investment

It can help individuals pass assets to their heirs while reducing taxes

Reviewed by Anthony Battle
Fact checked by Amanda Jackson

Somewhere between a corporation and a partnership lies the limited liability company (LLC). This hybrid legal entity is beneficial for small-business owners and a powerful tool for estate planning.

For those who want to transfer assets to children, grandchildren, or other family members and are concerned about gift taxes or the burden of estate taxes your beneficiaries will owe, an LLC can help. Individuals can control and protect assets during their lifetime, keep assets in the family, and reduce taxes.

Key Takeaways

• A limited liability company (LLC) is used to pass assets to loved ones while avoiding or minimizing estate and gift taxes.
• A family LLC allows heirs to become shareholders who benefit from the assets held by the LLC.
• The tax benefit of the LLC lies in the fact that the value of the shares transferred to heirs can be discounted steeply, often up to 40% of their market value.

What Is an LLC?

An LLC is a legal entity recognized in all 50 states, although each state has regulations governing the formation, administration, and taxation of LLCs. Like a corporation, LLC owners are protected from personal liability in case of debt, lawsuit, or other claims, protecting personal property such as a home, automobile, personal bank account, or investment.

Unlike a corporation, LLC members can manage the LLC however they like and are subject to fewer state regulations and formalities. As a partnership, members of an LLC report the business’s profits and losses on their tax returns, instead of the LLC being taxed as a business entity.

The LLC formation process is simple and individuals can use an LLC filing service.

Estate Planning With an LLC

Parents who establish a family LLC with their children maintain control over assets, reduce the estate taxes children pay on their inheritance, and distribute that inheritance to children during a parent’s lifetime, without being hit as hard by gift taxes. The federal lifetime gift and estate tax exemption is $13.61 million per person and $27.22 million per married couple in 2024.

A gift tax applies after $18,000 in 2024 if the giver is unmarried. Married couples can jointly give $36,000. This total resets annually, and the giver pays the taxes rather than the receiver. This limit applies per recipient, so giving $18,000 to each child and various grandchildren would not incur gift taxes.

Family LLCs

In a family LLC, parents maintain management of the LLC, with children or grandchildren holding shares in the LLC’s assets, yet not having management or voting rights. This allows the parents to buy, sell, trade, or distribute the LLC’s assets. Other members are restricted in their ability to sell their LLC shares, withdraw from the company, or transfer their membership in the company.

Parents maintain control over the assets and can protect everyone from financial decisions made by younger members. Gifts of shares to younger members will incur gift tax, but with significant tax benefits that allow parents to give more and lower the value of their estate.

Once a family LLC is established according to the state’s legal process, parents can begin transferring assets. They decide how to translate the market value of those assets into LLC units of value, similar to stock in a corporation. Parents can then transfer ownership of LLC units to children or grandchildren.

Tax Benefits

The discount on the value of units transferred to non-managing members of an LLC is based on the fact that LLC units without management rights are less marketable. For those who manage the LLC, with children as non-managing members, the units transferred to them can be discounted steeply, often up to 40% of their market value.

Offspring can receive an advance on their inheritance, but at a lower tax burden than they otherwise would have had to pay on their income taxes, and the overall value of a parent’s estate is reduced, resulting in an eventual lower estate tax when they pass away. The ability to discount the value of units transferred to children also allows parents to give them gifts of discounted LLC units, thus going beyond the gift limit without gift tax.

For example, to gift one child non-management shares of LLC units valued at $1,000 each, parents can apply a 40% discount to the value (down to $600). Instead of transferring 16 shares before paying a gift tax, parents can transfer 26 shares. Parents can give significant gifts without gift taxes while reducing the value of their estate and lowering the eventual estate tax their heirs face.

Assets Allowed in an LLC

• Cash: Parents can transfer money from their personal bank accounts into the LLC and distribute it among the members.
• Property: Parents can transfer the title to land and structures built on that land into their LLC after first checking with any applicable mortgage holders.
• Personal Possessions: Parents can transfer ownership of automobiles, stocks, precious metals, artwork, or other significant belongings into their LLC.

How Does an LLC Pass at Death?

When the owner of an LLC passes away, some states declare that the LLC must dissolve unless a specific plan of succession has been made. However, dissolution can be avoided by providing for a transfer to another individual upon death detailed in the operating agreement, creating a joint tenancy membership, creating a revocable trust to hold the LLC membership, or probating the LLC through court to determine the succession plan.

What Are Some of the Downsides of an LLC?

Compared to a sole proprietorship, LLCs are more costly to create and maintain. Depending on the state, an LLC typically requires a formation fee and various ongoing fees. Sole proprietorships do not typically require registration or associated costs.

Is the Owner of an LLC Liable for the LLC’s Debts?

No, the owner of an LLC is not liable for the debts of the company, which is one of the key benefits of an LLC. An LLC provides protection to the owner from creditors in the event that the company defaults, enters bankruptcy, or otherwise cannot make its obligations. Creditors are not allowed to go for the owner’s own personal assets.

The Bottom Line

A family-owned LLC is a powerful tool for managing assets and passing them to children. Parents can maintain control over their estate by assigning themselves as the manager of the LLC while providing significant tax benefits to both themselves and their children. Because estate planning is very complex, and the regulations governing LLCs vary from state to state, individuals should check with a financial advisor before formalizing their LLC plan.

Reviewed by Robert C. Kelly
Fact checked by Yarilet Perez

The income approach measures a country’s gross domestic product (GDP) based on the accounting principle that all expenditures should equal the total income generated by producing the economy’s goods and services.

The income approach assumes that there are four major factors of production in an economy and that all revenues must go to one of these sources. Add together all of the sources of income over a period and make adjustments for taxes, depreciation, and foreign-factor payments.

Key Takeaways

• The expenditure approach and the production approach are two alternate ways to measure GDP.
• GDP provides a broad snapshot of a nation’s economy.
• The national income and product accounts (NIPA) form the basis for measuring GDP, allowing policymakers to analyze the impact of variables like monetary policy and tax plans.

Measuring GDP

GDP measures the total monetary value of all goods and services produced within a country over a set timeframe. GDP is usually measured over a year, but can be calculated over any period. There are various ways to calculate GDP, each distinguished by its starting point:

• Income approach: Starts with the income earned from producing goods and services.
• Production approach: Sums the “value-added” at each production stage, defined as total sales less the value of the inputs into the production process. 
• Expenditures approach: Begins with the money spent on goods and services.

