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Key Investment Advice for Caregivers

Our guest blog author, Steve Carr, is Partner and Director of Research for Peloton Wealth Strategists. Peloton manages custom investment portfolios and provides financial counsel on a fee-only basis for clients throughout the U.S. and internationally.

When a parent or other loved one looks to us to handle their personal affairs because they are no longer able to, the stress can be heavy. Financial caregivers are often required to make investment decisions without the benefit of key information. The following are of some of the most common investment-related decisions that you may need to make for a family member’s benefit.

SUITABILITY: I advised a woman whose 88 year old father was in failing health and in need of full-time care. The father had an IRA and personal account and his daughter anticipated a need to use the money to pay her father’s ongoing expenses. But the portfolio was heavily invested in stock mutual funds and included small positions in individual bonds, one of which had a rating below investment grade, a.k.a., “junk.”

When a person needs to use an investment portfolio for living expenses, special care needs to be taken to ensure that its liquidity, income, and growth components are sufficient for the spending needs ahead. While some allocation to stocks or stock funds likely makes sense, as a person’s time horizon gets shorter and their need to spend money in the portfolio grows, the allocation to short-term, high-quality bonds and cash increases substantially. Be aware of unsuitable investment allocations.

EXPENSES. We use individual securities in part because we believe in controlling costs at a reasonable level. Mutual funds sold by brokers typically charge a “load” or a commission to purchase the shares. Other financial advisors use “no-load” funds and layer their advisory fee on top of the mutual fund expenses. Still other advisors – particularly those affiliated with insurance companies and brokers – sell variable annuities.

In the case of loaded funds, be aware that you can change funds within a “fund family” without paying another commission. When dealing with advisors and layered fees, it would be prudent to negotiate on behalf of your loved one for a total all-in fee of 1.20% or lower – be aware that layers and layers of fees on expenses can erode portfolio value rapidly.

Annuities often carry among the highest fees of all financial products, and generally include steep penalties for early liquidation. The good news is that there are annuity companies that offer decent annuities with costs that are well below average. Be aware that if you can’t get out of an annuity without steep penalties and taxes, you may be able to use a “1035 Exchange.”

BASIS STEP-UP: When you sell an investment that has appreciated above your original cost, the resulting capital gain is taxable income. There is a special allowance related to investments owned by decedents that allows the tax basis to be “stepped-up” on the date of death. If someone has owned a security that had appreciated substantially since the initial investment, by waiting until after a loved one is deceased to sell it, you will avoid a significant tax burden for the beneficiaries of her trust. Be aware of low cost-basis investments that might receive a step-up in basis.

Armed with these strategies, you’ll be better prepared to manage the financial needs of your loved one.