In The News...

When pop-icon Prince died in April 2016, he left behind a lot of things, totaling an estate valued at a whopping $200 million.

Unfortunately though, there is one thing he failed to leave behind...

A Will.

Nothing resembling an estate plan. Prince passed away without, it seems, having taken any estate planning measures whatsoever. The fallout has resulted in a long, drawn out series of court appearances and rulings to determine who his rightful heirs are, what they get and by how much. According to an article in Rolling Stone, a staggering 45 different people came forward as potential heirs, trying to stake a claim to his riches. Last week, the court finally deemed his sister and five other half-siblings as the rightful heirs to his estate.

How did this happen? Most of us know we need a Will, but do you actually know why? It isn't just about saying who gets what, it is equally about ensuring certain people do not get things. A Will safeguards against instances like Prince's heirs have experienced, where long-lost "cousins" are coming out of the woodwork following his untimely death.

What is "probate"? When you die your estate goes through probate, which is the process of proving the intentions in your Will. Probate can take quite a while (in Prince's case, well over a year) because the public is given an opportunity to stake claims against your estate. Said differently, probate is a period that allows anyone to challenge your Will.

(NOTE: In community property states, such as Washington and California, probate for married couples does not really play out until the second spouse passes away. Community property is defined as anything you or your spouse acquired during marriage (with some exceptions). This usually ends up being most of what a married couple owns. Community property is jointly owned, 50-50, between both spouses. When one spouse passes away, the surviving spouse instantly becomes 100% owner of the community property. So for the purpose of explaining the true purpose of an estate plan in a community property state, assume we're talking about a widow or someone single.)

It gets worse: The wealthier you are the more problematic these post-death issues become without proper planning. Assets are frozen while probate plays out, and worse, if you are really wealthy your heirs may owe a hefty estate tax bill (federal and state). Due to the 40% federal estate tax rate, nearly half of Prince's $200 million fortune will go to Uncle Sam (~$100 million!). Oh, and because of court appeals, his heirs may not be able to access his wealth for another year, if not longer.

The estate tax laws change every few years. Right now, with minimal planning, estate taxes are avoided if your married estate is less than $10 million. But that threshold is debated every presidential cycle and it wasn't long ago that the exemption threshold was only $1,000,000 (which sounds like a lot, but not so much when you add up all assets, including real estate). Also, state estate taxes may still apply (in Washington, anything above $2 million is subject to estate taxes).

More on this, including my recommendations, below in the Q&A/Financial Planning section.

In The Market...

The S&P 500 gained +1.4% this past week. Let's look under the hood...

Stocks: The S&P 500 did it. It finished the week above 2,400 for the first time ever (2,416 to be exact). This is a bullish development, although it may be met with some choppiness in the days ahead. Nine of the 10 stock sectors were higher this past week, led by Utilities (a current holding of ours). Only Energy was down and is the lone negative sector year-to-date.

Bonds: A pretty inspiring week for bonds considering the stock rally. Conservative bonds (treasuries, investment-grade) were only down minimally, which is better than I would have anticipated considering the S&P 500 was up more than 1%. High-yield bonds were up nicely, following the lead of the stock market.

We purchased a Utilities fund (XLU) a few weeks back, anticipating a potential rally. We may have gotten that this past week, as Utilities were up +2.5%. The following chart shows this breakout, following weeks of calm. (For reference, the last "candle" on the right, where the arrow points, represents this past week.)

This is certainly no prediction that Utilities will continue to gain, but we like the odds.

In Our Opinion...

Someone asked me this week if Amazon, whose share price is currently $995, might split its stock sometime soon.

In this instance it was not a loaded question, but oftentimes when I get this question it is. When a company "splits" its stock, anyone who owns it sees the number of shares they own double following the split. A lot of people are inclined to believe that they now have more money because they have more shares.

False.

Yes, when a stock splits you double the number of shares you own. However, the share price is cut in half when it does. Effectively, you have the exact same value of stock that you had pre-split. For whatever reason, many people feel as though they become wealthier when their stock splits, when that is not the case.

Now, there is an argument that it helps the stock's future prospects because a split makes the per-share price more affordable for smaller investors to buy. In theory, this would increase demand, which would push the share price higher than if it had not split. There is some merit to this rationale but no real proof. Apple did a 7-for-1 split back in 2014 (7 times the shares received and price cut by one-seventh) and did that help its price moving forward? No one knows. The stock price sure was choppy for the following two years after that massive split.

Amazon may or may not choose to split its stock, but here is the thing to remember... If you have $1,000 and are interested in buying Amazon, purchasing one share for $1,000 is exactly the same thing as buying 5 shares for $200, 10 shares for $100 or 1,000 shares for $1. Do not let the absolute price alone dissuade you from buying a particular stock.

In Our Portfolios...

Stocks: No changes this week, but we are looking to add the Nasdaq 100 fund (QQQ) or S&P 500 fund (IVV) next week. The specific fund will be determined by account size.

Bonds: Investment-grade corporate bonds (LQD) were bought for certain accounts. Next week we will look to add high-yield bonds (JNK) to certain accounts that do not own them. I also continue to eye long-term Treasury bonds (TLT) as a potential buy, but am awaiting the price movement I would like to see before doing so. Some of this bond-jockeying comes after having sold our preferred stock position over the past two weeks.

Q&A / Financial Planning...

Revisiting the above story about Prince's estate, here are my recommendations:

Establish a Will. If you already have a Will, update it if life circumstances have dramatically changed.
Consider adding a Living Trust as well. The concept of a Trust is often associated with the ultra-wealthy, but that word association is wrong. A Trust adds an extra layer of security and peace-of-mind to your estate because assets in your Trust bypass the probate process. This means your heirs can inherit your property (real estate, stocks/bonds, cash, etc.) quickly post-death than if those assets pass through your Will and become subject to probate. A Trust is also a private record, whereas your Will is public record. I, for one, value the privacy a Trust provides.

There are other life decisions that basic estate planning can solve too, namely guardianship for your minor children and health-care directives for making those tough decisions that occur as you age. If your wealth is substantial enough, certain Trusts can help reduce the estate tax burden your heirs become responsible for paying.

Let me know if you have questions. I am clearly not an attorney, so do not misconstrue this as legal advice. With that said, I can certainly refer you to a qualified attorney who can assist you.

What's New With Us...

Most client accounts have transitioned over to TD Ameritrade. As we wind down our firm's relationship with Scottrade, do not worry about the empty, zero-dollar balance in the account(s) you left behind. I will handle that in the near future and let you know if anything is required.

Have a great, LONG weekend!

Brian E Betz, CFP®
Principal

Market & Financial Planning Commentary

When Heirs Cry: A Lesson Learned From The Death Of A Pop Icon