Market Musings Blog

How to Choose a Personal Representative

We recently worked with a client who asked us how she should choose her personal representative. The PR carries out instructions in a will. (An executor is for all intents and purposes identical to a PR.) We realized that this rather common question was worthy of an entry on these pages.

A PR should be young enough to last beyond your lifetime, for one thing. If you want to name a spouse or relative of similar age, go ahead, but do name an alternate.

The PR can be a beneficiary of your will – there’s no law against that. But your PR should be able to get along with your other beneficiaries, and she should be responsible enough to make arrangements that may be needed, such as running an estate sale or hiring it done, investigating your safe deposit box, and so forth. The PR should be trustworthy – in fact in some states PRs and executors must post a bond in order to do the job.

For legal reasons, you cannot name anyone with a felony conviction or a foreign person. It’s better if your PR lives at least within a reasonable distance of you, but that’s not necessary.

Clients often name a son, daughter or in-law to this job, but this can cause strife among siblings. A close personal friend is an alternative; some attorneys (though fewer every day) and some accountants (ditto) will act; or you can hire a professional PR.

Acting as PR, depending on the condition of your estate, can be like having a second job for a while! The PR deserves compensation and more than likely a family member will charge less than a professional. Still, a professional brings efficiency and emotional distance to the equation, which might be desirable.

Keeping in mind the nature of the job, you can do your part by working to streamline your estate – have a will, take care to leave specific instructions for personal items, be as detailed as possible. If appropriate, make sure to discuss the job ahead of time with whomever you name.

Finally, if in doubt, get advice from your attorney. He’s been around this block more than once!

Oregon 529 Tax Deduction is Disappearing in 2020

The Oregon State legislature has decided to limit the tax benefits of contributing to an Oregon 529 College Savings Plan. The new rules go into effect in 2020:

  1. Instead of a tax deduction, which counts against your income, there will be a minimal tax CREDIT. A tax credit directly reduces your tax liability, on a 1 for 1 basis. A deduction, on the other hand, is most valuable if your income is high.
  2. The current deduction for a couple filing jointly is $4865, but this will be reduced to a $300 tax credit in 2020. Even then, if your income is high, you will not qualify to take the entire credit.
  3. Although this is bad news for those who want to save aggressively for one of the most expensive endeavors we ever undertake – college – there is an opportunity to accelerate your saving – IF YOU CONTRIBUTE BY DECEMBER 31, 2019. By contributing about $25,000 now, you can take the full $4865 tax deduction in this year and each of the next four years, with some restrictions. It is possible that you will also be able to take the tax credit in each of the next four years.
  4. Amounts are less for single filers; deductions and credits are totals, so you cannot take the full deduction multiple times for multiple accounts.
  5. Information on the plan changes is here:

Oregon’s plan has become less generous incrementally. When the Tax Act loosened rules for using the 529, allowing the funds to be tapped for grade school and other tuition, this state did not follow. Oregon still restricts the use of the 529 to post secondary education. Several states allow in-state tax deductions for contributions to out of state plans – not Oregon. Our plan has also been through an unusual number of manager changes. The 529 still gives you the benefit of tax deferred savings for college, but it does seem to us that limiting the benefits of saving for college is not a wise direction.

Talk to your accountant posthaste if you intend to pursue the carry forward idea; there are nuances to be aware of.



The Congressional Budget Office is as Bad as Anyone at Forecasting

Since it is political “silly season”, and every politician under the sun is broadcasting plans for programs designed to catch the voter’s eye, we thought it was worth looking at how accurate cost forecasts of these programs are. Large projects such as TARP or the Affordable Care Act represent significant outlays by taxpayers, affecting government budgets for a decade or more. We wanted to know whether what we hear about their cost ahead of time is right, or not.

The majority of the work for this project was performed by our excellent intern, Jacob Godshalk, this last summer. The task we set to Jacob was to research the accuracy of the government’s own forecasting arm, the Congressional Budget Office. Jacob found that the CBO is adequately accurate when the forecast time frame was short. For instance, for revenue projections for the next one to two years, the CBO tended to forecast about 1% to 2% too high versus reality. So tax revenues are somewhat chronically falling short of forecasts, but not by much. Of course, over time, even 1% compounds to real money.

Over more intermediate time frames – five or six years – accuracy decayed. The CBO was generally five or six percent too high on revenue projections, though it managed to precisely forecast the cost of the ACA by 2015 in 2010.

