growing popularity of donor-advised funds

NPT reports that, as of 2016 (the latest available data), assets held in DAFs amounted to $85 billion, up 9.7% from 2015, due to increased contributions and investment gains. Contributions equaled more than $23 billion that year, reaching an all-time high. The total number of DAF accounts stood at 284,965, compared with 83,276 private foundations..

While there are nearly triple the number of DAFs than PFs, private foundations hold almost nine times the amount of assets than DAFs. Private foundations generally have larger balances (such as the Bill and Melinda Gates Foundation) and have been in existence much longer, giving them the benefit of compounded growth over the years (such as the Rockefeller Foundation). The first DAFs were created in the mid-1930s and only became popular with the growth of national DAF programs starting in the early 1990s.

Despite having lower overall assets, DAFs have historically had much higher grant payout rates (grant payments divided by total assets multiplied by 100) than private foundations. DAFs are not subject to the 5% minimum required distribution (MRD) that PFs are. Nevertheless, the overall grant payout rate for DAFs in 2016 was just over 20%, and has been near or above 20% each year since the NPT started collecting the data in 2007. In contrast, private foundations paid out slightly over 6% in 2016.

Today, charitable sponsors of DAFs exist in every state, with nearly half of DAF accounts in the three states with the largest charitable sponsors: Massachusetts, California and Pennsylvania. The charitable sponsors fall into three categories:

  • National charities, including organizations such as National Philanthropic Trust2 and those affiliated with financial institutions
  • Community foundations, ranging from major metropolitan areas, such as the Chicago Community Trust, to smaller rural organizations
  • Single-issue charities, including faith-based and education-focused organizations

 

Choosing between a DAF and a PF

Below are some high-level guidelines to help you compare a DAF and a PF. Note that our discussion of PFs is limited to grant-making foundations operated by individuals and families, and excludes private operating foundations and corporate foundations, such as Google.org. Your financial professional can help you determine if a DAF or PF is right for you.

A DAF may make sense if you are:

  • Making a minimum contribution of approximately $5,000-$50,000 (account minimums differ by sponsoring charity and/or DAF program)
  • Seeking a simple, fast and inexpensive way to form a charitable giving vehicle
  • Looking to maximize your charitable giving income tax deductions
  • Contributing closely held stock, publicly traded stock, real estate or cryptocurrency that has appreciated in value, especially if you want a larger tax deduction
  • Seeking greater flexibility in the annual amount of your grant making, including (under current law) the ability to forego making any grants in some years
  • Looking for greater privacy in your grant making, including keeping the balance of your charitable giving vehicle private

Although a DAF offers lower administrative and management fees, more favorable deduction limitations and asset valuations, and no excise tax on investment income, a PF provides greater control in the areas of grant making and investing.  This is because a donor to a DAF must surrender discretion and control over contributed assets, retaining solely advisory privileges.  The sponsoring charity makes all final decisions with respect to DAF grants and investments.

A charitable sponsor of a DAF typically offers several investment pools into which you can allocate funds for investment (although most charitable sponsors will permit independent and active management of a DAF account if it has a minimum balance determined by the charity — typically $250,000 to $1 million). On the other hand, a you may retain complete control of the investment of funds in your PF within the PF rules; PF investments are not limited to a selection of investment pools.

In addition, as a donor to a PF, you can exercise full control over grant making. With a DAF, the charitable sponsor has the legal right to approve or deny a grant and makes all the final decisions. However, it’s important to note that you can make recommendations and, in practical application, the charitable sponsor generally approves recommendations for grants to 501(c)(3) public charities.

Finally, as a donor to a PF, you may appoint its board members, including family members, providing the opportunity for your family’s future generations to participate in its legacy through philanthropy. A PF may operate in perpetuity, and successive generations may serve on the board. A PF exists until its board votes to dissolve and unwind its operations.

See the accompanying table for a more detailed comparison of the two vehicles.

 

 

Benefits of donating appreciated publicly traded stock held for more than one year

When you donate appreciated publicly traded stock that you’ve held for more than one year, rather than donating cash, you pay no capital gains taxes, and neither does the charity that receives the donation when it sells the stock.

For example, suppose you want to donate $100,000 to a DAF and have the choice of donating cash or appreciated publicly traded stock held for more than a year worth $100,000 (with a cost basis of $20,000). Assume you are in the 37% and 20% federal income tax brackets for ordinary income and capital gains, respectively.

 

While each investor’s situation is unique, the example above illustrates that there may be times when donating appreciated stock is advantageous relative to donating cash. Some donors whose modified adjusted gross income exceeds certain thresholds may also save Net Investment Income Taxes of 3.8% which is not illustrated in this example.
1 National Philanthropic Trust 2017 Donor Advised Fund Report.

