Scam update for more on Cyber-Attackers, Cloud Computing – be Vigilant!

We wrote before about the need for vigilance to protect you from cybercriminals. We drew on input from Norton Antivirus about social media scams. In this post, we draw upon the Kiplinger’s Tax Letter and SingleHop.com site.

IRS e-mails – You might not think that tax preparers would fall for e-mail scams, but some do. The 2-27-15 Kiplinger’s Tax Letter describes use of bogus e-mails asking professionals to “update their IRS e-services accounts and their electronic filing ID numbers plus provide personal data.” As we have said in prior posts, the IRS categorically states that they do not send out e-mails.

Cloud Computing – SingleHop is a company endeavoring to be private cloud experts. They champion users holding cloud servers accountable for maintaining high level, monitored and updated security for all client files. Their recent newsletter notes that over 250,000 complaints were filed with the FBI’s Internet Crime Complaint Center (ic3.gov) in 2013 alone, of which over 20% were under age 30. (For more on how “private cloud” computing fits in the internet infrastructure, here is a helpful SingleHop page: SingleHop site)

They caution you not to rely on links from e-mails to the websites you frequent. Instead, they encourage you to create bookmarks for these websites to ensure that you are logging onto the site you intend. They also favor sites that use two levels to authenticate you before granting access to personal information. “With such methods, after logging in with your password, the site will text or email you a single-use code that must be entered. Only the registered phone number or email address will receive the code, making it that much harder for hackers to gain unauthorized access to your accounts.”

Scam Update – With the cautions from both sources in mind, we updated our post, to help you remain vigilant:

Hidden URLs – Those shortened URLs are convenient, but they may be links to websites you don’t want to visit, or worse, they could install malware on your computer. SingleHop admonishes, “Especially look out for slightly misspelled words or words that use unexpected characters, such as substituting a “0” (number) for a “0” (letter) — for example, HOME DEPOT. If something looks even a little bit fishy, delete the email or close the site immediately.”
Phishing Requests – When you get an invitation to click on any link, think twice. When you click, you may be taken to a fake Twitter or Facebook or to a bank, credit card issuer, or another financial institution login page. SingleHop says “Phishers will design their sites to look exactly like the website of your” institutions. If you fall for the fake website, and enter you username and password, the cybercriminals can use your information on the real website to gain complete control of your account.
Hidden Charges – Be wary of those online quizzes that offer to tell you interesting information about yourself like which 1960s sitcom star you resemble. If the quiz asks you for personal information, such as your phone number, stop. If you continue, you many end up subscribing to some service that charges a recurring monthly fee.
Cash Grabs – It’s great to make new friends, but maybe not by “friending” strangers on Facebook. That person you just friended on Facebook may soon be asking you for money. You can avoid this situation by limiting your social media connections to people you know personally. Ignore friend requests when you do not know the person and have no friends in common.
Chain Letters – Sure, you want to be sure that Microsoft will donate the millions it promised to some worthy charity if you keep the online chain letter going. However, such “chain letter” e-mails are a way for spammers to access your friends to connect with them later. Also, you never know to whom your friends will forward the letter.

Sites that are popular with users are popular with criminals, so remain vigilant when you are on line, and, of course, keep your antivirus and anti-malware software up to date. Be wary and think twice before clicking on a suspicious link!

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Green Investing or Investing in Green – How to Invest in an Environmental IRA

For an increasing number of investors, “doing good” with their investments is as important as doing well. Tapping into this new environmentally conscious market, more not-for-profit organizations are teaming up with money managers to create a new line of impact investments. Here are some examples:
 Green Century Funds at http://greencentury.com/?gclid=CjwKEAiAgfymBRCEhpTR8NXpx1USJAAV0dQyEZ_PmZ0_1lwRSC3TFyhBXaxSa0wWglGdXOyvpu-7IBoCGkHw_wcB;
 Aquinas Funds at http://www.aquinasfunds.com/index.html; and
 Calvert at http://www.calvert.com/green.html
Caution: before you pick any, use a resource to evaluate and compare, such as Kiplinger’s Finance at http://www.kiplinger.com/article/investing/T041-C007-S001-five-great-green-funds.html.
While there is no “green IRA”, you can pick a mutual fund, such as the ones mentioned above, or select stocks yourself in within your IRA or Roth IRA – for more, see https://millennialsmny.wordpress.com/2015/01/23/financial-literacy-millennials-received-poor-marks-but-they-can-fix-that/ That is, when you contribute cash to your IRA, it sits in a money market account, doing little until you invest it. If you want to invest in environmentally conscious companies, you can, as follows:

