Categories for Blog
October 3, 2013 1:00 pm
Published by dylan
The United States Government last shutdown was for 26 days between 1995 and 1996. According to The CBO (Congressional Budget Office) this shutdown shaved about .50 percent of quarterly growth from the U.S. Economy. With a partial shutdown now in place, below are some of the concerns investors need to be aware of when it comes to their portfolio:
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If the shutdown persists for upwards of one month, we could see economic growth decline by as much as 1.5%, some $55-$60 billion. Investors need to be aware of the potential talk of recession fears if the shutdown continues. Markets are skittish so volatility may pick up.
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Federal Reserve Tapering is becoming political: the threat of the Government shutdown made Fed officials reconsider the reduction of tapering; the economy is still considered “luke-warm” especially as it relates to jobs.
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Nearly 1 million government employees on furlough directly effects spending in the private sector as well – jobs are the mother’s milk of the economy. Government based contracts could be put on hold ultimately affecting some corporate earnings.
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Beware of False Accusations: The Shutdown and Debt Ceiling issues are converging together: The government’s $16.7 trillion spending cap is set to reach its limit October 17th. No doubt, raising the debt ceiling so the Congress may continue to spend more with a “broken credit card” is not a long-term solution and could have negative implications. To force a compromise, government officials will threaten to stop Social Security checks being sent to retirees. The President has and will likely utilize executive branch power to raise the debt ceiling so that the US will not default on its obligations if necessary.
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Interest rates are likely to remain low for longer than we think. The talk of tapering only affects the “degree” of how much the Congress is spending on their credit card. If interest rates rise the cost to borrow as well as maintain credit balances rises. For every 1% interest rate increase it may cost $160 billion or more in additional interest charges to the federal budget. The Fed and Treasury are keenly aware of this.
There are many concerns we see in the current political landscape and the dysfunction in D.C, if the shutdown takes on a new level of wrangling. However, we also see many opportunities as we sit back observe and watch “elephants collide.”
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We could be in a corrective phase which we would add to equities – energy , biotech sectors.
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We are adding to municipal bonds (where appropriate), as rates have crossed the 5% tax free(9% equivalent at the top tax bracket).
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Auto Recovery: at General Motors, 9 of 17 plants operate at full capacity, more than any at any other time in history.
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Companies that can, will deploy capital and generate risk adjusted returns, ie: VISA/MC
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Consumer companies which benefit from demographics and events look attractive, ie NIKE – summer Olympics and World Cup Soccer.
April 8, 2013 10:18 am
Published by dylan
For more than a decade, estate planning has harkened back to the “wild, wild west,” a time when even the best hired guns didn’t know what would happen next. Now, finally, there’s more certainty, thanks to the estate tax provisions in the American Taxpayer Relief Act (ATRA). The new law, signed as the country teetered on the brink of the “fiscal cliff,” extends several favorable tax breaks, with a few modifications.
Before we explore ATRA’s main provisions, let’s recap the events dating back to 2001, the year the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was enacted. Among the changes, EGTRRA gradually increased the federal estate tax exemption from $1 million to $3.5 million in 2009 while decreasing the top estate tax rate from 55% to 45%. It also severed the unified estate and gift tax systems, creating a lifetime gift exemption of $1 million unrelated to the estate tax exemption. Then the law repealed the estate tax completely, but just for 2010. After that year, the estate tax provisions were scheduled to “sunset,” restoring more onerous rules that had been in effect before EGTRRA, unless new legislation dictated otherwise.
The Tax Relief Act of 2010 generally postponed the sunset for two years. It hiked the estate tax exemption to $5 million (indexed for inflation), lowered the top estate tax rate to 35%, and reunified the estate and gift tax systems. That law also allowed “portability” of exemptions between spouses.
Now, at long last, ATRA brings permanent clarity. Here are the key estate changes:
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The estate tax exemption remains at $5 million with inflation indexing. For 2013, the exemption is $5.25 million. Also, portability of exemptions between spouses is made permanent, so a married couple can effectively pass up to $10.5 million tax-free to their children or other non-spouse beneficiaries, even if the exemption of the first spouse to die isn’t exhausted.
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The top estate tax rate is bumped up to 40%. Not as low as the 35% rate in 2011 and 2012, but still better than the 55% rate slated for 2013 prior to ATRA.