2 National Philanthropic Trust operates the BMO Charitable Fund.

Seven steps to effective 2018 tax planning

How the Tax Cuts and Jobs Act may affect your 2018 income tax 

It’s the time of year again to consider steps you can take to potentially reduce your income tax liability. The Tax Cuts and Jobs Act (TCJA) reduced the highest tax rate from 39.6% to 37%, but that does not necessarily mean you’ll be in a lower bracket. If you’re a middle or upper bracket taxpayer, particularly a single filer or head of household, you may be pushed into a higher bracket. As in years past, it may be important to consider ways to reduce your taxable income and accelerate deductions.

In addition to new tax brackets, the TCJA contains other provisions that are likely to impact your financial plan. The seven steps below can help you understand some of those provisions, better manage your tax liability, and initiate conversations with your tax and financial professionals.

1. Evaluate withholding and estimated tax payments
If you have not yet done so, ask your tax professional to calculate whether the money you’ve paid in taxes so far this year is in line with your expected tax liability. If it’s not, you still have time to adjust the amount withheld from your paychecks or your final quarterly estimated tax payment. If your 2018 liability will be higher than it was in 2017, increasing your withholding or estimated payments may help you avoid a penalty. If not, reducing them will help you avoid paying excess tax.

 

2. Look for ways to maximize deductions
The TCJA increased the standard deduction to $24,000 for married couples and to $12,000 for those who file as single. You will no longer be in a position to itemize if your deductions do not exceed these higher levels. While this may make tax filing easier, it could also mean lower overall deductions. However, with a little planning, you might still be able to itemize in certain years. Here’s an example:

Suppose you have $22,000 of itemized deductions this year, including $4,000 in charitable contributions that you plan to make at year end. Instead of making the charitable contributions in 2018, you could bunch two years’ worth of contributions into 2019 so you’re eligible to itemize in that year. The table below summarizes the potential benefit.

The impact would be even greater if you bunched several years’ worth of contributions into one year. If you’re worried about providing a steady stream of donations to charitable organizations, ask your financial professional about setting up a donor advised fund (DAF). You would make a lump-sum contribution into the DAF and then dictate when and to whom the funds are disbursed over time. Likewise, you may be able to fund multi-year charitable contributions using the qualified charitable distribution (QCD) rule with required minimum distributions from your IRA.  If you’re 70½ or older, ask your financial professional about this way to reduce your adjustable gross income.

 

3. Break down your mortgage debt

The TCJA eliminated the deduction for home equity interest (unless used to buy, build or substantially improve a residence) and reduced the maximum mortgage interest deduction. You can now deduct interest on only up to $750,000 of mortgage debt ($1,000,000 if the debt was outstanding before December 16, 2017). Since you can deduct mortgage acquisition debt that you incurred to buy, build or substantially improve your primary or secondary residence, for 2018, you’ll want to consider what your debt is made up of and identify the portion used to buy, build or improve your home. You may also want to consider:

  •  Consolidating non-qualifying debt into qualifying debt
  •  Restructuring debt that doesn’t qualify into investment debt, which might qualify as investment interest

 

4. Take advantage of tax-favored health care plans

If you belong to a high-deductible health insurance plan, you may be able to take advantage of a health savings account (HSA) that allows you to contribute pre-tax up to $3,450 for self-only coverage ($4,450 if you’re 55 or older) and  up to $6,900/$7,900 for family coverage. Money socked away in an HSA does not have to be used up each year, as it does in a flexible spending account, and the earnings grow tax-free.

 

Note that the TCJA allows you to deduct unreimbursed medical expenses above 7.5% of your adjusted gross income, but that rate will rise to 10% in 2019. Therefore, it may make sense to pay all medical expenses for 2018 before the end of the year, especially if you will meet the deduction floor this year but not next, or if you won’t be able to itemize next year.

 

5. Maximize contributions to your retirement plans

Most contributions to retirement plans are made with pre-tax dollars, so maximizing those pre-tax contributions will increase your retirement savings and decrease your taxable income. You have until the end of 2018 to contribute up to $18,500 to an employer plan ($24,500 if you’re age 50 or older) and until April 17, 2019 to contribute up to $5,500 to an IRA ($6,500 if you’re age 50 or older). If you don’t already have an IRA, speak with your financial professional about the benefits of contributing to a traditional IRA and then converting it to a Roth IRA. An immediate conversion will have little or no tax impact.