Income Approach Formula

$begin{aligned}&text{GDP}=text{Total National Income}\&qquadquad+text{Sales Taxes}+text{Depreciation}\&qquadquad+text{Net Foreign Factor Income}\&textbf{where:}\&text{Total National Income}=text{Sum of all}\&quadtext{wages, rent, interest, and profits}\&text{Sales Taxes}=text{Consumer taxes}\&quadtext{imposed by the government}\&quadtext{on the sales of goods and}\&quadtext{services}\&text{Depreciation}=text{Cost allocated to a}\&quadtext{tangible asset over its useful life}\&text{Net Foreign Factor Income}!=!text{Difference}\&quadtext{between the total income that a}\&quadtext{country’s citizens and companies}\&quadtext{generate in foreign countries,}\&quadtext{versus the total income foreign}\&quadtext{citizens and companies generate}\&quadtext{in the domestic country}end{aligned}$​GDP=Total National Income+Sales Taxes+Depreciation+Net Foreign Factor Incomewhere:Total National Income=Sum of allwages, rent, interest, and profitsSales Taxes=Consumer taxesimposed by the governmenton the sales of goods andservicesDepreciation=Cost allocated to atangible asset over its useful lifeNet Foreign Factor Income=Differencebetween the total income that acountry’s citizens and companiesgenerate in foreign countries,versus the total income foreigncitizens and companies generatein the domestic country​

Note

Income earned includes wages, rents, interest, and profits.

Alternate Calculation

Total national income is equal to the sum of all wages plus rents plus interest, and profits. It’s possible to express the income approach formula for GDP as follows:

$begin{aligned} &text{TNI} = text{Sales Taxes} + text{Depreciation} + text{NFFI} \ &textbf{where:} \ &text{TNI} = text{Total national income} \ &text{NFFI} = text{Net foreign factor income} \ end{aligned}$​TNI=Sales Taxes+Depreciation+NFFIwhere:TNI=Total national incomeNFFI=Net foreign factor income​

Why GDP Is Important

GDP provides information that policymakers and central banks can use to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon.

The national income and product accounts (NIPA) form the basis for measuring GDP, allowing policymakers, economists, and businesses to analyze the impact of economic variables on both the overall economy and specific sectors of the economy. These variables can include:

• Fiscal and monetary policy
• Economic shocks, such as a spike in oil prices
• Tax and spending plans

Important

In the United States, GDP is computed in a monthly report by the Bureau of Economic Analysis, based on data collected by several government agencies on wages, tax receipts, and retail prices. The GDP for the fourth quarter of 2024 showed a real GDP growth of 2.4%.

Economic Cycle and GDP

When the economy is booming, GDP rises, and inflationary pressures can build up rapidly as labor and productive capacity near full utilization. This leads a central bank to initiate a tighter monetary policy to cool down the overheating economy and quell inflation.

As interest rates rise, companies cut costs, and the economy slows down. To break the cycle, the central bank must loosen monetary policy to stimulate economic growth and employment.

Which Approach to Measuring GDP Is Better?

The income approach and the expenditures approach are useful ways to calculate and measure GDP, though the expenditures approach is more commonly used.

Is a High GDP Good?

A high GDP is generally good for a country because it indicates a high degree of economic activity and material well-being. However, if a country has a high overall GDP but a low per-capita GDP, this usually indicates a high degree of income inequality, which can be dangerous for a country’s long-term economic growth or stability.

Why Is Real GDP a Better Measure Than Nominal GDP?

It is best to calculate GDP on a real basis, rather than a nominal basis. Real GDP accounts for inflation and provides a measurement that allows different GDP values to be compared over time.

The Bottom Line

Gross domestic product (GDP) provides a broad picture of a country’s economic health and is used by policymakers and economists to assess the impact of monetary policy, global trends, and other economic changes. The income approach to calculating GDP states that all expenditures should equal the total income generated by all goods and services within the economy.

Fact checked by Ariel Courage
Reviewed by Chip Stapleton

Federal and state governments have a myriad of agencies in place that regulate and oversee financial markets and companies. These agencies each have a specific range of duties and responsibilities that enable them to act independently of each other while they work to accomplish similar objectives.

Although opinions vary on the efficiency, effectiveness, and even the need for some of these agencies, they were each designed with specific goals and will most likely be around for some time. With that in mind, the following article is a review of many of the regulatory bodies active in the U.S. financial sector.

Key Takeaways

• Regulatory bodies are established by governments or other organizations to oversee the functioning and fairness of financial markets and the firms that engage in financial activity.
• The goal of regulation is to prevent and investigate fraud, keep markets efficient and transparent, and make sure customers and clients are treated fairly and honestly.
• Several different regulatory bodies exist from the Federal Reserve Board which oversees the commercial banking sector to FINRA and the SEC which monitor brokers and stock exchanges.

The Federal Reserve Board

The Federal Reserve Board (FRB) is one of the most recognized of all the regulatory bodies. As such, the “Fed” often gets blamed for economic downfalls or heralded for stimulating the economy. It is responsible for influencing money, liquidity, and overall credit conditions. Its main tool for implementing monetary policy is its open market operations, which control the purchase and sale of U.S. Treasury securities and federal agency securities. Purchases and sales can change the number of reserves or influence the federal funds rate—the interest rate at which depository institutions lend balances to other depository institutions overnight. The Board also supervises and regulates the banking system to provide overall stability to the financial system. The Federal Open Market Committee (FOMC) determines the Fed’s actions.

One of the key regulatory roles of the FRB is to oversee the commercial banking sector in the United States. Most national banks must be members of the Federal Reserve System; however, they are regulated by the Office of the Comptroller of the Currency (OCC). The Federal Reserve supervises and regulates many large banking institutions because it is the federal regulator for bank holding companies (BHCs).

Office of the Comptroller of the Currency

One of the oldest federal agencies, the Office of the Comptroller of the Currency (OCC) was established in 1863 by the National Currency Act. Its main purpose is to supervise, regulate, and provide charters to banks operating in the U.S. to ensure the soundness of the overall banking system. This supervision enables banks to compete and provide efficient banking and financial services.

The OCC is an independent bureau within the Department of Treasury. Its mission statement verifies it is to “ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.” 

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) was created by the Glass-Steagall Act of 1933 to provide insurance on deposits to guarantee the safety of funds kept by depositors at banks. Its mandate is to protect up to $250,000 per depositor. The catalyst for creating the FDIC was the run on banks during the Great Depression of the 1920s.

Checking accounts, savings accounts, CDs, and money market accounts are generally 100% covered by the FDIC. Coverage extends to individual retirement accounts (IRAs), but only the parts that fit the type of accounts listed previously. Joint accounts, revocable and irrevocable trust accounts, and employee benefit plans are covered, as are corporate, partnership, and unincorporated association accounts.

FDIC insurance does not cover products such as mutual funds, annuities, life insurance policies, stocks, or bonds. The contents of safe-deposit boxes are also not included in FDIC coverage. Cashier’s checks and money orders issued by the failed bank remain fully covered by the FDIC.

