Q: I want to help my grandkids by setting aside some money for their college educations. Currently, I’ve just opened an investment account in their names. Is there a better way to do this?

A: There is a better way. My suggestion is to open a 529 college savings plan directly with the State of Michigan (go to www.misaves.com).

To start, the money you contribute to a 529 plan might enjoy a state income tax break. The maximum tax benefit is ~$200 for a single person or $400 for a married couple. It’s not huge, but it’s something.

Next, a 529 plan’s investments enjoy some major tax benefits. The income earned in the account is never taxed if the money is used for qualified education expenses. The list of approved is very encompassing. IRS Publication 970 spells them out.

Plus, you won’t lose control of the money in the plan. Most importantly, your grandchildren won’t automatically get the money at age 18. This is in direct contrast to your current setup.

Now, if it turns out that one of your grandchildren isn’t college-bound, you can always change the beneficiary designation to another family member. Of course, you can even take the money back, but know that the earnings portion is subject to tax and there is a 10% penalty on those earnings, too.

Finally, if there is money left over in the 529 plan, and it’s been open for at least 15 years, new rules allow for the money to roll into a Roth IRA for your grandkids. There are many rules around this, but it’s a very interesting feature to keep in mind.

Q: I’m growing tired of sending in my quarterly estimated tax payments. It seems there must be an easier way to get the government their money. Any suggestions?

A: Quarterly estimated tax payments can be a bit of a pain. After all, who likes deadlines? Fortunately, there are some alternatives that might make this easier.

One option is to make your estimated federal tax payments through four automatic, scheduled draws directly from your checking account. This can be set up right on your previous year’s tax filing. Ask your tax preparer about it. However, Michigan tax payments will still need to be made the traditional way.

There is another option for those who are drawing from their retirement accounts, receiving a pension payment or even collecting Social Security. If this describes you, you can have the correct amount of federal and state income taxes withheld directly from these income sources. It takes a little math and a good tax projection, but it’ll eliminate the need for quarterly estimated tax payments.

Q: I’m working on my estate plan. I want to leave money to charity after I pass, but I’m worried about how the money might be spent by them in the future. How can I make sure my donations will be put to good use, even after I’m gone?

A: Given your concerns, you might consider the use of a “testamentary” donor-advised fund (DAF). The word, testamentary, simply means that the DAF is created upon your death, not before.

A donor-advised fund is a tool for your charitable giving where you get to “advise” on where the money should  go in the future. While you no longer have true, legal control over the money you’ve donated, a DAF effectively allows you to choose the charities to support and the timing and amounts of the donations.

Upon your death, you can name other people (let’s say, your kids) to assume your role in advising on future donations. Having them oversee future donations might alleviate your concerns about the future use of the money. The key thing is to explain your wishes and then hope they listened!

Q: We are considering selling one of our homes. We’ve heard there’s a capital gains exclusion, but we’re not exactly sure how it works. How do we qualify for this tax break, and what should we do now to make sure we can use it?

A: To start, the capital gain exclusion is only for your primary residence. Legitimately establishing your primary residence does take some specific steps that might be a bit cumbersome. Frankly, given the size of the tax benefit, it’s purposely designed to be somewhat difficult to use, especially if you are just trying to work the system.

When you sell your primary residence, you are entitled to a capital gains exclusion of up to $250,000 each. As a married couple, this works out to a $500,000 capital gain exclusion. However, there are specific tests that you must pass to use this gain exclusion.

In short, your property must have been your primary residence for two of the past five years. To help you prove it was your primary residence, there are some tell-tale signs that can help support your claim.

Among them, the property’s address should be used on your tax returns, voter registration, financial accounts, utility bills and your car registrations. Also, it would make sense for this property to be taxed as your primary residence, not as a second home, obviously. Finally, consider having some proof that you are actually a part of the community, such as participation with local organizations.

Bottom line, the overall facts and circumstances of your life, routine and general habits should align with the claim that you are, in fact, selling your primary residence.

Q: We have decided to sell our home, but we haven’t done this for a long time. With the National Association of Realtors (NAR) new commission changes, will this change our strategy for setting our listing price?

A: With this spring’s lawsuit settlement, the NAR’s new real estate commission policy just took effect. Understanding its impact is wise, but it honestly might not result in much of a practical change. 

The NAR’s new policy results in two changes in how buyers and sellers deal with their agents. The end result is greater transparency through clearer disclosure.

Under the old system, through the MLS listing system, the buyer’s agent (and, often, not the buyer) would see how much of the commission the seller’s agent was willing to share with them. This behind-the-scenes practice is no longer allowed.

Under the new system, the buyer’s agent now needs to present a written agreement to their client that spells out their commission and must be signed before showing any property to them. Buyers will know what their agent will be doing for them and what they will be paying them for their services.

These are good changes, but beyond greater transparency through clearer disclosure, it might not make much of a difference with the true economics.

Let’s say you list your home for $600,000. Under the old system, you might have paid a 5% commission to your agent. You would receive proceeds of $570,000, after the commission expense. And, your agent would have then turned around and shared part of their $30,000 commission with the buyer’s agent. That was the behind-the-scenes part.

