Archives for December 2021

Investing Blog Roundup: Happy New Year

I hope that 2021 has treated you well.

As for me, it was on the whole a good year, working with individual clients again for the first time in many years, enjoying a number of climbing adventures with friends, and sincerely appreciating the ability to safely spend more time with friends and family, relative to 2020.

As always, thank you for reading, and I wish you the best for 2022!

Tax Returns Necessary After Somebody’s Death

A reader writes in, asking:

“A family member appears to be in his final days. I have not seen his will, but I have been told that I am named as executor. I have never been an executor before, so I am doing some research on what my responsibilities will be. Could you perhaps discuss what tax filings will be necessary?”

Firstly, one thing you should know if you choose to accept the role of executor is that you are allowed to hire assistance (e.g., an attorney to guide you through the process and/or a tax professional to prepare the necessary returns).

And as far as basic tax information, IRS Publication 559: Survivors, Executors, and Administrators will be very helpful.

Background Information (Basic Definitions)

What exactly is an estate? An estate is a legal entity that comes into being when a person dies. The purpose of the estate is to gather the decedent’s assets, pay the decedent’s debts and expenses, and distribute the remaining assets. The estate exists until all of the assets have been distributed to heirs or other beneficiaries.

The executor is the person named in the will to administer the estate. (If no will exists, if no executor is named in the will, or if the named party refuses to serve as executor, the court will appoint an administrator to perform the same functions.)

Form 1040 (Final Individual Tax Return)

The executor must file the final income tax return for the decedent for the year of death as well as any returns from prior years that have not yet been filed. (For example, if you die in February of a given year without yet having filed your return for the prior year, your executor will have to file your return for that prior year as well as the return for the year of death.)

The final tax return is due on the same date it would have been due if the death had not occurred (i.e., typically April 15 of the following year).

For the final return and any returns for prior years not yet filed, the executor may choose to file a joint return with the decedent’s surviving spouse, if applicable.

Form 1041 (Income Tax Return for the Estate)

The executor also must file an income tax return (Form 1041) for the estate for each year that the estate remains open. Broadly speaking, the estate has to pay tax each year on any income it earns that is not distributed to beneficiaries. Form 1041 is where all such income and distributions are reported and where the resulting income tax is calculated.

For calendar year estates, Form 1041 for each year is due April 15 of the following year.

Form 706 (Estate Tax Return)

Form 706 is the estate tax return. That is, it’s the return relating to the federal estate tax (filed once), whereas Form 1041 discussed above is the income tax return for the estate (filed every year until the estate is closed).

Form 706 is also used to report and calculate the tax on generation-skipping transfers.

Form 706 generally only has to be filed if one of two things is true:

The gross estate, plus taxable gifts made during the person’s lifetime (i.e., gifts beyond the annual gift tax exclusion amount) exceed the applicable threshold ($12,060,000 for 2022), or
The executor elects to transfer the deceased spousal unused exclusion amount to the surviving spouse.

If Form 706 must be filed, the executor must file by 9 months from the date of death, with a 6-month extension possible.

State Returns

In addition to the above, there will generally be forms to file at the state level as well (e.g., income tax return for the decedent, income tax return for the estate, and potentially an estate tax return if the state has an estate tax).

Are you (or a loved one) a surviving spouse?

After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

See it on Amazon.

Topics Covered in the Book:

The estate administration process
Responsibilities as personal representative (executor)
Social Security planning
Handling inherited retirement accounts
Reassessing your own finances
Finding professional assistance
Click here to see the full list.

December 20, 2021

Investing Blog Roundup: Advice-Only Financial Planning

A 2020 Kitces Research survey found that roughly 70% of advisors charge based on assets under management. For many people — especially people with a history of taking a DIY approach to personal finance — that’s a deal breaker. Despite recognizing the value of getting advice from a professional at various points in time, they’re uninterested in paying an ongoing fee.

The result: a growing sub-field of “advice-only” financial planning.

Envisioning an Advice-Only Planning Model from Cody Garrett

10 Years with a One-Fund Portfolio

Roughly 10 years ago (December 2011), we switched our retirement savings portfolio from a combination of individual index funds to a single fund: Vanguard LifeStrategy Growth.

I wrote a couple of articles about it at the time:

And I gave an update about 18 months later:

Are We Still Using the LifeStrategy Growth Fund?

I haven’t written too much about it since then, but people still ask regularly: are we still using the LifeStrategy fund? Are we still happy with it?

Yes, we’re still using it. Yes, we’re still happy with it.

I like it because it’s easy to understand. It owns “total market” funds for both stocks and bonds, US and international. And that’s it.

I like it because it’s reasonably low-cost (expense ratio 0.14%, as of this writing). Using individual ETFs or index funds would be slightly cheaper, but I am willing to pay the extra cost for the convenience.

I like it because it’s hands-off. I never have to rebalance. It makes it easy to ignore what the market is doing from one day to the next, which is the whole idea of the Oblivious Investor blog to begin with. (That said, if you use an “all-in-one” fund, you do still have to pay some attention, at least occasionally, because the fund company can make changes to the underlying allocation. And you want to know about such in order to check whether or not the fund is still a good fit for you.)

As an all-in-one fund, it is not particularly tax-efficient. But for our household, that doesn’t matter, because basically all of our savings are in retirement accounts.

It is not, frankly, the exact asset allocation that I would select if I were creating a DIY portfolio of individual index funds/ETFs. (I would probably exclude international bonds, I might use just Treasury bonds rather than a US “total bond” fund, and I would probably use a higher international stock allocation.)

But as I’ve written before, I’m really not that optimistic about the value to be gained from various modest changes to asset allocation. For any given investor, there’s an unlimited number of asset allocations that would be “good enough.”

We treat the fund roughly like a savings account — not in the sense that it’s low risk, because with an 80%-stock allocation it most definitely is not — but in the sense that it occupies a similar level of mental space (i.e., almost none). We just dump money into it, and we’re confident that it will grow over time.

An all-in-one fund is about as boring as it gets, which is what I want. And it also checks the boxes of being diversified and reasonably low-cost. For us, that’s (still) a good fit.

Full disclosure: our portfolio is not strictly one-fund anymore, because the 401(k) at my wife’s place of employment uses non-Vanguard funds. But she uses a target-date fund in that 401(k) for all the same reasons discussed above: it’s simple, it’s diversified, it’s low-cost, and it’s low-maintenance.

December 6, 2021