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'The best thing to do'

An S&P 500 index fund is a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of the S&P 500 Index, a primary benchmark for the U.S. stock market. The index reflects the stock performance of 500 of the largest companies listed on stock exchanges in the U.S. and is often considered a barometer for the overall economy.

While Buffett advocates everyday investors make use of index funds, he does not dismiss the value of his own company.

During Berkshire’s 2021 annual shareholders meeting, Buffett addressed a question about whether his directive to the trustees of his estate to invest significantly in an index fund represents a lack of confidence in Berkshire’s management.

“Well, no, because we’re talking about way less than 1% of my estate,” he clarified, noting that 99.7%-plus of his estate will either go to philanthropies or to the federal government.

“I just think that the best thing to do is buy 90% in S&P 500 index fund,” Buffett emphasized.

The average person can't pick stocks

Buffett’s preference for recommending index funds stems from his belief that stock picking is not an optimal strategy for average investors.

At the 2021 shareholders meeting, he stated frankly, “I do not think the average person can pick stocks.”

This is where index funds come into play.

Investing in an S&P 500 index fund is not complicated: one simply purchases the fund and holds onto it without the need to select individual stocks.

It’s a passive investment strategy. The fund aims to replicate the index's performance by holding the same stocks in the same proportions as they appear in the index. Unlike actively managed funds, where fund managers make decisions about how to allocate assets, index funds try to match the index, not outperform it.

Moreover, by investing in an S&P 500 index fund, investors get exposure to 500 large companies across various industries. This diversification can help reduce risk because the fund's performance isn't tied to the success or failure of a single company.

In 2023, the S&P 500 surged 24% — and it’s up more than 8% in 2024.

Federal estate and gift taxes

In 2017, then-President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA), which provided a flurry of temporary tax relief measures.

Among them was raising the lifetime federal gift and estate tax exemption — the amount for 2024 stands at $13.61 million ($27.22 million for married couples). That means individuals can transfer assets up to those amounts without triggering federal estate taxes. If Congress decides not to extend the tax breaks offered by the TCJA by the end of 2025, the exemption amounts will revert to the previous system, roughly half as much.

One tool people can use to safely pass on wealth and can be used before the TCJA expiry date is called a spousal lifetime access trust (SLAT). These are irrevocable trusts that remove assets from an estate but allow for the possibility of accessing them in the future by the primary beneficiary. Typically, a spouse is listed as the primary beneficiary, while children and grandchildren can be beneficiaries of the remaining assets in the trust once the primary beneficiary dies.

Jing Pan Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.


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