Now, unless an agreement is struck openly between the two agents on commission sharing, the seller and the buyer will each have to pay a commission to their own agent. As the seller, let’s say that commission is 3%. And, let’s say the buyer agent’s commission is 2%. Yes, it’s the same 5% in total, but the buyer and seller are each paying their own part.

So, how will this new commission arrangement affect a deal? Well, obviously the buyer won’t just blindly pay more than $600,000 for your home, with their 2% commission cost added on top. To offset their commission expense, they’ll actually want to negotiate a lower price of $588,235, to be exact. And, if you agree to sell your home for $588,235, then your own agent’s 3% commission will reduce your net sales proceeds to $570,588. As you can see, that net amount is awfully close to the same $570,000 you’d get under the old, less-transparent 5% commission-sharing setup.  

While this new policy change might feel like much ado about nothing, in all practicality, I think the real estate industry will be commensurately more transparent. In my book, that’s always a win.  

Over the first few trading days of August, investors have again been reminded that markets don’t just rise. From Thursday, August 1 through Monday, August 5, stocks have declined about 6%. While this level of decline feels  somewhat “pedestrian”, it has certainly attracted attention.

It’s important to note that the media is always looking for reasons to explain the movements of financial markets. When stocks rise, it’s caused by some recent optimistic factor. When stocks declined, it’s attributed to some downbeat headlines. As humans, we seek explanations for everything.

This time, general recession fears have been pegged as the proximate cause for the market’s recent decline. In part, these fears have been driven by a few items.

The July jobs report was a bit weaker than expected. This report was joined by another negative reading of a closely-watched index of manufacturing activity. And, finally, investors are growing impatient with the Federal Reserve. There is a growing concern that the Fed is already “behind the curve” and has waited too long to cut interest rates to avoid a recession.

Recession worries have been constant since the Fed quickly raised interest rates in the spring of 2022 after their very slow response to the post-Covid rise in inflation. They steadily raised interest for about 18 months. Since August 2023, however, they’ve paused and have vowed to watch how things unfold.

The economy has continued to grow through it all. Yes, the latest job report showed a decline to only about 115,000 new jobs in July. But, the statistical margin of error of the jobs report is wide. Monthly reports should be viewed with some perspective. Over the past year, the US economy has added about 200,000 new jobs per month. Over the past six months, the monthly average is about 190,000. And, over the past three months, the monthly average was about 170,000. Yes, the jobs picture is slowing. But, things certainly don’t appear to be falling off the proverbial cliff.

Now, with inflation readings having steadily and significantly fallen since hitting their peak in late 2021, the Fed is expected to begin cutting rates at their September meeting. And, with the unemployment rate now finally rising after staying stubbornly low in face of substantial interest rate hikes, there is sufficient reason for the Fed to cut rates to help support the economy.

Without sounding like a Pollyanna, my current take on the recent stock market decline is investors are behaving like a person who shoots first and asks questions later. The fact is, as hard as we may try to explain the inexplicable, nobody really knows what causes markets to suddenly rise or decline.

The list of services of a wealth manager is always expanding. The job now goes well beyond the basics of investment management, tax planning, and estate planning. Notably, I’ve now committed to conducting online financial security audits, starting with my most vulnerable clients.

These audits cover four key elements: (1) Managing Passwords, (2) Identifying Scams, (3) Protecting Your Credit, and (4) Tapping Trusted Contacts. While nothing is fail-safe, the layering of these four elements works to lower the risks of falling victim to online fraud.

Password Management: There are many different ways to manage your passwords, ranging from using a simple notebook to using a password management software. Regardless of your chosen method, there are three principles that need to be followed. First, you should use different passwords for your key finance-related logins. Second, you should change your passwords regularly. Third, you should always use two-factor authentication for all your financial accounts and your primary shopping websites.

Scam Identification: Criminals are always looking for new ways to separate you from your money. Their primary goal is to get you to divulge your sensitive personally-identifiable financial information, such as your Social Security number, your credit card and bank account information, or your login credentials. In the end, your awareness and constant vigilance are the only realistic methods to avoid falling for a suspicious email, text, call or mailing. Given this, repeated reminders of the types of scams out there are the only defense. As silly and as simple as it may seem, you should consider having a list of common scams near any device you use to access your most sensitive, online accounts.

Protecting Your Credit: As I wrote about in a recent column, one way to limit the damage after you inadvertently divulge some of your sensitive personally-identifiable information is to freeze your credit reports. This process is a little bit time-consuming, but it can be accomplished in less than an hour with help. Freezing your credit file can help stop any attempts to open new loans in your name.

Trusted Contacts: Perhaps most important, you should identify key people in your life willing to act as a second set of eyes for you. Whenever you are in doubt, just pick up the phone and ask for their take on what to do (or not do!) Your trusted contacts should be included on your list posted next to your computer or devices. Reaching out to your trust contact just might provide you with enough pause to save you a lot of pain and worry.

Jason P. Tank, CFA, CFP®, EA is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com