At Flatrock, we’re firm believers that the more you know, the better you’ll be at handling your wealth. Unfortunately, the financial media seem determined to flood your inbox with the latest “shiny object” du jour. Flatrock’s “Newsclips” are your filter, cutting through the nonsense and distilling the headlines into something useful. We hunt down research and insights from off the beaten path—perspectives that actually matter when it comes to building lasting wealth.
This month we look at your interest getting “swept” under someone else’s rug, the need to plan for capital gains if you sell your home, and the sunset of the estate tax.
Financial Advisor: Wall Street Giants Sued In Rising Furor Over Low Cash Sweep Rates
Over the past few months, several class action lawsuits have been filed against major brokerage firms over their cash sweep programs. These programs automatically transfer uninvested cash from client accounts into low-risk, interest-bearing account. Sounds reasonable. Better to earn something, than nothing. But, the problem arises when these sweep accounts are held for a long time. Plaintiffs accuse brokerages of sweeping uninvested cash balances into low-interest accounts, while these firms earn much higher interest rates from banks where the cash is deposited. Clients claim they received minimal interest, sometimes as low as 0.05%, while firms earned significantly higher returns, up to 5% or more.
Flatrock’s Take: We surveyed seven accounts we recently onboarded from full-service brokers to see the allocations and yields for sweep accounts. The balances ranged from 0.3% (good) to 9.3% (not-so-good) of account value with the yields ranging from 1.27% (bad) to 0.01% (why bother.) The median was 0.30%. These sweep yields are paltry relative to a simple money market fund or Treasury Bill ETF. The delta over the past year could easily be north of 5%.
This is an implicit and hidden fee. How big is this fee? A 10% allocation to a sweep fund paying annual interest at 0.30% when money market rates are 5.00% is effectively paying an annual implicit advisor fee of 0.47% on their total assets. This is revenue to the advisor even if they are not directly debiting the account!
Kiplinger Personal Finance: More Homeowners Stuck With Capital Gains Tax Bills: What to Know
Rising home values are pushing more homeowners beyond the capital gains tax exclusion limits of $250,000 for singles and $500,000 for couples. This is especially common in states with high property values, such as California and New York. Homeowners can reduce their taxable gains by documenting home improvements and selling expenses, potentially avoiding large tax bills.
Flatrock’s Take: Many Flatrock clients are in their early 50s, a time when one begins to think about downsizing a primary residence and/or moving out-of-state. But, this could come with an unexpectedly big tax bill. As an example, a $3 million home purchased 10-15 years ago could be worth more $6-$7 million today. A married couple would be looking at a gain of roughly $2.5 million that would equate to a tax bill of over $930,000!
In addition to the tips in the article, Flatrock suggests clients looking to sell their primary residence in the next 3-10 years begin finding ways to use tax loss harvesting to offset these gains. This strategy can be implemented across stocks, bonds and funds. Importantly, it can be implemented even when clients have highly appreciated securities. The key is to start the process now! Use time and market volatility to potentially lower your tax bill.
Cal CPA: Estate Planning – Act Now Before Its Too Late
Time is running out. Potential changes in U.S. tax laws after 2025 could reduce the current gift and estate tax exemptions and raise tax rates. The article highlights some strategies like Dynasty Trusts, Spousal Lifetime Access Trusts (SLATs), and sales to Intentionally Defective Grantor Trusts (IDGTs) as effective tools for transferring wealth to future generations tax-efficiently. Families should act before the tax law changes to maximize these opportunities.
Flatrock’s Take: We are already hearing from our estate planning attorney network that the rush is on. The first step is to systematically and holistically capture your household’s “Total Wealth” and the key priorities it will fund. In institutional portfolios, we call this asset-liability planning. The key is to not overlook any aspect of your wealth! When done correctly, the analysis captures an “illustrative value of future wealth transfer” to get clients to focus on this now and spur conversations with estate planning attorneys. Many clients are surprised at just how large their taxable estate is likely to be in the decades ahead.
With this information, we can effectively work with your estate and tax advisors to develop and deploy impactful strategies. Indeed, many clients are surprised at how little of their own time is needed to accomplish meaningful impact. We’re fond of saying, “Preparation and structure over prediction.” And the time to prepare is now.
If any of these topics spark a conversation, we’d be delighted to chat. Markets fluctuate. Priorities change. We’re here to help.
Disclosures
Flatrock Wealth Partners LLC (“Flatrock”) is a registered investment advisor.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
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