1. Select type of IRA: Before opening and IRA, decide whether a Roth IRA or a traditional IRA suits your needs (see the Financial Literacy post).
2. Open an IRA: Opening an IRA has never been easier. You can contact a financial institution, by phone or online, that offers IRAs, usually a bank, brokerage or mutual fund company. Do your research and be sure the broker offers a self-directed IRA, so you can pick your investment options. Also, be mindful of fees charged for trades, that is the buying and selling of stocks or funds. You want a discount broker. Finally, name beneficiaries in case something happens to you.
3. Choose your Investments: Your IRA can be made of stocks, mutual funds or a mixture. In choosing stocks, experts such as Jennifer Schonberger of The Motley Fool, suggest that you focus on particular countries as you make green stock or mutual fund selections for your IRA. She notes that China is an innovator in green technology, though it is also known as one of the world’s biggest polluters.
4. Fund your Account: Make a plan to fund your account and stick to it! Starting early and contributing regularly can have an enormous impact your account’s value due to tax-free compounding of returns (see “Save 10% of Income” at http://generationyra.com/2015/01/22/stevenabransonguestpost/)

As with any stock market investing, your Green IRA may show you a roller coaster ride of value swings; however, if you have a long-term horizon, the significant growth potential should out-weigh this volatility risk. Also, if you pick a loser, you can always sell your investment (tax-free) and invest in another. Good luck!

P.S. – you can always decide to invest well, this is both easier and yields better returns, and then donate to environmental groups.

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Make customer service calls work for you – Get them on your side

Your goal on these calls is to convert the customer service rep to your side so that their goal is to make you happy. Most people in customer service are there because they want to please others; you want tap into that bent.
Here are some easy tips:
1. Be Respectful: Make them feel important and validated. Ask them their name, if they did not give it, and use that in the conversation.
2. Show Gratitude: thank them.
3. Recruit Them: Use terms like “we” and clearly state your objective so you turn the call into a mission, with the representative committed to helping you accomplish it.
4. Remain Calm: Avoid trigger words, anger and any swearing. Otherwise you risk losing the bond you created. Maintain the position of being empowered to get what you, as the customer, deserve.
5. Communicate Your Determination: Be clear that you are not going anywhere until your mission is accomplished. Be clear that you are not taking any brush off.
6. Escalate: If you are not making progress, then escalate: ask to speak to a manager. Many representatives are judged by the number of calls referred to managers or supervisors, so asking may prompt them to be more helpful.
This approach may take practice (and patience). However, it is quite effective, so you are likely to see good results.

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Financial Literacy – Millennials received poor marks, but they can fix that

While Millennials have proven themselves an increasingly budget conscious group, e.g., employing smart phone apps to ensure they get the best prices for their purchases, they have also shown themselves to have poor financial literacy. This generation is heavily laden with debt, with young adults holding an average debt load of $45,000. So, having a strong understanding of money management may be more important than ever.

The U.S. Treasury Department and Department of Education recently assessed Millennials’ level of financial literacy, and they scored a D+. Fortunately for Millennials, there are a multitude of resources available to help them become educated. However, recent surveys conducted by Fidelity Investments and TIAA-CREF indicate Millennials turn primarily to their parents for advice. The TIAA-CREF survey found that 47% of its 1,000 participants identified their parents as having a major influence in financial counseling. While parental input can be useful, it’s not always sufficient.

Financial education starts as early as pre-kindergarten and is best implemented by parents and schools. Studies show that children who learn money management skills at a young age enjoy long-term benefits throughout adulthood. A 2011 survey by the Council for Economic Education showed that students who studied personal finance in school were more likely to avoid accruing credit card debt, to be less likely to become compulsive shoppers and more likely to save money.

Young adults with poor financial literacy and money management skills can have a negative effect on society as a whole. Individuals with too much debt, whether credit or student loans, can be prevented from making major life changes such as buying a home, getting married or having children. Additionally, job seekers with too much credit card debt may be precluded from obtaining certain types of employment. There are also psychological and emotional implications, which affect physical health.

There are many resources available to Millennials either to start their financial education or to enhance what they already know. The key is to know where to start and whom to trust. Young people would do well to reach out to a broad set of resources including 401(k) administrators, employers, and financial planning firms that understand the diverse needs of Millennials. (We designed much of the content of our website with this in mind.)