Office of Thrift Supervision

The Office of Thrift Supervision (OTS) was established in 1989 by the Department of Treasury through the Financial Institutions Reform, Recovery and Enforcement Act of 1989. It is funded solely by the institutions it regulates. The OTS was similar to the OCC except that it regulated federal savings associations, also known as thrifts or savings and loans.

In 2011, the OTS was merged with other agencies including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors, and the Consumer Financial Protection Bureau (CFPB).

Commodity Futures Trading Commission

The Commodity Futures Trading Commission (CFTC) was created in 1974 as an independent authority to regulate commodity futures and options and other related derivatives markets and to provide for competitive and efficient market trading. It also seeks to protect participants from market manipulation, investigates abusive trading practices and fraud, and maintains fluid processes for clearing.

The CFTC has evolved since 1974 and in 2000, the Commodity Futures Modernization Act of 2000 was passed. This changed the landscape of the agency by creating a joint process with the Securities and Exchange Commission (SEC) to regulate single-stock futures.

Financial Industry Regulatory Authority

The Financial Industry Regulatory Authority (FINRA) was created in 2007 from its predecessor, the National Association of Securities Dealers (NASD). FINRA is considered a self-regulatory organization (SRO) and was originally created as an outcome of the Securities Exchange Act of 1934.

FINRA oversees all firms that are in the securities business with the public. It is also responsible for training financial services professionals, licensing and testing agents, and overseeing the mediation and arbitration processes for disputes between customers and brokers.

State Bank Regulators

State bank regulators operate similarly to the OCC, but at the state level for state-chartered banks. Their oversight works in conjunction with the Federal Reserve and the FDIC.

For example, in New York State, the Department of Financial Services (DFS) supervises and regulates the activities of approximately 1,500 N.Y.-domiciled banking and other financial institutions with assets totaling more than $2.6 trillion and more than 1,800 insurance companies with assets of more than $4.7 trillion. They include more than 130 life insurance companies, 1,168 property/casualty insurance companies, about 100 health insurers and managed care organizations, and more than 375,000 individual insurance licensees, 122 state-chartered banks, 80 foreign branches, 10 foreign agencies, 17 credit unions, 13 credit rating agencies, nearly 400 licensed financial services companies, and more than 9,455 mortgage loan originators and servicers.

State Insurance Regulators

State regulators monitor, review and oversee how the insurance industry conducts business in their states. Their duties include protecting consumers, conducting criminal investigations and enforcing legal actions. They also provide licensing and authority certificates, which require applicants to submit details of their operations. (For a directory of specific state agencies visit www.insuranceusa.com.)

Important

In New York, the DFS regulates both financial firms and insurers, while in other states separate regulators monitor each industry separately.

State Securities Regulators

These agencies augment FINRA and the SEC for matters associated with regulation in the state’s securities business. They provide registrations for investment advisors who are not required to register with the SEC and enforce legal actions with those advisors.

Securities and Exchange Commission (SEC)

The SEC acts independently of the U.S. government and was established by the Securities Exchange Act of 1934. One of the most comprehensive and powerful agencies, the SEC enforces the federal securities laws and regulates the majority of the securities industry. Its regulatory coverage includes the U.S. stock exchanges, options markets, and options exchanges as well as all other electronic exchanges and other electronic securities markets. It also regulates investment advisors who are not covered by the state regulatory agencies.

The SEC consists of six divisions and 24 offices. Their goals are to interpret and take enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation among different levels of government. The six divisions and their respective roles are:

• Division of Corporate Finance: Ensures investors are provided with material information (that is, information relevant to a company’s financial prospects or stock price) in order to make informed investment decisions.
• Division of Enforcement: In charge of enforcing SEC regulations by investigating cases and prosecuting civil suits and administrative proceedings.
• Division of Investment Management: Regulates investment companies, variable insurance products, and federally registered investment advisors.
• Division of Economic and Risk Analysis: Integrates economics and data analytics into the core mission of the SEC.
• Division of Trading and Markets: Establishes and maintains standards for fair, orderly, and efficient markets.
• Division of Examinations: Conducts the SEC’s National Exam Program.

The SEC is allowed to bring only civil actions, either in federal court or before an administrative judge. Criminal cases fall under the jurisdiction of law enforcement agencies within the Department of Justice; however, the SEC often works closely with such agencies to provide evidence and assist with court proceedings.

Why Are Financial Regulators Important?

Financial regulators have many important jobs, including ensuring that markets operate fairly and also helping to prevent fraud. Proper regulation protects investors from scams and other financial improprieties.

Why Are There So Many Financial Regulators?

The world of finance is complicated and there are many things to keep track of and create rules for. Each financial regulatory agency tends to focus on a small segment of the financial world, such as securities trading or banking. That specialization lets regulators focus more closely on their area of expertise and create more effective regulations.

How Do Financial Regulators Punish Rulebreakers?

The punishment for breaking financial regulations varies depending on the nature and severity of the offense. For example, some offenses can lead to fines while others, such as securities fraud or insider trading, can lead to jail time.

The Bottom Line

All of these government agencies seek to regulate and protect those who participate in the respective industries they govern. Their areas of coverage often overlap, but while their policies may vary, federal agencies usually supersede state agencies. However, this does not mean that state agencies wield less power, as their responsibilities and authorities are far-reaching.

Understanding the regulation of the banking, securities, and insurance industries can be confusing. While most people will never deal directly with these agencies, they will affect their lives at some point. This is especially true of the Federal Reserve, which has a strong hand in influencing liquidity, interest rates, and credit markets.

Reviewed by David Kindness
Fact checked by Yarilet Perez

The debt-to-equity (D/E) ratio is a leverage ratio that shows how much a company’s financing comes from debt or equity. A higher debt-to-equity ratio means that more of a company’s financing is from debt versus issuing shares of equity. Banks commonly have slightly elevated D/E ratios because they operate with higher financial leverage. We explore what this means in a little more detail below.

Key Takeaways

• Banks tend to have higher D/E ratios because they have higher financial leverage.
• You can calculate a company’s D/E ratio by dividing its total liabilities by its total shareholder’s equity.
• A D/E ratio of 1.5 or lower is considered desirable for most companies while a ratio over 2 is less desirable.

Calculating the D/E Ratio

The D/E ratio is considered a key financial metric because it indicates potential financial risk. It is calculated as follows:

D/E Ratio = Total Liabilities ÷ Total Shareholders’ Equity

For example, if the total debt of a business is worth $60 million and the total equity is worth $130 million, then the debt-to-equity is 0.46 ($60 million ÷ $130 million). In other words, for every dollar in equity, the firm has 46 cents in leverage.

A ratio of 1 indicates that creditors and investors are balanced when it comes to the company’s assets.