 

6. Look for tax-loss selling opportunities

The markets have been rising for the longest period in history. If you’ve sold securities this year for a gain, consider selling others that would produce a loss if you don’t expect them to come back. You can offset the gains with the losses and reduce your taxable income. If you have more losses than gains, you can offset up to $3,000 of ordinary income and carry over extra losses to offset income next year.

 

7. Leverage expanded uses for 529 plans

Another way to set aside tax-advantaged dollars that grow tax-free is in a 529 education savings account. The TCJA extended the use of 529 plans beyond college expenses to allow up to $10,000 per year, per beneficiary to be used for elementary or secondary school tuition. You can open an account for a child, grandchild, or anyone else who might need the money for education. If the beneficiary is not old enough to benefit from the plan yet, opening an account now allows more time for the money to grow.  You can even open it in your own name and change the beneficiary later on.

 

The annual gift exclusion rules allow you to contribute up to $15,000 to each beneficiary per year ($30,000 if you and your spouse contribute). And, you can make up to five years’ of contributions at once if you don’t make other annual exclusion gifts over those years.

 

Four more considerations for business owners

If you own a business, there are a few more tax-related steps you can take.

 

1. Start a tax-qualified retirement plan

There are many options available, and each has its pros and cons. Some have to be established before year end but others give you until the tax-filing deadline of next year. A retirement plan can provide valuable business deductions starting this year if you act quickly. It also offers the opportunity for you to start growing tax-advantaged retirement savings. Talk to your tax professional to determine which plan is right for your business.

 

2. Find out if you’re eligible for a new 20% deduction

One of the most intricate and wide-ranging pieces of the TCJA is IRC Sec. 199A, which allows an additional deduction to eligible pass-through business owners of up to 20% of business income. This complex provision is not available to all pass-through entities and is limited in scope. As this is an entirely new provision, ensure adequate advance planning with your tax professional to learn if you qualify and to maximize the benefits.

 

3. Consider buying new business assets

Under the bonus depreciation rules, business owners can now write off the entire cost of qualifying purchases under changes enacted with the TCJA. Last year, the bonus limit was 50%. In addition, the IRC Sec. 179 deduction limit was increased to $1 million, subject to phase out after $2.5 million of purchases.

 

4. Don’t forget the R&D credit

This credit is available for businesses for specified research and development expenses, including those for qualified software development. It’s also available to business owners of pass-through companies and can be used to offset up to $250,000 in payroll taxes per year for 5 years for qualifying new or small businesses.  As the rules for claiming and documenting this tax credit can be complex, you should discuss this with your tax professional.

Should you be concerned about the estate tax?
With the increase in the lifetime exemption from $5.49 million per person to $11.18 million, many estates that were exposed to a potential estate tax may no longer be. However, if your estate is valued over $11.18 million (or you’re married with a combined estate over $22.36 million), here are some ideas to consider:

  • You could use some of the additional lifetime exemption given to you before the amount reverts back to original levels in 2026. If you do that, make sure to leave yourself enough to live on.
  • An option is to remove assets from your estate and freeze their values using a Spousal Lifetime Access Trust (SLAT). In a SLAT one spouse sets aside assets for the benefit of the couple’s children and, as long as the spouses remain married, the spouse can access it if needed. To insure equality, each spouse can set up a SLAT for the other, as long as they are sufficiently nonreciprocal to avoid IRS scrutiny.
  • If you have an older estate plan that uses a formula, it could be booby-trapped due to the increase in the lifetime exemption amount.  See your tax professional about a possible rework.

To be sure, the provisions of the TCJA are a primary concern when it comes to 2018 tax planning. That said, the framework for tax reform 2.0 is already in the works. Aside from making some of the temporary provisions of the TCJA permanent, the next generation of tax reform may include expanded family, schooling, and retirement savings rules, more write-offs of startup costs for small businesses, and other incentives for business and economic growth. As you work with your tax and financial professionals, these new proposals could prove important. The moral of the story: see your tax professional early as there is much to consider.

Choosing the right retirement plan for your business

Understanding the benefits of IRAs, 401(k)s and defined benefit plans for you and your employees

As a business owner, you naturally focus your energy, time and resources on growing and sustaining your business, while fostering an environment where your employees can thrive and support your vision. As you set your priorities, planning for retirement may fall to the bottom of your list. In fact, according to a 2016 BMO Wealth Management survey of more than 400 business owners, 75% had saved less than $100,000 for their retirement. This illustrates that most business owners prioritize their business over retirement planning.

Whether you don’t see the benefit of planning now or simply have not had the time for it, failing to plan for retirement can come at a high cost. You may forego the tax and wealth planning opportunities that a well-structured retirement savings strategy can provide, while your employees may miss an important benefit that can help them prepare for their futures.

