Categories for Blog
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.
February 6, 2013 9:50 am
Published by dylan
A survey from the Luxury Institute shows that high-net-worth investors (with $5 million or more in assets) prefer boutique wealth management firms over Wall Street giants. Those who opt for boutique firms cite quality, exclusivity, and other factors. But what about investors of more limited means? What’s the best choice for them—smaller independent firms or big-name companies?
The Wealth Management Luxury Brand Status Index (LBSI) survey from the independent Luxury Institute in New York scores respondents’ answers based on each firm’s quality, exclusivity, social status, and ability to deliver special client experiences. The average respondent reported $15 million in net worth and income of $720,000.
“Reputations for honesty and superior client service are what make the smaller firms standouts in this survey,” says Luxury Institute CEO Milton Pedraza.
Investors have been shifting toward independent advisors for years. The number of independent Registered Investment Advisors, for instance, surged 31% between 2004 and 2010, according to Cerulli Associates Inc. A report by Charles Schwab, the 2012 RIA Benchmarking Study, shows RIAs enjoyed an 8.2% increase in new clients in 2011 (subtracting departing clients cuts the increase to 4.7%), along with a 12% gain in revenue.
The trend is partially due to technology, as smaller firms are now able to offer access to many of the specialized investment vehicles and services that were once the province only of larger corporations with more resources. Declining trust in larger firms in the wake of the 2008 financial crisis is another factor.
Smaller firms enjoy a reputation of being more likely to put clients’ needs first, while large firms are believed more likely to push in-house products. Another widespread belief is that smaller firms offer more in-depth, personalized service.
Many investors remain with big-name firms, however, especially if they are primarily looking for investment services that include access to high-end alternative investments. Even though access has become more widespread through technology, many of the larger firms still have an edge in terms of cost.
Some investors have even more specific reasons for sticking with the larger companies. For instance, an executive at a big, publicly traded company who has stock options may want to work directly with the financial services firm that handles that company’s options.
Still, many investors have shifted to smaller, independent firms, which tend to offer more comprehensive wealth management services and more coordination among investment, tax, legal, and other advisors.
If you are looking for a financial advisor, consider interviewing advisors from both large and small firms, then compare them in relation to your own needs and goals.
January 15, 2013 8:55 am
Published by dylan
Have you ever dreamed of owning a 1965 Aston Martin like the one driven by James Bond in the movies? Or a 17th century Stradivarius? A piece of your favorite sports team? It may not be as far-fetched as it once seemed. Increasingly, well-heeled investors are diversifying by adding a special kind of alternative investment—known as “treasure assets”—to their holdings.
Although you probably can’t afford the top items on your wish list, you may still be able to indulge your inner fantasies. In fact, some private funds allow investors to pool their money to buy treasure assets. A firm will typically charge a 2% administrative fee in addition to taking a healthy cut of any profits, but the cost may be well worth it to aficionados.
Realize, however, that these undertakings are highly speculative and not for the faint-hearted. Frequently, items are illiquid and have no real intrinsic value. And commissions and other fees can eat into any gains you might eventually realize.
Still, for some investors, pride and joy trumps other factors. In any event, treasure assets should represent only a small part of your overall portfolio. Keeping that in mind, here are three hot buttons.
1. Classic cars.
It’s well-known that most cars lose value as soon as you drive them off the lot. But vintage automobiles can be an exception to that rule. According to the Historic Automobile Group International (HAGI), vintage Ferraris rose 28% in price during the first 10 months of 2012, while Porsches climbed 15% in value. The HAGI index of the top 50 classic cars shows prices increasing almost 64% since 2008.
2. String instruments.
An auction house sold a 1721 Stradivarius violin for almost $16 million in 2011. Maybe you will have to lower your sights, but investments in other string instruments, including vintage electric guitars, are available. A 2011 study tracking violin sales showed an average annual return of about 3.5% between 1850 and 2008 after inflation adjustments, and concluded that the instruments have a slight negative correlation with stocks and bonds (in other words, violin prices tend to rise when the value of those other assets falls).
3. Wine.
This category is attracting attention as an inflation hedge with potential for growth. But investing in wine is risky enough to drive you to drink. The Liv-ex 100 Fine Wine Index, which tracks prices of 100 top wines worldwide, says it has produced an annualized return of 10% since 2002. However, the index is down nearly 10% for the first 10 months of 2012.
Other treasure assets, such as interests in major and minor league sports franchises, may strike your fancy. But be aware that glamorous investments are more likely to produce personal enjoyment than a steady return. View these offerings with your eyes wide open.