Note

Industries with the highest D/E ratios tend to be those requiring large capital expenditures and infrastructure investment, such as energy production, telecommunications, and utilities.

The D/E Ratio and Risk

A relatively high D/E ratio commonly indicates an aggressive growth strategy because it has taken on debt. For investors, this means potentially increased profits with a correspondingly increased risk of loss. If the extra debt enables the company to increase net profits by an amount greater than the interest cost, then the company should deliver a higher return on equity (ROE) to investors.

Keep in mind that a company with a high D/E ratio and a high ROE is considered more risky and less desirable than a company achieving the same ROE with less debt.

However, if the interest cost of the extra debt does not lead to a significant increase in revenues, the additional debt burden would reduce the company’s profitability. In a worst-case scenario, it could overwhelm the company financially and result in insolvency and eventual bankruptcy.

What D/E Level Is Considered Desirable?

A high D/E ratio is not always detrimental to a company’s profits. If the company can demonstrate sufficient cash flow to service its debt obligations and the leverage increases equity returns, that can be a sign of financial strength.

However, not all high D/E and high ROE companies are so successful. Taking on more debt and increasing the D/E ratio boosts the company’s ROE. Using debt instead of equity means that the equity account is smaller and the ROE is higher. The inflation of the ROE metric by high debt can hide problems within a company. A high ROE alone doesn’t make a company a good investment, which means investors should examine other metrics to determine the company’s health.

Note

Bank of America’s D/E ratio for the first quarter of 2025 was 1.169. This is considered a healthy D/E ratio. In the first quarter of 2010, coming out of the financial crisis, the ratio reached 2.23.

The cost of debt is typically lower than the cost of equity. Therefore, another advantage of increasing the D/E ratio is that a firm’s weighted average cost of capital (WACC), or the average rate that a company is expected to pay its security holders to finance its assets, goes down.

A D/E ratio of 1.5 or lower is considered desirable for most companies while a ratio higher than 2 is considered less favorable. That’s because a higher ratio means a company is financing more of its operations with debt. D/E ratios vary significantly between industries, so investors should compare the ratios of similar companies in the same industry.

In the banking industry, a relatively high D/E ratio is acceptable in some situations because the core of the business revolves around borrowing and lending. Although risky, financial leverage is also tied to banking profits—lending money at a higher rate means earning more than the cost of borrowing. Banks with a lot of fixed assets, such as those with a large branch network, also tend to carry slightly elevated amounts of debt in a healthy way.

What Does a Negative D/E Ratio Mean?

A negative D/E ratio means that a company’s liabilities exceed its assets, resulting in negative shareholder equity. Put simply, it doesn’t have enough money to cover its financial obligations. Analysts and investors should be cautious as this could mean that the company is under financial distress and could be close to bankruptcy.

What Financial Ratios Should I Use to Analyze Banks?

Some of the most common financial ratios you can use to analyze banks include:

• Efficiency ratio
• Profitability ratios, such as return on assets, return on equity, net interest margin)
• Liquidity ratios like the loan-to-deposit ratio
• Capital adequacy ratio

How Safe Is the Banking Industry as an Investment Option?

The banking industry is considered a relatively safe investment. Banks are heavily regulated and can sustain economic and market volatility. They pay dividends, providing investors with a steady stream of income. Adding banks to your portfolio can also diversify your holdings, so any dips in other industries can be offset by gains in the financial sector.

The Bottom Line

A bank’s D/E ratio measures its financial leverage, comparing its liabilities to its shareholders’ equity. In most cases, a ratio of 1.5 or lower is desirable while a higher ratio can be problematic because it means a company is financing more of its operations with debt. Banks, though, can operate with a higher ratio

The race to establish “Y’all Street” as a legitimate competitor to the duopoly of the New York Stock Exchange (NYSE) and Nasdaq on Wall Street has kicked into high gear, with billions in potential listing fees at stake. NYSE Texas opened in Dallas in March 2025, securing Trump Media and Technology Group Corp. (DJT) as its first listing, while the Texas Stock Exchange (TXSE) has secured $161 million in backing from giants like BlackRock, Inc. (BLK) for a 2026 launch.

“Texas’s $2.7 trillion economy is very large (second in the U.S., eighth in the world) and rapidly-growing (fastest-growing large state in the U.S.),” Bülent Temel, professor of economics at the University of Texas at San Antonio, noted to Investopedia. “It means more and more companies are growing to reach the scale to go public to accelerate their growth. Getting listed and traded in a local Texas exchange would likely be these companies’ first choice as it is good PR for them in a state’s common culture that rewards localness.”

Key Takeaways

• The Texas Stock Exchange (TXSE) is the most significant challenge to the NYSE/Nasdaq duopoly in decades, with unprecedented financial backing and institutional support.
• NYSE Texas launched in late March 2025, giving it the first-mover advantage, while TXSE plans to begin trading in 2026.

The Rise of “Y’all Street”

Regional exchanges once operated across America, but by the late 20th century, regulatory changes and technological advances had solidified the NYSE-Nasdaq duopoly, with the last of the five regional exchanges swept away by consolidation from 2006 to 2009.

Attempts by others to carve out market share by focusing on high-frequency trading (HFT) largely went nowhere in the 2010s. Backers of the TXSE say this time is different. The state has drawn in hundreds of major companies with its low taxes, looser regulations, and thriving economy, including high-profile relocations by Tesla (TSLA), Oracle Corp. (ORCL), and Chevron Corporation (CVX).

Adding to all this, traditional exchanges face fierce competition from alternative trading systems. According to CBOE data, off-exchange trading venues now account for 51% of U.S. equities volume, compared with 18% for NYSE and 14% for Nasdaq—an increase of about 20% since 2020. This shift largely stems from the rise of dark pools, payment-for-order-flow arrangements, and trade matching among large institutional investors.

In January 2025, TXSE filed its 4,000-page Form 1 registration with the U.S. Securities and Exchange Commission, officially beginning the regulatory approval process with $161 million in capital. The exchange plans to launch its trading operations in early 2026, with listings becoming available by the end of that year.

The NYSE, recognizing the growing threat, relocated its Chicago operations to avoid the lengthy process of developing a new exchange from scratch, opening NYSE Texas in Dallas in March 2025, giving it the coveted first-mover advantage in the state.

Despite regulations for securities being national and trading that’s done electronically, Temel said being a local matters. “Arguably more so than other U.S. states, Texas has a common culture that is proud of its differences … and its business acumen,” he said. “This social psychology will likely pave the way for increasing numbers of Texans to invest in stocks using their local exchanges. Coupled with the fact that the average discretionary income has been rising in Texas, these cultural dynamics signal a bright future for the new exchanges in Dallas.”