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The estate and gift tax systems remain reunified. This means that the lifetime gift tax exemption is equal to the estate tax exemption of $5.25 million in 2013. (That’s now the maximum exemption for combined taxable lifetime gifts and estate bequests.) Other provisions, including the generation-skipping tax that applies to most bequests and gifts to grandchildren, are coordinated within the system.
As a result of these changes, now is a good time to examine wills, trusts, and other aspects of your estate plan. Depending on your situation, revisions may be required or you might create a new trust to take advantage of the current estate tax law.
April 1, 2013 9:44 am
Published by dylan
The odds that you’ll suffer a disabling injury or illness are far greater than the likelihood of you dying prematurely. A disability income (DI) insurance policy, used to supplement life insurance coverage, could help protect you from loss of income if you’re unable to work. Indeed, a DI insurance policy might provide even more benefits than you expect.
Typically, a private DI insurance policy can pick up some of the slack if you’re disabled for an extended time. Should you no longer be able to work, you will begin receiving a monthly disability benefit. Normally, the benefit is a predetermined amount, unlike employer-provided coverage, in which the benefit equals a percentage of compensation.
As with life insurance, DI terms can vary widely from policy to policy. Some key variables include the amount of the benefits you’ll receive; the length of the coverage; the requirements for receiving full benefits; the definition of “disability”; the length of the waiting period before benefits begin; any cost-of-living adjustments; availability of partial benefits; and possible non-cancellation features. Naturally, the cost of the premiums also will vary, depending mainly on those variables.
But don’t assume that you must be bedridden to collect any benefits. Frequently, a DI insurance policy will provide “residual benefits” in the event you can work some of the time or if you’re slowly getting back on your feet. Some policies even offer benefits after you’ve returned to work if you are earning less than you did before your disability.
The residual benefits generally kick in when the loss of income is greater than 20% of previous earnings and the decline is due to the medical condition underlying the disability. This feature could be especially valuable to small business owners, including self-employed entrepreneurs, and professionals in fee-based practices, such as physicians, attorneys, and accountants.
For example, suppose a surgeon recovering from a severe illness returned to practice but was able to see fewer patients. If the surgeon’s income was reduced from $50,000 a month to $30,000, the residual benefit could restore income to 80% of the pre-disability level—in this case, $40,000 a month. Similarly, if the side effects of chemotherapy make it too hard for a litigator to appear in court or for a CPA to handle a company’s books, the residual benefits can soften the economic blow.
To see what your coverage may or may not include, take a close look at existing DI policies or any new policy you’re considering and have your insurance agent explain the residual benefits section. The policy might be more valuable than you imagined or the residual benefits may be too restrictive. Those provisions could be a key component of your DI insurance coverage.
March 29, 2013 11:14 am
Published by dylan
There’s good news in the mail: Johnnie or Susie just got accepted into a top college. Naturally, you’re proud of your child. But now comes the hard part—figuring out how to pay for four years of education at an elite school.
Tuition costs at private institutions, in particular, can seem staggering. Still, there are ways to send your son or daughter to a great college without bankrupting your financial future. Start with these five steps:
1. Compare and contrast financial aid offers.
There’s no standard format for the wording of award offers, so carefully review the information in each one your child receives. Typically, the offers will list financial aid from several sources, including school scholarships, work-study programs, and federal loans, and also will note your “expected family contribution,” calculated from the information you provide on the Free Application for Federal Student Aid (FAFSA). But some schools provide more information than others, so try to compare apples to apples.
2. Do the math.
Once you determine how much aid each school will provide, figure out your how much you will have to provide. Incorporate the amounts you expect your child will be able to cover—perhaps for such things as books, meals, and entertainment—into your calculations. That will give you a better handle on what you’re really facing.
3. Expand the hunt for financial aid.
Don’t give up just because your child isn’t a star athlete or a computer genius. You can find scholarships to fit a wide range of niches and groups on websites such as Fastweb.com, SchoolSoup.com, and SallieMae.com. In addition, students may qualify for state aid. Also, many corporations offer scholarships to children of employees. And remember to reach out to civic, religious, and ethnic groups within your community.