January 14, 2013 9:05 am
Published by dylan
Do you tend to put off certain chores—maybe cleaning the gutters, organizing your files, or changing batteries in smoke detectors? Most people can add another item to their to-do list: rebalancing a portfolio. However, unlike neglecting some of the others, failing to rebalance could result in significant financial losses.
Why do you have to rebalance in the first place? If you keep your holdings intact without making any changes, your preferred asset allocation will eventually get out of kilter. As a result, you could be exposing yourself to considerably more risk than you expect or consider acceptable.
Let’s say you’ve determined the optional approach for your current needs is to maintain a portfolio with 50% allocated to stocks, 30% to bonds, and 20% to cash and other vehicles. (This is a purely hypothetical example and not indicative of any specific portfolio.) If the value of your stocks has increased during the past year, your portfolio might now have 75% in stocks, 15% in bonds, and 10% in cash and other investments. Stocks are historically more volatile than other assets, and with that heavier concentration, you may not feel comfortable with your risk exposure. To get back to your previous allocation, you could sell some shares and put the proceeds into bonds and cash.
Similarly, if the value of your stocks has declined so that they represent only 35% of your portfolio, you may want to convert some of your other holdings into stocks.
There are several other direct and indirect reasons for rebalancing. Consider these three:
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It encourages you to cash in profits from investments that have done well and shift those funds to other investments that have merit but have yet to increase in value.
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It gives you the opportunity to review the mutual funds in your portfolio to see whether they’re still performing up to your expectations.
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It can smooth out investment returns. All asset classes are cyclical, so rebalancing removes some of the inherent volatility associated with investing.
How often should you rebalance? For many investors, it makes sense to do it twice a year to keep a portfolio on track. Certainly, you should rebalance at least once a year. Another approach is to rebalance whenever an asset class deviates from its target percentage by a specific amount—perhaps five percentage points. For example, a portfolio with a 50% target allocation in stocks would be rebalanced any time the value rises to 55% or sinks to 45%.
Rebalancing is an important part of long-term investment management. It ensures that you are buying asset classes when they drop in value and don’t overweight investments that have appreciated. Over a long period, it can make a major difference in a portfolio’s performance and risk exposure. In addition, rebalancing can be managed for tax efficiency. Our firm handles rebalancing for clients we work with.
December 10, 2012 9:13 am
Published by dylan
The IRS allows you to build up a sizeable nest egg for retirement inside your traditional IRAs. But then the other shoe drops: Whether you want to or not, you must begin taking “required minimum distributions” (RMDs) once you reach a certain age. Otherwise, you could be socked with a hefty tax penalty.
But the tax law does provide some flexibility. Depending on your situation, you might decide to withdraw funds from one of your IRAs, all of your IRAs, or any combination you prefer.
You have to start taking RMDs from your IRAs by April 1st of the year after the year in which you turn age 70½. In other words, if your 70th birthday was on June 1, 2012, you must take an RMD for the 2012 tax year by April 1, 2013. Then you still have to take another RMD for the 2013 tax year by December 31, 2013.
The amount of the RMD is based on the value in your accounts on December 31st of the tax year and is calculated according to IRS-approved life expectancy tables. For example, if you have a total balance of $1 million in your IRAs and your age is 76, the distribution period under the life expectancy table is 22 years. Divide $1 million by 22, and you arrive at an RMD of $45,454.55 for the current tax year.
The penalty for failing to take a timely RMD is equal to 50% of the required amount of the distribution (minus any distribution you actually received). Going back to our example, suppose you’ve taken an RMD for 2012 of $20,454.55, or $25,000 less than the required amount. In this case, you would owe a penalty of $12,500 (50% of $25,000) on top of the regular income tax. If you’re in the 35% tax bracket in 2012, that’s a whopping total of $28,409 ($15,909 + $12,500)!
Comparable rules apply to tax-deferred earnings within a tax-qualified retirement plan such as a 401(k). But you may postpone RMDs from qualified plans (not IRAs) if you continue working past age 70½ as long as you don’t own more than 5% of the company that employs you.
The amount of your annual RMD reflects the value of all your IRAs, but you can actually withdraw the funds from one or more of the IRAs. If you’re maintaining separate IRAs with different beneficiaries, you might want to keep the balances in all of them equal—and they may have gotten out of whack because of withdrawals, contributions, fees, and investment performance. So, for instance, if you have three IRAs and you’ve designated a different beneficiary for each one, you could withdraw the entire RMD amount from the IRA with the highest balance. Or you could get rid of underperforming assets in one of your accounts by liquidating those to provide cash for the RMD.
Keep in mind that you must give explicit instructions about your RMDs to each IRA custodian, and please call us if you have any questions.