Note

Dallas now ranks as the second-largest financial hub in the U.S. by number of finance employees. The southeastern U.S., TXSE’s primary market, is home to 1,500 publicly traded companies and more than 5,200 private equity-backed firms, many of which are eyeing public market access.

TXSE vs. NYSE Texas

NYSE Texas hit the ground running with established regulatory approvals and infrastructure as part of Intercontinental Exchange Inc. (ICE), giving it immediate global recognition and existing relationships with listed companies.

TXSE, while backed by major players like BlackRock and Citadel, must build from scratch—a challenge that its backers frame as an opportunity to implement more efficient systems without legacy constraints.

Perhaps most striking is their divergent approach to listing standards. NYSE Texas follows its parent company’s established criteria, while TXSE said it’s going to institute significantly stricter requirements, with TXSE CEO James Lee saying these standards would exclude about 1,700 companies currently listed on NYSE and Nasdaq, a bold strategy that prioritizes quality over quantity.

The Bottom Line

TXSE represents the most serious challenge to the NYSE/Nasdaq duopoly in decades. Its unprecedented financial backing, Texas’s growing economic clout, and the increasing fragmentation of equity markets provide advantages earlier challengers lacked.

“There is an unsatisfied demand for stock trading, if not a need per se for local exchanges in Texas,” Temel said. “Distinct features of Texas … create opportunities for many private companies to go public, many public ones to also trade their stocks in Texas, and many more citizens and institutional investors to invest in Texas’s exchanges.”

Fact checked by Suzanne Kvilhaug

An emergency fund isn’t just for major disasters. It’s for life’s everyday surprises: a flat tire, an unexpected medical bill, or a layoff you didn’t see coming. And while the idea of saving up months of expenses might sound overwhelming, getting started is easier than you think.

“An emergency fund is what stands between you and high-interest debt when things inevitably go wrong with your home, car, health, or life in general,” says Jeremy Zuke, a financial planner at Abundo Wealth. As a result, having some savings tucked away can help keep that surprise expense from becoming a shockingly big one.

Here are five practical tips for getting your emergency fund off the ground—no big budget overhaul required.

Key Takeaways

• Even $50 is enough to kick off an emergency fund—consistency matters more than the amount.
• Automating savings makes it easier to stick with your plan and avoid temptation.
• Try to build toward saving three to six months of expenses—it’s OK if it takes a while to work up to your goal.
• Keeping a portion of savings in your own name—even in a joint household—is one potential safeguard for your funds.
• If your budget is tight, look for side gigs and small ways to boost your income.

1. Set a Realistic Goal for Your Emergency Fund

Yes, the gold standard for emergency funds is saving enough to cover three to six months of expenses. But that’s not where you need to begin.

“An emergency fund of a few thousand dollars is an amazing start,” says Zuke. That alone can cover unexpected car or home repairs, medical bills, or emergency travel.

Rather than fixating on a massive number, break it into milestones: $500, then $1,000, then a month of expenses. This makes the process feel doable and gives you quick wins to stay motivated. From there, build toward the longer-term goal of weathering a job loss or other major disruption.

2. Start Small—It’s About Consistency, Not Amount

You don’t need hundreds of dollars a month to build an emergency fund—you just need to begin.

“Setting up an emergency fund is simple—don’t overthink it,” says Zuke. “Most high-yield savings accounts have no minimum, so you could start with as little as $50 or $100.”

Start with whatever you can afford—even if it’s $10 or $25 a week. Consistent progress adds up quickly. And if you get a bonus, refund, or cash gift, consider setting aside a chunk toward your fund before spending the rest.

3. Automate Your Contributions

Automating your savings can help ensure you stay on track with your goals. “I strongly recommend automating your monthly contribution because when you never see the money, it’s easier to avoid accidentally spending it,” Zuke says.

Set up recurring transfers to a dedicated high-yield savings account so your savings can keep working for you. Better yet, Zuke suggests routing part of your paycheck directly into savings via your employer’s direct deposit system. “That way, you truly never see the money as available to spend,” he notes.

Important

A high-yield savings account can help your emergency fund grow over time.

4. Consider Keeping Some Savings in Your Own Name

Joint accounts make sense for many shared expenses, but your emergency fund shouldn’t be entirely communal.

“Each partner or spouse in a relationship should have a little bit of savings in their own name,” says Zuke. “If for any reason someone needed to leave a relationship, having all the funds in a joint account is risky because any joint owner could take all the money.”

Having individual access to at least a portion of your savings ensures personal security in case of relationship changes, urgent needs, or any other unexpected emergency.

5. Having Trouble? Find Small Ways to Boost Income

If your current budget is stretched too thin, consider small, manageable ways to earn extra cash, just enough to funnel into your savings.

This could be as simple as tutoring, pet sitting, or freelancing a skill you already have. Side income doesn’t need to be permanent or time-consuming. Even $100 per month from a few quick jobs can snowball into a $1,200 cushion by year’s end.

Tip

Try using a separate checking account just for side hustle income, and set up an automatic transfer from there into your emergency savings.

The Bottom Line

You don’t have to be wealthy to build a financial safety net. Set a small, manageable goal that you can work up to over time. Automate your savings, and direct them into a separate high-yield account where they can grow quietly in the background.

The most important part is getting started—because the next emergency isn’t a question of if, but when.

How To Calculate Your Rental Property ROI

Rental properties offer investors an attractive way to diversify beyond traditional assets like stocks and bonds while providing access to a passive income stream. A well-located property in a growing market can generate steady cash flow and appreciate in value over time. Add debt to
the mix and the returns to an investor’s equity get even more attractive through the power of leverage.

However, while the prospect of owning a portfolio of income-producing properties may seem like the perfect early retirement plan, investors must be aware that rental property investing comes with its own set of challenges. Fortunately, real estate has a long-established track record, and numerous performance metrics can help guide investors in making informed decisions. One of the most valuable of these metrics is the return on investment (ROI).

Key Takeaways

• Return on investment is critical for evaluating rental property profitability.
• Calculating ROI depends on whether the property is purchased with cash or financed.
• Expenses, maintenance, and vacancy rates significantly impact ROI.
• Leverage (borrowing) and financing terms can also alter the ROI.

Understanding Return on Investment (ROI)

ROI is a fundamental metric for real estate investors evaluating the profitability of rental properties. It measures how efficiently an investment generates returns relative to its cost. A strong ROI indicates a potentially lucrative investment, while a weak ROI suggests financial drawbacks.

Along with the internal rate of return (IRR) and cash-on-cash return, the ROI is one of the best ways to assess the attractiveness of an investment property.

The ROI for rental properties can be used to help assess how effectively an investor’s capital is generating returns through rental income, property appreciation, and tax benefits.