4. Consider a payment plan.
Frequently, colleges provide tuition payment plans that charge little or no interest. You may have to pay just a small up-front fee. Contact the school for the necessary arrangements.
5. Explore loan options.
If your family must borrow money, start with federal loans, which typically have the lowest interest rates. Currently, a subsidized federal Stafford Loan offers a fixed interest rate of 3.4%, while the federal PLUS loan features a 7.9% rate and Perkins loans have a fixed interest rate of 5%. Apply for these when you fill out the FAFSA. As a last resort, you might turn to private loans, but be aware that the interest rates on those tend to be higher.
This is just a quick lesson on navigating the financial aid waters. The schools your son or daughter is considering also may be able to provide ideas for reducing the financial burden on your family.
March 13, 2013 10:17 am
Published by dylan
Estate planning is especially complex in 2012. Due to a series of tax law changes—most recently under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Relief Act”)—wealthy families can benefit from generous estate tax exemptions, a lower estate tax rate, reunification of the estate and gift tax systems, portability of estate tax exemptions, a return to “step-up in basis” rules, and other changes. But it may be all for naught.
Why is that? The latest set of estate and gift tax provisions are scheduled to “sunset” after 2012. Barring any new legislation, the estate and gift tax law generally will revert to the way it was prior to the passage of a 2001 law that phased in today’s favorable rules.
Of course, Congress still could act late this year, or even impose retroactive provisions next year, but there are no guarantees, and without further action, the family of someone who dies in 2013 will face much stiffer estate planning challenges than if the death had occurred the previous year.
How well do you understand the current state of affairs? Here’s a brief quiz to test your knowledge.
1. The maximum estate tax exemption for someone who dies in 2012 is:
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$1 million.
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$3.5 million.
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$5 million.
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$5.12 million.
2. The maximum estate tax rate in 2012 is:
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25%.
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35%.
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45%.
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55%.
3. The portability provision for estates allows for the:
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Transfer of an unused exemption between spouses.
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Transfer of an unused exemption to a child.
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Carryover of the exemption to the following year.
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Extension of the exemption to gift tax.
4. The generation-skipping tax generally applies to any:
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Transfer from a grandparent to a grandchild.
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Transfer from an estate to a trust.
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Transfer from a parent to a child.
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Transfer to a younger individual.
5. The lifetime gift exemption in 2012 is:
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The same as the estate tax exemption.
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Half of the estate tax exemption.
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Equal to the gift tax exclusion.
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Repealed.
6. Barring new legislation, which of the following will occur in 2013?
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The estate tax will be repealed.
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The top estate tax rate will be 55%.
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The estate tax exemption will be $500,000.
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The generation-skipping tax will expire.
7. Barring new legislation, which of the following will NOT occur in 2013?
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The portability provision will be repealed.
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The generation-skipping tax exemption will be reduced.
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The lifetime gift tax exemption will be reduced.
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The carryover basis rules will be reinstated.
Answers: 1-d; 2-b; 3-a; 4-a; 5-a; 6-b; 7-d
March 12, 2013 12:21 pm
Published by dylan
Now that another year is under way, you might make a “New Year’s Resolution” to put your financial house in order—and a great place to start is to resolve to pay down the debt on your personal balance sheet. If you owe money to multiple lenders, you may find it advantageous to consolidate those obligations with a single creditor.
What are the benefits of debt consolidation? Here are several to consider.
1. No muss, no fuss.
You can make just one monthly payment instead of having to sort through an avalanche of statements and write checks or make electronic payments to many credit card companies or other lenders. Simplicity and convenience are often cited as the main reasons for consolidating.
2. Better recordkeeping.
It’s easier to track payments to one creditor than to collect information from several sources. You’ll get a better handle on how your debt is affecting your cash flow.
3. Less stress.
Trying to figure out what you have to pay, and how to fit it into the family budget, can turn into a nightmare. And consolidation will save you from being harassed by collection agencies.
4. Lower interest rate.
Debt consolidation makes the most sense when it saves you money. Try to arrange terms so that your new interest rate is lower than the average rate for all of your old loans.
5. Longer repayment schedule.
If the new loan lets you stretch out payments longer than the terms of lots of small debts, it may be easier to balance your family’s budget.