Below, we review three categories of retirement savings plans available to business owners – Individual Retirement Accounts (“IRAs”), 401(k)s and defined benefit/pension plans. We identify the pros and cons of each and provide specific ideas to help you put a plan in place. We’ve also included a detailed comparison chart to help you decide which may be right for you.

Do you really need a retirement plan?

If your business is thriving and generating a steady income, you may not see the benefit of putting retirement money aside today. Perhaps you are overwhelmed by the options available or are hesitant to add another responsibility to your already lengthy list. If the value of your business has been growing, you may plan to sell it and monetize the value later in life, essentially considering the business to be your retirement plan. However, unforeseen factors may impact the value of your business and your ability to continue running it, such as health, family or economic changes. In such cases, a separate retirement plan can help provide an important safety net.

With a retirement plan, you can:

  • Take control of your future, particularly if you don’t have the benefit of a company pension or stock plan.
  • Realize tax benefits today and in the future that can save you money every year.
  • Earn compound growth on your nest egg, giving you greater flexibility to work as much or as little as you want as you approach retirement.
  • Retain valuable employees by providing an important benefit to them that may be of minimal cost to you.

IRAs: The easiest way to start saving

Both you and your employees can take advantage of the benefits of an Individual Retirement Account, at little to no cost to your business.

  • Traditional or Roth IRA. Anyone with earned income can open an IRA (though there are income limits for Roth IRAs). Although these types of IRAs have the lowest contribution limits, you can set one up in conjunction with another retirement plan to increase savings.
  • SIMPLE IRA. Designed for small businesses with fewer than 100 employees, a SIMPLE IRA allows employees and employers to make contributions. Employees can choose whether or not to contribute, but as the employer, you must make matching contributions up to 3% of compensation or 2% nonelective contributions, so you will need to be committed to the plan year after year. In addition, the business (generally) cannot maintain another retirement plan in conjunction with a SIMPLE plan.
  • SEP IRA. With this plan, the contribution limits are higher than with any other type of IRA; you can potentially put away up to $55,000 per year for yourself, depending on your income. In addition, you have the flexibility to contribute or not each year, depending on the cash flow needs of your business. The percentage of salary contributed to all plans must be equal, so if you have employees, you’re required to invest the same percentage of their salary in their accounts as your own salary.
Tip: If you need to set up a new plan and contribute for the prior year, a SEP IRA may be your only solution.
  • Employer-sponsored IRA. Designed to help your employees save faster, this plan allows them to contribute to an IRA through payroll deductions.
  • Self-directed IRA. These plans allow you to direct your retirement savings to an area of investing in which you’re particularly savvy, such as real estate, private equity or hard money lending. Traditional and Roth tax benefits and contribution limits apply.
Tip: Use self-directed IRAs with care; according to IRS self-dealing rules, if you make a transaction that benefits you or a “disqualified person”(such as funding a repair on a real-estate investment), the account could become taxable. You’re responsible for understanding and complying with these rules.

 

Pros and Cons of IRAs

(+)

  • Low cost and very easy to start
  • No plan administrator required
  • No annual compliance testing
  • Flexible contributions (except SIMPLE IRAs)

(-)

  • May have lower contribution limits than defined benefit or 401(k) plans
  • No loan options

401(k)s: Greater savings ability with greater flexibility

In general, 401(k) plans may be a bit more complex and costly to set up than IRAs. However, most plans will allow both you and your employees to set aside more money for retirement.

  • Solo 401(k). This solution allows a sole proprietor with no employees (except a spouse) to make contributions as both the employer and employee, potentially up to $55,000 (plus $6,000 catch-up if you’re over age 50), depending on your income. Contributions as employee and employer may be fully tax-deductible, further reducing your income taxes. You can also establish the plan as a traditional 401(k) or Roth 401(k), depending on your goals.
Tip: Consider hiring your spouse to boost household savings.
Tip: Work with your CPA to determine if a SEP IRA or Solo 401(k) will allow for higher contributions based on your salary and business income. In many cases, particularly for an S Corp owner with flexibility in wage distributions, a Solo 401(k) can allow for higher contributions with less income. This is because SEP IRA contributions are only profit-sharing (generally limited to 25% net self-employment income up to $55,000), whereas a Solo 401(k) includes both an employee deferral of compensation (up to $18,500) and profit sharing (up to a combined $55,000).