Understanding ROI allows investors to do the following:

• Evaluate different properties based on expected profitability.
• Determine whether a rental property meets an investor’s hurdle rate (the cost of capital plus a risk premium to compensate for market and property-specific risks).
• Identify areas to reduce expenses or increase revenue.
• Guide decisions such as whether to hold, sell, or refinance.

Below, we’ll review two examples for calculating ROI on residential rental property—a cash purchase and one that’s financed with a mortgage.

ROI Formula

To calculate the ROI, take the current value of the investment minus the cost of the investment. Then divide that number by the cost of the investment.

$begin{aligned}text{ROI}=frac{text{Current Value of Investment}-text{Cost of Investment}}{text{Cost of Investment}}end{aligned}$ROI=Cost of InvestmentCurrent Value of Investment−Cost of Investment​​

For example, if you bought shares of a stock for $10,000, and a year later the shares rose to $16,000, you had an ROI of 60%, calculated as ($16,000 – $10,000)/$10,000.

Calculating ROI on Rental Properties

For real estate, ROI is a bit more complicated than with stocks because you must consider debt, interest rates, property taxes, insurance and maintenance, as well as your initial equity and rental income.

Real estate ROI compares the net income a property generates divided by the initial
cost, as opposed to just the net gains of the investment. For example, if a property costs $100,000 to acquire, and it generates net profits of $10,000 every year, the ROI for the property is 10%.

ROI for Cash Transactions

Calculating the ROI on properties purchased with cash is simpler than calculating the ROI on properties financed with debt.

• Assume an investor purchases a property for $100,000.
• Closing costs are 5% of the purchase price, or $5,000.
• The real estate agent’s commission is also 5%, or $5,000.
• That means the total initial cost of the property is $110,000.
• The investor then collects $1,000 monthly, or $12,000 per year in rental income.
• Expenses such as insurance and property taxes total $300 monthly, or $3,600 annually.

A year later, the investor would have earned $12,000 a year in rental income. After subtracting the expenses, the net income is $8,400.

Next, divide $8,400 by the initial cost of $110,000. That gives you an ROI of 7.6%.

ROI for Financed Transactions

Calculating the ROI for properties financed with debt is a bit more complicated.

• Assume the investor bought the $100,000 property with a 20% down payment, or $20,000.
• The closing costs are still $10,000.
• The initial investment in this example is $30,000 ($20,000 down payment plus $10,000 in closing costs).
• The mortgage is a 30-year mortgage at 5% interest rate, compounded monthly. Using the PMT function on a finance calculator or in Excel, the monthly payments can be calculated as $429.46 or $5,153.52 per year.
• P = 80,000 (loan amount = purchase price – down payment)
• r = 5% ÷ 12 or 0.004167 (monthly interest rate)
• n (the number of payments) = 30 × 12 or 360
• Property income remains at $1,000 per month or $12,000 per year
• Expenses remain $300 per month or $3,600 per year

One year later, the investor would have earned the following:

$12,000 – $3,600 – $5,153.52 = $3,246.48 (net income).

Dividing this by the initial cost of $30,000 yields an ROI of 10.8%.

This example illustrates that although the net income earned in the second example is lower because of the mortgage payments, the ROI is higher because of the lower upfront cost, thanks to the power of leverage.

Home Equity 

To further highlight the power of leverage, we need to take equity into account. After all, as the principal on the mortgage gets paid down, the investor accumulates equity in the property. Looking at the second example, after a year the mortgage principal has been paid down by $1,180.29.

Adding this into the annual net income results in a new figure of $4,426.77, or a ROI of 14.8%.

An example of an amortization table can be seen below:

Factors Affecting ROI in Rental Properties

Expenses and Maintenance

While an ROI of more than 10% may seem attractive, investors must account for common budgeting principles regarding expenses and maintenance. Unexpected costs, such as a leaking roof or a boiler repair, can quickly erode profits accumulated over months or even years.

A good rule of thumb is to budget 50% of the monthly rent toward total expenses. For example, if your monthly rent is $1,000, set aside $500 monthly for operating expenses before mortgage payments to account for contingencies.  

Vacancy Rates

In addition, for enormous one-time costs such as a boiler repair, another rule of thumb is to set aside 1% to 2% of the purchase price annually for a financial cushion for significant expenditures, which can also include HVAC replacements, roof repairs, or structural improvements. That’s above a reserve fund of about two to six months of operating costs to prevent cash flow shortages when large capital projects arise.

High vacancy rates reduce rental income, as every month a unit sits empty leads to direct revenue loss while fixed expenses like property taxes, insurance, and mortgage payments continue to accumulate. Looking back to our mortgaged property scenario, the investor needs at least six months a year of rental income to break even just on the mortgage payments.

Furthermore, frequent vacancies often mean higher turnover costs, such as advertising for new tenants, screening applications, and making necessary repairs or renovations to attract renters. Leasing commissions or finder’s fees paid to real estate agents further reduce net income.

These steps can help mitigate high vacancy rates:

1. Screen tenants carefully. Investors should carefully vet prospective tenants, performing or obtaining background checks, credit reports, and references from previous landlords.
2. Offer competitive rental rates. Pricing your rental competitively ensures steady occupancy. While overpricing can cause vacancies, underpricing limits profitability.
3. Maintain the property. Regular inspections, prompt repairs, and aesthetic improvements increase a property’s appeal and tenant retention.

Cash vs. Financed Purchases

Based on our previous example, financing the initial purchase with a mortgage appears to generate significantly higher ROIs than a cash transaction because of the power of leverage. However, as with most financial decisions, there’s no such thing as a free lunch.

Investors should be mindful that financing comes with its own set of challenges, including the following:

• Debt obligations: Monthly mortgage payments can strain cash flow, especially during vacancies or unexpected expenses.
• Interest costs: Over time, interest payments increase the total cost of the investment.
• Risk of market fluctuations: If rental income drops or property values decline, investors may struggle to cover mortgage payments or face negative equity.

To mitigate these pitfalls, experts commonly recommend that a monthly mortgage payment should not exceed 28% of your gross monthly income. In addition, your total debt payments, including your mortgage, should not be more than 36% of your gross income—this is called the “28/36 rule.”

The Bottom Line

ROI in rental properties is a key metric for assessing profitability, considering rental income, operating expenses, financing costs, and tax benefits. While leverage can amplify returns, investors must carefully manage risks such as vacancies, maintenance costs, and market fluctuations.

A well-researched approach, incorporating financial prudence and strategic property management, ensures a more stable and profitable real estate investment.

Fact checked by Suzanne Kvilhaug
Reviewed by Marguerita Cheng

China is one of the largest countries in the world. The Asian nation also has one of the world’s largest economies, ranking second to the United States. According to the World Bank, China’s gross domestic product (GDP) was $17.79 trillion in 2023—rising steadily since the country began reforming its economy in 1978. Changes ushered in by the federal government helped bring millions of people out of poverty and put a number of its industries on the world map. This article looks at the top three industries driving China’s economy: services, manufacturing, and agriculture.