6. Improved credit history.
Having bad credit can hinder your ability to borrow or to qualify for preferred terms on new loans. Consolidating debts and attacking the outstanding balance will generally help your credit score.
7. Get a plan.
If you work through a debt consolidation company, it will help you address your situation in an organized fashion, paying off old debts while getting a reasonable interest rate and repayment schedule for the consolidated loan. Or you could develop such a plan on your own.
8. Avoid late fees.
Typically, fees for late payments will be reduced or waived if you can show that you have a reasonable plan for consolidating and paying down your debt.
9. Set yourself free.
Finally, debt consolidation provides an opportunity to get out from down under the obligations of multiple loans. Then, if your financial situation improves, you can pick up the pace of repayment to lift your debt burden as soon as you can.
Debt consolidation isn’t a cure-all; it won’t solve all your financial problems. But it can start you on a better path.
March 12, 2013 9:58 am
Published by dylan
Are you planning to donate real estate to charity? The tax law allows you to claim deductions, within generous limits, for giving property to qualified charitable organizations. But you have to meet strict requirements, including the necessity to obtain an independent appraisal for property valued at more than $5,000.
In fact, in a new case, a taxpayer who donated real estate worth approximately $18 million failed to provide the required appraisal, and after an audit, the IRS challenged his charitable deductions. The Tax Court’s verdict? His deduction was zero!
The basic rules for deducting gifts of property say you can’t use those donations to write off more than 30% of your adjusted gross income (AGI). Overall, your charitable deductions can’t exceed 50% of your AGI for the year. But if you exceed those levels, you can deduct the rest in future tax years.
If you donate property that has gained value, the deductible amount is equal to the fair market value (FMV) of the property at the time of the donation, as long as you’ve owned it for more than one year. For shorter-term gifts of property, the deduction is limited to your “basis” (usually, what you paid for it).
However, the IRS requires you to jump through a few hoops before you can pocket any tax deductions. When you file your tax return, you must include a detailed description and other information for property valued at more than $500. Also, if you claim the FMV is more than $5,000, you must obtain a written appraisal of its worth.
In the case of the above disallowed deduction, Mr. Mohamed was a prominent entrepreneur, real estate broker, and certified real estate appraiser. He donated several parcels of property to a charitable remainder trust during a two-year period. When he completed his tax returns for those two years, he attached Form 8283 (Noncash Charitable Contributions). Based on his own appraisals, the total FMV of the properties exceeded $14 million (although his initial deduction was “only” $3.8 million due to the AGI limits).
But Mohamed didn’t read the form’s instructions explaining that self-appraisals aren’t permitted. He also omitted important information such as the basis of the properties. The IRS challenged the deductions. When Mohamed appealed to the Tax Court, the IRS disallowed the entire deduction, despite subsequent independent appraisals establishing the total FMV at more than $18 million. In the end, the Tax Court agreed with the IRS, although it acknowledged the result was harsh.
The moral of this story is that if you donate appreciated property, you need to make sure you observe the strict letter of the law.
March 11, 2013 8:18 am
Published by dylan
Planning your retirement involves far more than determining how much income you’ll need. One of the most basic and important decisions is where you want to live during your retirement years.
Choosing a location is something you can start working on early, as much as five to 10 years before you leave work. Don’t wait until retirement is just around the corner, because the process of comparing and contrasting different regions can be time-consuming and eye-opening.
The first step is to decide whether you want to remain where you are or move to a new place. It’s a very personal starting point, and often it will take into account proximity to family members and attachment to your community.
For those who decide to move on, here are some steps to make sure you end up in a happy place:
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Discuss your desires. Do you dream about lying on a beach with the latest bestseller, or reeling in giant marlin from deep water? Do you envision attending symphonies and plays, or riding horses and hiking up mountains? Will you play golf or visit museums and the library? Do you want lots of sunshine or four seasons? Small town or big city? Lots of restaurants or lots of bait shops? Start by writing down a clear picture of your life in retirement.
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Do your homework. Start matching real places with your dream retirement activities and environment. Look into weather, demographics, health care costs and health care availability for hospitals and medical specialties, crime statistics, and other factors using popular “Best Places To Retire” guides. Generate a list of three or four places that look like good matches.