 

  • Traditional 401(k). Employees can contribute up to $18,500 pretax per year, commonly through payroll deductions. Business owners can make matching contributions to encourage employee participation, or profit sharing contributions based on cash flow each year, all of which are tax deductible for the business.
  • Roth 401(k). Like a Roth IRA, there is no up-front tax savings, but any growth and subsequent withdrawals are tax-free in retirement. Contributions to a Roth 401(k) are not subject to the income limits that apply to Roth IRAs. Employer matching contributions are pretax and may not be directed to the Roth portion.
Tip: If you believe your taxes will be higher when you retire, consider directing all or part of your contributions to this option.
Tip: Ask your plan administrator about including a Roth savings option in a traditional 401(k) plan to allow for after-tax savings

 

Pros and Cons of 401(k)s

(+)

  • Higher tax-deferred contribution limits
  • Employer matching of employee contributions allowed
  • End-of-year profit sharing to incentivize employees allowed
  • Tax-free loans up to IRS limits

(-)

  • More costly than IRAs
  • Additional forms for bigger plans

Defined benefit/pension plans: Maximum Retirement Savings

These plans allow you to sock away more than any other type of retirement plan. An actuary uses statistics, such as the age of the participants (you and your employees), salary levels and years until retirement to calculate the contribution limits. Older business owners with younger employees can potentially maximize benefits to their own accounts based on these calculations, in some cases resulting in allowable contributions of $100,000 or more. Contributions are fully tax deductible. If you’re looking to put away as much as possible, and have the cash flow to do so, a defined benefit plan may be right for you.

Pros and Cons of Defined Benefit/Pension Plans

(+)

  • Save more than any other type of plan
  • Can be paired with a 401(k) or profit sharing plan to maximize contributions

(-)

  • Most expensive option to maintain
  • Requires annual reporting and actuary calculations
  • Must have consistent income available to cover IRS minimum funding requirements

Getting started

Establishing a retirement plan does not need to be complicated or time-consuming. Your financial professional can help by handling the setup, directing you to investment options that are appropriate for your situation, and sending you annual reports to share with your accountant. Start by engaging your financial and tax professionals to help you:

  • Project your retirement needs and define how much you can safely put away to meet those needs.
  • Project the annual tax savings possible given your personal and business situations.

You may find it makes sense to fully fund a tax-deferred plan up to IRS limits, split savings between pretax and after-tax vehicles, or save a portion to a tax-deferred account and put the rest back into the business. Working with your advisors will enable you to make the best decision for you and your business.

Just as a business plan sets your company up for success, a retirement plan can help both you and your employees prepare for a better future. Ask your financial professional for help understanding and choosing the right business retirement plan for you.

Retirement Plan Options for Business Owners

Wealth Planning Update: Best practices for your online safety

Tips to avoid scams and other online security threats

The Internet has become a common feature of daily life, with nearly 90% of American adults saying they go online.  Unfortunately, anyone using the Internet can be the potential target of online scams and security threats. From email scams to malicious websites, it’s more important than ever to protect your personal information and financial accounts online. Whether you’re a baby boomer or younger adult, understanding the potential threats and taking some basic precautions can help keep your information safe and help you to make the most of your digital life.

Protecting yourself from email scams

Hackers and scam artists are usually after one thing: they want your personal information so they can steal your money or your identity. Personal information includes your bank or investment account numbers, credit card details, online passwords and other private data, such as your social security number. These threats may surface in your email, perhaps disguised as an offer to “click here” for a free prize or a vacation. It may appear that the emails were sent from a trusted place, such as the Social Security Administration, Medicare, the IRS, your bank or a charity. They may also threaten an action unless you reply quickly.

Don’t be fooled. Websites or emails that ask for your personal information are typically not legitimate. Banks and other institutions will never request your personal information through email. Never enter your social security number, account number, date of birth or your mother’s maiden name online unless you have verified that you are on a legitimate site that has a genuine need for that information.

It can be difficult to identify a malicious email or other online scams. Here are some tips that can help:

  • Read your emails carefully before you reply. Typographical errors or phony-looking logos are a sure sign that the email is not trustworthy and likely does not come from a legitimate source.
  • Don’t open an email if you don’t recognize the person or organization that sent it as it could contain a dangerous computer virus. Move the email directly to your trash folder or recycle bin without opening it.
  • Be wary of any offers that sound like they are too good to be true.

Case study: Beware of bogus requests to wire money

This past holiday season, Anna and others in her Florida retirement community received emails that appeared to be from a friend claiming to be stranded in India. The message included instructions to wire money in order to help the person get back to America. Some of the residents, including Anna, were each duped into sending thousands of dollars to an unknown recipient. Unfortunately, this type of scam is all too common. Many scam artists will try to convince you that they are a friend or relative in distress, a debt collector or government agency claiming you owe money, or a technology company trying to protect your computer from a virus. Make sure you take the time to verify the truthfulness of an email—perhaps by asking a relative—before sending money to anyone.