Key Takeaways

• China is one of the largest countries in the world and a significant manufacturer and producer of industrial goods.
• The country’s services sector is propelling its economic output followed by manufacturing and industry, with agriculture rounding out the list of top three sectors.
• China is one of the world’s largest exporters and importers in the world.

1. Services

China’s services sector represented more than 56% of the economic output in 2024. By contrast, the services industry represented slightly more than 48% of GDP in 2014. Consumption of goods is a major factor and driver of growth and continues to help boost the country’s economy. The country reported $6.63 trillion in 2023, which is an increase of 7.2% in one year.

China’s retail sales increased 3.7% between December 2023 and December 2024. Retail sales represent consumer spending within the economy. As a comparison, retail sales in the United States showed an increase of just over 4% within that same period.

A healthy services sector is a sign of healthy domestic consumption. It also indicates an increase in per capita wealth, which gives the Chinese people the capacity to afford their own output.

Note

China’s GDP grew at a rate of 3% in 2022.

2. Industry and Manufacturing

China’s manufacturing and industrial sector represented over 38% of China’s GDP in 2023. However, China’s industrial production has been on the decline in recent years, coming in at 4.5% in March 2024.

China’s manufacturing sector has been declining as a percentage of GDP. In 2013, manufacturing and industry accounted for 44.2% of GDP. The decline is likely due to China transitioning towards a domestically-driven consumer spending economy. Chinese goods within the manufacturing and industry sector include iron, steel, aluminum, textiles, cement, chemicals, toys, electronics, rail cars, ships, aircraft, and many other products.

China exports many goods globally, including to the U.S. The top exported goods for China at the end of 2022 were electronic goods, computers, and machinery.

China has a thriving automobile manufacturing industry and is the world’s largest car manufacturer. The country produced more than 30.1 million vehicles in 2023. That’s compared to 10.6 million produced in the U.S.. Japan was the third-largest producer with about nine million followed by India with about 5.9 million units produced in 2023.

3. Agriculture

Agriculture is the third-largest sector in China, representing 7.1% of the country’s total output as measured by GDP as of the end of 2023. The share of GDP is down from 8.9% in 2013. Although the percentage is not as high as emerging market economies in Africa, it is higher than the 5.6% share of U.S. GDP in 2023.

China produces many agricultural goods, including corn, rice, wheat, soy, cotton, peanuts, and apples. China also produces 69% of the world’s nectarines and peaches, while it’s the leader in peanut, rice, and wheat production as of 2020.

China’s Economic Outlook

China opened up and reformed its economy in 1978. The country has experienced significant growth since then. China wiped out extreme poverty in 2020, raising itself as an upper-middle country. Economic growth has been largely due to investment and manufacturing.

The country’s economy grew 5.2% in 2023. This followed moderate growth after the COVID-19 pandemic. The World Bank estimates the economy to continue growing at a rate of 4.5% in 2024, and expects to see sluggish demand and low inflation.

How Healthy Is China’s Economy?

China is one of the world’s largest economies in the world. The country’s GDP, reported by the World Bank as $17.96 trillion in 2022, is driven by its services, manufacturing and industrial, and agricultural sectors. China experienced a significant amount of growth since it opened up its economy in 1978. Experts estimate growth of 4.5% in 2024.

What Are China’s Top Imports?

China’s top imports include integrated circuits, crude petroleum, gold, iron ore, and petroleum gas. The country was the largest importer of these products in March 2024.

What Are China’s Largest Exports?

The products exported the most by China include telephones, integrated circuits, computers, and cars in March 2024.

The Bottom Line

China has the second-largest economy in the world by GDP. Government spending is helping fuel the country’s economic growth. Although there are certain challenges, including sluggish consumer spending and inflation, experts believe China’s economy will continue to grow. This is largely due to its three main sectors: services, manufacturing and industry, and agriculture.

Reviewed by Amy Drury
Fact checked by Yarilet Perez

Owning common stock doesn’t just come with an equity stake in a public company. It also gives the shareholder certain rights—notably, the right to vote on corporate matters, such as electing board members, on corporate decisions and matters that directly affect their stock ownership (like stock splits, mergers, or acquisitions), executive compensation packages, and other administrative issues.

Key Takeaways

• Anyone who owns stock in a company has a voting right to the decisions that the company makes.
• The fewer shares someone owns, the less voting power they have, as each share is one vote.
• Voting has a significant impact on share prices, which is why investors should learn about a company’s proposed decisions.

How Voting Rights Work

Common stock ownership always carries voting rights, but the nature of the rights and the specific issues shareholders are entitled to vote on can vary considerably from one company to another. Some companies grant stockholders one vote per share, giving shareholders with a greater investment in the company a greater say in corporate decision-making.

Shareholders can exercise their voting rights in person at the corporation’s annual general meeting (AGM) or other special meeting convened for voting purposes, or by proxy. Proxy forms are sent to shareholders along with their invitations to attend the shareholders’ meeting.

These forms list and describe all the issues on which shareholders have the right to vote. A shareholder may elect to fill out the form and mail in their votes on the issues rather than voting in person. Shareholders can also enter their votes over the phone or on the internet.

Important

A company’s common shareholders may have voting rights but get paid after preferred shareholders in the event of liquidation.

How Voting Rights Influence a Company’s Decisions 

Voting rights give shareholders a significant amount of influence over the success of the company and their investment. For instance, decisions made at the annual shareholders’ meeting can end up leading a company’s stock price to double or decline. Therefore, shareholders need to take advantage of the opportunity to positively influence corporate direction.

Shareholders should thoroughly analyze proposals being presented for a vote. For example, a company may need a poison pill to thwart a possible takeover. While this may benefit management, it may not be in the best interests of shareholders who could realize substantial capital gains. Any proposed changes to the company’s bylaws should be carefully scrutinized, as should company management proposals to change legal or accounting firms.

Proposed stock options or split plans can significantly impact the value of existing shares, so such proposals merit careful evaluation by shareholders before voting. Another item for shareholder analysis is the company’s Compensation Committee Report. Investors should review the company’s compensation plan to determine things such as the overall reasonableness of executive compensation packages and how effectively bonuses are tied to actual performance.

What Happens in a Hostile Takeover

Because shareholders have a proportional influence per their stake, certain market movers or hostile activist investors will amass a large stake in a company by purchasing shares. When they have enough shareholder power to sway a vote, they will step in and direct the company in the direction that benefits them or they may purchase enough shares to become the majority shareholder of the company. When that happens, they can direct it more assertively.

What’s the Difference Between Common and Preferred Stock?