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Dip your toe in. Schedule a trip to each area, and make it a long vacation if possible, up to several weeks. Try to visit each area at different times (e.g., when weather isn’t ideal) and experience as many things as you can while there. Are the people friendly? Do any unexpected difficulties pop up? Does it match your vision?
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Consider longer visits. If your short-term visits leave you uncertain, consider renting your current home out while you spend even more time in your potential locations. Take several months to get a real feel for the area and make your decision. After all, you hope to live there for a long time to come!
Once you decide on a location, it’s time to look at some financial factors, starting with the sale of your current home. Ask several realtors for an estimate, and compare what you’re likely to clear from the sale with what you’ll need in your new area. We can help you do these calculations, and we’ll add any expected surplus into your income calculations, and take into account tax and other implications.
Relocating can be one of the most stressful aspects of retirement. Work with a financial advisor who understands all the state and estate tax implications and how moving affects your financial outlook and quality of life.
March 10, 2013 9:26 am
Published by dylan
There are two basic types of IRAs for retirement savers: the traditional IRA that has been around for decades and the Roth IRA, a more recent innovation. Each has pros and cons, so the choice often depends on your circumstances. To help you decide, here’s a brief comparison.
First, be aware that both IRAs share some common traits. The contribution limit for 2013 for all IRAs (of either type) is $5,500 (up from $5,000 in 2012). If you’re age 50 or older, you can kick in an extra $1,000. There’s no current tax on earnings from contributions within either IRA. And the deadline for contributions is the tax return due date for the year of the contribution, with no extensions permitted.
Now let’s examine the key differences.
1. Traditional IRAs.
If your modified adjusted gross income (MAGI) exceeds a specified annual level and you actively participate in an employer retirement plan, the deductibility of your contributions will be phased out. The phaseout for 2013 occurs for a MAGI between $59,000 and $69,000 for single filers, and between $95,000 and $115,000 for joint filers. If your spouse participates in an employer plan but you don’t, the phase-out range is between $178,000 and $188,000 of MAGI. Thus, many high-income individuals can’t deduct any part of their contributions.
When you take distributions during retirement, you’re taxed at ordinary income rates on the portion representing deductible contributions and earnings. Furthermore, if you’re under age 59½ when you take a distribution, you must pay a 10% tax penalty (unless one of several exceptions applies).
2. Roth IRAs.
Unlike with a traditional IRA, contributions to a Roth are never deductible, regardless of your MAGI. In addition, the ability to make full contributions to a Roth is phased out for 2013 for a MAGI between $122,000 and $127,000 for single filers, and between $178,000 and $188,000 for joint filers.
However, qualified distributions from a Roth in existence for at least five years are 100% tax-free. This includes distributions made (1) after age 59½, (2) due to death or disability, or (3) used to pay qualified first-time homebuyer expenses (lifetime limit of $10,000). Other distributions are taxed at ordinary income rates under “ordering rules,” which treat contributions as coming out first, then conversion and rollover amounts, and finally earnings. So a portion or all of a payout still may be tax-free.
Due to the back-end benefits, you might convert funds in a traditional IRA to a Roth, paying tax in the year of conversion. If it suits your purposes, you can “undo” the conversion by the tax return due date (including any extension).
Which type of IRA is best for you? Figure it out by factoring in all the variables. We can help you crunch the numbers.
March 5, 2013 8:39 am
Published by dylan
Women often find themselves at a disadvantage when it comes to providing for their retirement years. Data shows women tend to live longer than men do, to earn and save less, to bear the financial brunt of divorce and widowhood, and to spend more time and money taking care of family members.
Life expectancy is increasing for both men and women. But women outlive men by an average of five years, according to the Centers for Disease Control and Prevention. Once a U.S. woman reaches age 65 she is likely to live to the age of 85. That makes women far more likely to outlive their assets.
Advocates debate the reasons behind income disparity, but the fact is that women earn 77 cents for every dollar men earn, according to the U.S. Census Bureau. That means women have fewer dollars to put toward retirement savings, and earn less in Social Security benefits.
Historically, women save less money than men. They usually make less, first of all, and thus are more likely to depend on their spouse’s earnings for savings. Women also spend more time and money helping ill family members than do men.
For all of these reasons, losing a spouse, whether through divorce or death, can have a more drastic impact for a woman than a man.