Reducing your vulnerability to hackers

Hackers are people who use computers to gain unauthorized access to data. They’ve made national news headlines by attacking major institutions and stealing millions of people’s credit card details, addresses, and other personal information. While large organizations are often the victims, even your personal computer is a potential target.

When your computer is not protected, hackers can wreak havoc in a number of ways. For example, they may install a keylogger to copy your usernames and passwords as you type them, then log in to your account later to transfer money out of your account and into theirs. They may also tap into your email and send malicious emails to all of your contacts in order to spread computer viruses and malware. In the worst case, hackers have accessed computers to deal in or hide the true origin of illegal activities.

You can limit the possibility that a hacker will gain access to your computer by safeguarding your system passwords, including both your modem and Wi-Fi passwords. Most people might only be familiar with their Wi-Fi password settings, but your modem security settings connect your computer to the Internet through your Internet Service Provider (ISP). It’s a good idea to change these passwords periodically. Tip: You may need to contact your ISP to learn how to access and change your modem password.

Here are some other ways to protect your computer from hackers:

  • Never allow someone access to your computer remotely. One exception might be your ISP if you’ve called them to fix a specific problem.
  • Keep your software up-to-date. Operating system updates typically include the latest security features.
  • Use anti-virus software. Although most operating systems have built-in security protection, such as a firewall, it’s usually a good idea to supplement with anti-virus software that is specifically designed to detect and destroy computer viruses. Unix-based operating systems, such as those used by Apple, may be less vulnerable but determined hackers may still find new ways to exploit users.
  • Don’t save your credit card details on your computer for later use. It’s worth the effort to enter them each time you make an online purchase.
  • Create strong passwords with a combination of letters, numbers and special characters, and change them often.
  • Never store your passwords in a file on your computer or in your browser unless you use a secure password management system that you trust.

Case study: Usernames can be just as important as passwords

Michael used his first initial and last name as his username for his online bank account. He was unaware that hackers had figured out the username and were trying random combinations of characters to decode his password. Every time the hackers entered an incorrect password three times, his account would be locked from online access. He would then need to reset his password in order to get back into it. When he called the bank, he learned there had been numerous attempts to log in that he had not initiated. Michael immediately changed his username to something less obvious and also changed his password.

Staying safe on websites

Many websites require you to enter sensitive information, including a username, password, account number or credit card details. With some diligence, you can minimize the risk that a hacker will uncover your data. Here are some tips:

  • Before you enter personal information on a website, be sure the URL begins with “https.” The “s” at the end stands for “secure” and means the data is encrypted and can’t be seen by anyone but you.
  • Log out of your accounts before you leave a website or close your browser. This ensures the account won’t be visible to the next person who opens the browser.
  • Log in to your accounts only from your home, where you know that your connection is safeguarded. Internet connections from public places such as coffee shops and airports may not be secure.
  • Use caution on social media. Scam artists create fake profiles to entice you to follow links to malicious websites or to give up sensitive personal information.
  • Be careful on dating websites where prowlers may try to gain your trust and then ask for a credit card number or money.
  • Beware of counterfeit drug scams targeting people who search the web for better prices on medication.

Ignore pop-up windows that open automatically when you’re searching the web. They often simulate virus-scanning software and will try to fool you into either downloading a fake anti-virus program (at a substantial cost) or an actual virus that will expose whatever information is on your computer to hackers.

How data aggregation tools can help you monitor your financial accounts

Considering the various online threats, it’s more important than ever to keep track of your accounts and be watchful of suspicious activity. This can be challenging if you have several bank, investment and credit card accounts. Data aggregation tools provide a way to view the transactions and balances in all of your accounts in a single, secure location. Using a dashboard-like interface, these tools provide a concise summary of your finances that you can access from your computer, smartphone or tablet.

Typically you cannot make a transaction from a data aggregation dashboard, so there is no risk of your money being accessed from these systems. Also, aggregators do not store your complete account numbers; they use truncated numbers, such as the last 4 digits. In addition, many data aggregation tools have alert features. For example, BMO Wealth Connection will notify you through email whenever a transaction in any of your accounts exceeds a dollar amount maximum that you have set.

At any age, it’s important to understand online scams and threats, and to take precautions to protect your personal information and financial accounts. If you suspect you’ve been the victim of a scam or hack, don’t be embarrassed. Tell someone you trust or seek help from your advisor or National Adult Protective Services (http://www.napsa-now.org/get-help/help-in-your-area/).