Common and preferred stock are two different types of equity ownership in a company. But they come with different rights. Common shares typically grant the investor voting rights while preferred shares get fixed dividend payments. They are also paid first if a company is liquidated.

What Is a Proxy Vote?

A proxy vote is vote or ballot cast on behalf of a shareholder who can’t attend a shareholder meeting. Proxy votes may also be cast for people who don’t wish to vote on certain issues.

What Are the Key Issues That Shareholders Can Vote On?

Common shareholders usually have one vote per share, which means investors with a substantial volume of shares have greater voting power. They can vote on issues like the election of the company’s board members, the issuance of new securities and initiation of corporate actions like mergers and acquisitions, and the approval of dividends. Owning common stock also gives a shareholder the right to vote on changes to corporate policies and operations.

The Bottom Line

Voting rights are generally granted to common shareholders of public companies. In most cases, one share equals one vote. These shareholders can vote on key issues like the election of a company’s board, corporate policies, how the company operates, dividends, and whether any new securities will be issued. Votes are cast at annual shareholder meetings or by proxy if they can’t attend.

Reviewed by Anthony Battle
Fact checked by Betsy Petrick

You cannot put your individual retirement account (IRA) in a trust while you are living. You can, however, name a trust as the beneficiary of your IRA and dictate how the assets are to be handled after your death. This applies to all types of IRAs, including traditional, Roth, SEP, and SIMPLE IRAs.

If you establish a trust as part of your estate plan and want to include your IRA assets, it is important to consider the characteristics of an IRA and the tax consequences associated with certain transactions. Learn more about putting an IRA into a trust.

Key Takeaways

• You cannot put your individual retirement account (IRA) in a trust while you are living.
• You can name a trust beneficiary for your IRA and dictate how the assets are to be handled after your death.
• The steps taken regarding the treatment of an IRA can significantly affect how the amount is taxed.
• Trust beneficiaries rarely benefit from tax savings, and the transfer upon death to the trust could trigger taxes.

What Is an IRA?

In 1974 under the Employee Retirement Income Security Act, known as ERISA, was passed. Among other provisions, it set rules and standards for private retirement accounts. This led to the creation of IRAs to help workers save for retirement on their own. At the time, many employers could not afford to offer traditional-style pension plans, leaving employees with only Social Security benefits after they stopped working.

The new IRA accounts achieved two goals. First, they provided tax-deferred retirement savings for those not covered under an employer-sponsored plan. Second, for those who were covered, IRAs provided a place for additional tax-advantaged retirement savings as well as a place for retirement-plan assets to continue to grow when and if the account holder changed jobs via an IRA rollover.

Who Can Own an IRA?

As the name implies, individual retirement accounts can only be owned by an individual. They cannot be held jointly, nor can they be conducted by an entity, such as a trust or small business. Additionally, contributions can only be made if certain criteria are met. For example, the owner must have taxable earned income to support the contributions.

Note

A non-working spouse can also own an IRA, but must receive contributions from the working spouse. The working spouse’s income must meet the criteria.

Regardless of where the contributions originate, the IRA owner usually must remain constant, whether it is a traditional or a Roth IRA. Two cases where ownership can be transferred are divorce and death.

When an IRA account holder dies, the IRA can be inherited by beneficiaries. Those can be people or a trust. The trust would then distribute assets to human beneficiaries in the future. If transferred to a trust, traditional IRA assets become taxable because the IRS treats this transfer as a distribution or withdrawal. In addition, if the owner is under age 59½ at the time of distribution, an early withdrawal penalty is imposed. The trust can accept IRA assets of a deceased owner, however, and establish an inherited IRA.

Advantages of a Trust Beneficiary

Naming a trust as the beneficiary to an IRA can be advantageous because you can dictate how beneficiaries use your savings. A trust instrument can be designed in such a way that special provisions for inheritance apply to specific beneficiaries—a helpful option if beneficiaries vary greatly in age, or if some of them have special needs to be addressed. Many people also believe the trust provides tax savings for beneficiaries, but that is rarely the case.

Important factors to consider are how beneficiaries take possession of the IRA assets and over what time period. Seek advice from a trust adviser well-versed in inherited IRAs. To gain the maximum stretch option for the distribution of the account, the trust must have specific terms such as “pass-through” and “designated beneficiary.”

Important

If a trust does not contain provisions for inheriting an IRA, it should be rewritten, or individuals should be named as beneficiaries instead.

Disadvantages of a Trust Beneficiary

Although moving all assets into the name of a trust and designating it as the beneficiary on retirement accounts is commonplace, it is not the best move for everyone. Trusts, similar to other non-individuals that inherit IRA assets, are subject to accelerated withdrawal requirements. They are required to empty the account by the end of the fifth year following the year of the account holder’s death. Rules that give certain beneficiaries until the tenth year following the account owner’s death do not apply to trusts.

If the “pass-through” trust rules are applied by the IRS, the IRA assets must be withdrawn within a 10-year period. An exception is made if the trust beneficiary is an eligible designated beneficiary. An eligible designated beneficiary includes a surviving spouse, a disabled individual, a chronically ill individual, a minor child, or an individual who is not more than 10 years younger than the account owner. These eligible designated beneficiaries may also follow the 10-year rule and not the five-year rule.

If the “pass-through” trust rules do not apply or the beneficiary is not an eligible designated beneficiary, the IRA assets will need to be withdrawn within a five-year period.

Depending on the size of the account, this could place a burden on beneficiaries. Particularly detrimental is eliminating the spousal inheritance provisions by naming a trust instead of a spouse as the beneficiary.

While trusts can streamline most estate-planning areas, they can create more paperwork and even additional tax burdens for beneficiaries of an inherited IRA. Work closely with an estate planner, attorney, and accountant to maximize a legacy.

Frequently Asked Questions (FAQs)

What Happens to a 401(k) in a Trust?

You can designate a trust as a beneficiary of a 401(k) as well. In this case, the trust inherits the account where it is maintained as a separate asset. Distributions are taxed according to the type of 401(k).

What Is the Downside of Putting Assets in a Trust?

When you place your assets into a trust, you lose your ownership rights to them. Instead, those assets then belong to the trust. In certain situations, a trust may be subject to higher taxes than an individual. If you have a living trust, those assets will not be protected from creditors.

Who Pays Taxes on an IRA in a Trust?

The IRA is maintained as an asset within the trust. Its distributions are taxed according to the type of IRA. If you have a traditional IRA, you will have to pay ordinary income taxes. If you have a Roth IRA, you will not have to pay taxes.

The Bottom Line

Moving an IRA into a trust is not permitted while you are living. However, you can plan to include your IRA in a trust by naming the trust as a beneficiary to when you die. Consider consulting with a professional financial advisor to review your options for meeting your financial goals.