Still, we were most curious about the huge numbers we sometimes hear out of the CBO for larger programs with muti-decade impacts. For instance, for the ACA, the longer term forecast was abysmal. The ACA cost over $30 billion MORE than the CBO had estimated, by the time 2016 rolled around, a forecasting error of 23%.

In the 1990’s, many Savings & Loan companies received a bailout. The CBO forecast that the bailouts would cost $120 billion, give or take a few billion. Instead, the total cost was $480 billion. More recently, TARP was expected to cost about $430 billion. Instead, it cost the government nothing; in fact, a net profit of over $15 billion (after program costs) flowed to Treasury. 

Furthermore, the CBO is no better than anyone else at predicting a recession. Its forecast for government revenue in 2009, a recession year, was a hefty overestimation of 25%!

So next time you read those gasping articles containing CBO cost projections, remember that their numbers are not facts. Instead, they are guesses, perhaps worse guesses than you yourself might make, and most often, guesses that put the taxpayer at a disadvantage. Chronically overestimating revenue costs us all in the long run, and underestimating program costs is even more deleterious.

Dividends 101

Quick: what is the difference between income and principal? While most people know vaguely that principal has to do with what you originally deposited in an account, and income is what is paid on that principal, these definitions can get pretty muddy over time as values in your account change.

Let’s say you deposit $100,000 in an investment account, and you buy ten stocks. All of them rise 10%. You now have $110,000. Is that extra $10,000 income, or principal?

It’s principal. So although you can think of principal as what you originally deposited, that value changes over time. In tax terms, the $10,000 is capital gain, but it’s still part of your principal.

Now let’s say that all ten stocks pay you $1 in dividends (to keep it simple we’ll assume that no matter how many shares you own, each company’s dividend totals $1). That’s another $10. Is that income, or principal?

It’s income. You can spend that, and still maintain your principal.

Now that we have defined income and principal, let’s delve into where that $1 comes from.

Every public company has a board of directors, and it’s up to that board to decide upon and declare a dividend on the company’s stock. So at a director’s meeting, someone will present the company’s financials, talking about how well operations are going. If things are going particularly well the board may decide it’s time to raise the company’s dividend. So instead of $1, the board may decide to pay $1.10.

Where does the dividend come from? It comes from the company’s cash flow, which it generates from selling goods or services. NOTE! that the payment of the dividend has nothing to do with the company’s SHARE price, only whether its profits are enough to pay the cash out to shareholders. So even if the company’s stock sinks in value, the $1.10 payment will still be made.

Now if a very bad recession hits, dividends may be reduced or eliminated. Sometimes a company runs into trouble even without a recession, and has to decrease its dividend. But for the most part, once the Board declares a dividend at a certain level, it is loathe to decrease it. So most of the time, there’s margin of safety around the dividend, assuring that the company can pay it even if times get lean.

So what does this mean for your portfolio? Well, your $110,000, which is generating $10 in income, could sink to $80,000, but it would still generate $10 in income, provided you own high quality companies. And you can see that growth can come from two places in your portfolio – principal, when stocks go up; and income, when the board of directors increases dividends. That’s why stocks pack such a powerful punch over the long term, despite being occasionally vexing over the short term.

Giving To Charity on the Cheap

Ever wonder how you can make a difference even if you don’t have a lot of extra cash? Here are a few ways we give to charity that don’t require a fat checkbook:

Kiva. Cascade Investment Advisors keeps funds on deposit with Kiva perpetually. We originally sent Kiva $1000, and that was spread among lots of loans. A loan can be made for as little as $25. Most of the loans benefit enterprising folks in South America, Europe, and the Middle East, but Kiva also has a new division making loans in the US. Recipients tend to be very good at repayment, and just a little goes a very long ways when you’re talking about Ecuador or Guatemala. Check it out here:

4Ocean. One of my pet peeves is trash in the oceans, which is reaching outrageous proportions and killing sea life. 4Ocean was started by two guys who went to Bali to surf and saw fishermen coming back with no fish, but lots of plastic, which they then tossed back into the sea. These two started a company that employs fishermen and others to extract the plastic, recycle it, and/or dispose of it responsibly. The results have been impressive. 4Ocean is not a nonprofit, but for as little as $20 you can do your part: If you love animals, this one is brilliant. FreeKibble was started by a grade schooler in Bend, Oregon several years ago. The idea is to answer a couple of trivia questions – one about dogs and one about cats – and whether you are right or not, donates kibble meals to shelter pets. A tie-up with Halo pet food assures the donations, and you can play every day. This one entails absolutely no money out of your pocket! Here is the website:

Happy Giving!