Outlook for Financial Markets

“The key to good decision making is not knowledge. It is understanding.”
– Malcolm Gladwell

  • The Tax Policy Center estimates that the middle household income quintile will benefit by over $900 per year from the tax cuts. Given that the savings rate in the U.S. is now around 3%, that’s a sizeable bump in extra spending money that consumers will have available starting in February.
  • Economists are largely in agreement that corporate tax cuts will pull forward growth in the U.S. and that the long-term 2% trend is essentially intact, notwithstanding a few years of stimulus-driven ramp up.
  • While the volatility seen in the first weeks of February was extraordinary, the difference between short-term corrections and more concerning developments is often gleaned from high-yield corporate bond spreads, which remain tight by broad historical standards and consistent with other periods of stable economic growth.
  • The U.S. economic momentum is palpable. Not throbbing as in 1999, but a strong and quickening beat as in 1997 or early 1998.

Download and read the March Outlook for Financial Markets to know more.

Preparing the next generation for wealth: Six conversations to have with your heirs

Over the next 30 to 40 years, $30 trillion in financial and non-financial assets is expected to pass from the baby boomers — the wealthiest generation in U.S. history — to their heirs. How can you successfully transfer your wealth to future generations? In addition to creating a will and estate plan, you can take steps to make sure your heirs are equipped to manage wealth and to understand what your wishes are for the assets they receive. In short, you can position them to become good stewards of the money they inherit. Below are six conversation starters that can help you prepare children, grandchildren and others to receive an inheritance.

1. Managing our family’s money is a big responsibility. 

You may have been taught that discussions about money are taboo or you may simply be uncomfortable discussing your children’s inheritance with them. However, it’s important that your children understand the time and effort that goes into managing the family’s wealth. One way to pass on this knowledge is through regular family meetings designed specifically to talk about money as a family.

The sooner you start these conversations, the better. Begin when your children are young if you can, but know that it’s never too late. Paying an allowance and opening a custodial bank account are two ways to start the conversation with younger children. Think about the values you were raised with and what values you want to pass on to your children. Then, communicate those values at appropriate times. For older children, your discussions can center on money management and investing.

Whenever you begin, make family meetings a regular event. Ongoing meetings give you a chance to explore topics in greater detail and allow time for questions.

2. Before you inherit wealth, you should have basic money skills.

To help ensure that your heirs make the most of the wealth you pass on, start by equipping them with basic money management skills. Instill in them your values around savings, spending, budgeting, investing and handling credit. If you don’t feel equipped to teach your children these skills, explore classes at local libraries, books or other resources. Or, ask your financial professional or tax advisor for help. Here are some topics to consider:

  • Saving and investing money
  • Getting paid what you’re worth
  • Spending wisely
  • Creating—and living within—an appropriate budget
  • Using credit wisely

3. Wealth is meant to be shared. 

If philanthropy is important to your family, sharing your charitable giving goals with your heirs can ensure they continue to use the money they inherit to positively impact others. Whether you set up a family foundation or choose individual charities to support, communicating your giving philosophy with your heirs can make it easier for them to continue your legacy.

4. You may not each receive exactly the same amount of inheritance in the same form.

If you have multiple heirs, is there one who would like to continue in a family business but others who aren’t involved? Do any of your children seem to feel “entitled” to the family wealth or fail to have a sense of responsibility when it comes to money? Communicate to all involved that you will do your best to equalize their inheritances but that you plan to take steps to make sure the assets are not squandered.

  • Consider leaving less cash and other assets to children who will inherit part of the family business.
  • Make special arrangements for spendthrift children or grandchildren, or those who struggle with substance abuse or other problems, including the use of trusts to manage how and when money is distributed over time.
  • Consider gifting a portion of your money to children during your lifetime so they receive it gradually rather than in a lump sum.

5. Financial and tax advisors are important to financial planning.

One of the most valuable assets you can pass down to your heirs is a relationship with your financial professional and your tax advisor. As soon as your children or grandchildren reach working age, begin to include them in meetings with the people you trust to advise you on financial decision making. In this way, your heirs learn firsthand:

  • How to express goals and concerns to financial professionals
  • What you expect they will do for you
  • What you don’t expect them to do

Through these meetings, you can gradually begin to include your children in the decision-making process or allow them to take on responsibility for certain aspects of the family wealth while you are available to oversee.

6. Protect the family wealth; be careful who you trust.

Along with making introductions to your trusted advisors, you can warn your heirs to be mindful of trusting others with their money. There are likely to be people who know about the family’s wealth and have “great” ideas for how to use it – perhaps even those close to the family. While some of those ideas might be worthwhile, many of them are likely to be futile. Help your children to understand that it’s easier to lose money than to earn it back.