The message is clear: Retirement planning is a vital necessity for women. We recognize the challenges you may face, and we can help you overcome them.
March 1, 2013 8:47 am
Published by dylan
When was the last time you reviewed your life insurance policies? If you’re like most people, you’ve probably stashed your policies in a drawer, filing cabinet, or safe deposit box where they’ve been gathering dust. But you should review your policies periodically to see whether they still meet your needs. Depending on the outcome, you might adjust your coverage.
In particular, you should examine your policy if you’ve experienced one or more major “life events” during the past year. What sort of events are we talking about?
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There may have been a birth, death, or disability in the family.
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You got married, divorced, or separated.
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You bought or sold a principal residence, vacation home, or other real estate property.
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Your child completed college or graduate school.
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You acquired property as a joint tenant.
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You have switched jobs, retired, or started up a new business.
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There was a significant economic change affecting your business operation.
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You need to revise the beneficiaries of your insurance policies due to a change in circumstances.
Note that other changes that might trigger a life insurance review could be less obvious. For instance, you may need additional coverage if you’re now taking on financial responsibilities for an elderly or disabled relative. Conversely, your financial responsibilities may decrease somewhat if you have finished paying off a home.
Furthermore, you should try to view your family’s needs as if you were buying life insurance for the first time. It’s your current and future circumstances that are the critical factors—not how things were last year or several years before. And don’t forget to review all of your life insurance policies, including any group coverage that your employer (and your spouse’s employer) might be providing.
Needless to say, this is an on-going process. A main function of life insurance is to replace lost income that your family relies on if you should die prematurely. When your financial obligations are small, the amount of life insurance coverage you require is also small. However, as those obligations grow, so does your need to acquire more coverage.
Typically, your life insurance needs will be at their greatest when your children are relatively young and you’re in the midst of your career. Once your children have flown the coop, or you have retired, your insurance needs will likely not be as great.
Best approach: Assess your life insurance needs at regular intervals. You may want to do so at the start of a new year or on some other “anniversary” date. In any event, don’t let too much time go by without a regular check-up.
February 10, 2013 9:43 am
Published by dylan
A Section 529 college savings plan can be a tax-smart way to help your children pay for their higher education. But you should also be aware of several potential pitfalls of this planning device. Here’s a brief rundown on the main pros and cons.
The Pros
The account can make money.
A Section 529 plan works much like a mutual fund, with account assets typically invested in equities by professional money managers. They do the hard work while you sit back and watch the account grow.
Count on the tax benefits.
Contributions to the plan are gift-tax-free, the earnings within the plan are income-tax-free and any distributions that are used for qualified education expenses are also income-tax-free. That’s a hard combination to beat.
Funds may be invested automatically.
Frequently, a plan will let you have funds automatically withdrawn from your checking or savings account. Not only is this convenient, it also takes some of the guesswork out of saving for college.
Contribution limits are generous.
State law effectively controls the amount you can sock away in a Section 529 plan, but the limits are favorable. In some states, you can contribute as much as $200,000 to your child’s account, which should be sufficient to cover tuition for four years at most schools.
Account assets are portable.
Although 529 plans are sponsored by individual states, the money can be used to pay for college wherever your child attends. Also, if funds are left over when your son or daughter completes school, you can use the excess to pay college expenses for another child. You don’t have to close the account until the youngest child reaches age 30.
The Cons
Funds must be used to pay qualified expenses.
If you make a withdrawal and use the cash for any other reason—say, to pay emergency medical expenses—the distribution attributable to earnings is taxed on both federal and state levels, and you’ll owe a 10% penalty. You’ll also be taxed on any leftover amount you receive after closing the account.
The investments are out of your hands.
This is the flip side of having professional money management. If you’re a savvy investor, you may prefer to have greater control over the funds. Should you be inclined to use a different investment option outside of a 529 you’ve established, you’ll be taxed and penalized if you withdraw funds and invest them elsewhere.
It might affect financial aid eligibility.
The impact of a Section 529 plan is usually negligible if held by a parent. Nevertheless, it must be factored into the equation to determine the “expected family contribution” (EFC) for college costs.
For most families, Section 529 plans are a good deal, but they’re not for everyone. We can provide the necessary guidance.