In summary, successful wealth transfer plans not only facilitate the transition of wealth but also equip heirs to manage their inheritance wisely. Using regular family meetings as the foundation, you can begin the process of sharing your knowledge, values and philosophies about money. In the end, your heirs will use the money as they want, but laying a strong foundation can help pave the way for them to use it wisely and to pass on your values to future generations.

10 resolutions for your wealth plan

The New Year is often a time to reflect and reevaluate. And each year (at least), it’s important to review your finances and make sure you’re on track toward your long-term financial goals. Here are 10 wealth planning resolutions to get you started in 2018.

5 steps for managing your digital assets

“Digital assets” are a relatively new asset class.

Digital assets are generally any electronic record in which you have a right or interest. They may have sentimental value (such as Facebook photos) or financial value (such as a PayPal account). As a result of the growing value and prevalence of digital assets, it is important to plan for your digital assets in case of your incapacity or death.

Here are 5 tips for managing this new class of assets:

    1. Understand What’s Considered a Digital Asset
      Examples of digital assets include:

      • Email;
      • Social media networks such as Facebook, Instagram and Twitter;
      • Internet “cloud” accounts like Dropbox or iCloud;
      • Payments accounts like PayPal or Venmo;
      • Frequent flier accounts;
      • Online retailer accounts such as Amazon.com;
      • Online bill-paying accounts;
      • Blogs;
      • Photo-sharing accounts like Flickr or Shutterfly; and also
      • Electronic devices, such as a smartphones, tablets, and laptops.
    2. Create a Detailed Inventory of Digital Assets
      You may consider keeping a current list of your online accounts and other digital assets. You also may want to keep a list of corresponding usernames and passwords. If you do keep one or more lists of your digital assets, usernames, and passwords, be sure to store this information in a secure location so unauthorized users can’t easily access your accounts. Depending on your circumstances, a secure location might be your safe deposit box or with a trusted professional or loved one.You may also use a password manager service to help create and securely store passwords on your computer. Password management systems require a master password to gain access to your data. A copy of that main password should be kept in a secure location as well.
    3. Track Your Digital Assets’ Values
      The financial value of Bitcoin or a PayPal account can be easily determined, whereas online photo albums are likely to hold only sentimental value. But, it can be more challenging to value other types of digital assets, such as a popular blog. If the blog creates revenue, that revenue can be tracked, but if you plan to sell the blog, you may need to work with a web appraisal expert to estimate the blog’s “digital finance” value.
    4. Plan for Your Digital Assets
      Consider whether you’d like to allow another person to access your digital assets in the event that you are incapacitated or upon your death. Each online account may have different rules, but if you would like to provide access to a third party:

      • First, review your account options. Determine whether each of your providers offers an online tool for you to name another person to access your accounts. Two common online tools are Google’s “Inactive Account Manager” and Facebook’s “Legacy Contact.” If an existing online tool provides the access you want or need, you may decide to use the tool.
      • Next, work with your estate planning attorney. Consider naming an individual in your estate plan to access your digital assets. At present, most U.S. states, including Arizona, Florida, Illinois, Indiana, Kansas, Minnesota, and Wisconsin, have adopted some form of the Revised Uniform Fiduciary Access to Digital Assets Act (referred to as “RUFADAA”). When adopted, this state law allows you to name a fiduciary in your estate plan (such as an agent under a power of attorney, an executor or personal representative under your Will, or a trustee under your living trust) to access your digital assets. In order to access electronic communications, such as e-mail, RUFADAA requires that you, as the account owner, specifically state your wish that your fiduciary have access to such communications. If you’ve already designated someone to access an online account through a particular service provider’s online tool, let your attorney know because an online tool designation takes priority over any persons you’ve named in your estate plan – and the designation you made in the online tool might conflict with the estate plan you discuss with your attorney.
    5. Tell Representatives How You’d Like Your Digital Assets Handled
      If you’ve named someone to access your digital assets on your behalf in an online tool or in your estate plan, it can be helpful to give them some guidelines in advance. For instance, do you want family members to leave your Facebook page in place as a memorial after your death, or take it down after a certain period of time? Do you want your children to sell your blog, leave up archived posts, or delete it entirely? Explaining your wishes in advance can make it less stressful for family members to manage your digital affairs in your absence. These conversations also make it more likely that your representatives will understand and follow your specific requests.It is best to consult with a legal advisor regarding your individual situation and goals with respect to your estate plan and disposition of digital assets.BMO Wealth Management is a brand name that refers to BMO Harris Bank N.A. and certain of its affiliates that provide certain investment, investment advisory, trust, banking, securities, insurance and brokerage products and services. Investment Products are: NOT FDIC INSURED – NOT BANK GUARANTEED – NOT A DEPOSIT – MAY LOSE VALUE