Test your financial literacy at http://www.forbes.com/sites/financialfinesse/2013/04/04/7-questions-to-test-your-financial-literacy/ Also see http://www.usfinancialcapability.org/quiz.php
Here is a useful list of resources: http://money.usnews.com/money/personal-finance/articles/2008/04/02/financial-literacy-resources-online

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Achieving a Better Life Experience Act – first look

President Barack Obama recently signed the Achieving a Better Life Experience Act (ABLE Act). The ABLE Act allows individuals and families to open tax-free savings accounts to save for long-term needs associated with an individual’s disability.

These accounts are modeled after 529 college savings accounts. To qualify, a person must be diagnosed with a disability resulting in “marked and severe functional limitations” by the age of 26. An account can be established for an individual without jeopardizing that person’s eligibility for federal programs such as Medicaid. The funds saved in these accounts can be used for a variety of expenses including transportation, housing, employment support and health care.

Like 529 plans, earnings in these accounts grow tax-free, but contributions are made with after-tax dollars. Accounts can be set up at financial institutions and the annual contribution limit is $14,000. ABLE accounts are allowed to accrue up to $100,000 in savings without affecting a person’s eligibility for government aid such as Social Security. This is a great improvement for ABLE account holders over the current asset limit of $2,000. Medicaid coverage would continue no matter how much money is in the accounts.

These accounts can be a useful planning tool for those living with or caring for someone with a physical or developmental disability.

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Plan now to avoid surprises from the Affordable Care Act when filing 2014 taxes

2014 was the first year Americans had access to health insurance options through the Affordable Care Act (the “ACA”). With this new access to insurance came the obligation to purchase it or face new tax consequences. If you opted not to buy health insurance in 2014, you may be faced with a penalty when you file your 2014 tax returns. Even if you did buy insurance through one of the insurance marketplaces, you may have new tax forms to complete and some surprises when it comes to your refund or tax bill.

For most taxpayers, the impact on their tax filing will be minimal, requiring those who were covered to simply check a box indicating they had insurance throughout the year. Those who received subsidies to purchase insurance and who later had increases in their 2014 salary may be required to pay back some of that subsidy. Those whose salary decreased may receive a larger than expected refund.

As these provisions are new to everyone, there may be confusion for taxpayers and tax preparers alike. Unfortunately, due to recent budget cuts, the IRS expects to be able to speak with only half of the people who call in for assistance.

While gearing up for the 2014 tax season, it’s helpful to understand some the most important provisions of the ACA:

  • 1. Exemptions: The ACA provided some exemptions that allow taxpayers to opt out of purchasing insurance without any penalties, including hardship, affordability and religion. There are different methods for applying for an exemption depending on the type of exemption you are requesting. To learn more, go to: https://www.healthcare.gov/fees-exemptions/apply-for-exemption/
  • 2. Penalties: Those who do not qualify for an exemption, were insured for only part of the year, or remain uninsured will be required to pay a penalty called “The Individual Shared Responsibility Payment.” The penalty is set to increase over the coming years, so compare not to see if it is more beneficial for you to pay the penalty or buy insurance. The Tax Policy Center has designed a calculator to help you determine your penalty is you opt to remain uninsured: http://taxpolicycenter.org/taxfacts/acacalculator.cfm.
  • 3. Reconciling: Those who purchased subsidized insurance on the exchanges received an advance on a tax credit. At the time of requesting the subsidy for insurance in 2014, the amount of the subsidy was calculated based on the taxpayer’s 2012 income. The amount of the subsidy granted will be reconciled in the taxpayer’s 2014 filing using the taxpayer’s actual 2014 income and that will affect the taxpayer’s refund or bill. Changes in an individual’s personal circumstances, such as divorce, marriage or a new child can also impact those numbers.
  • There’s still time to plan. Taxpayers facing a loss in premium subsidies because of an increase in income can reduce their income to qualify for the credits. For example, they can contribute to an IRA by April 15, 2015, for the 2014 tax year.

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    Side Hussle Series – Declutter & Make Money

    [from a post scheduled to appear on www.millennials-money.com when launched in 2015]

    We all have things lying around our homes that we have no use for anymore. Instead of holding on to them, sell them to someone who wants them and who will pay you for them. Look around, if you have unwanted electronics, clothes, furniture, books or CDs and DVDs, there’s a market.

    Used Electronics – Those old phones, computers and tablets sitting around your home could make you some quick cash. Companies such as www.Gazelle.com, www.BuyMyTronics.com, www.NextWorth.com and www.uSell.com want your used electronics and will pay you for them. The items don’t even need to work! The process is largely the same for all four companies. Simply go to their websites, get a quote for your unwanted electronics, ship the items and get paid. These companies all provide free shipping and some are associated with national retailers so you can get paid right away.

    Clothes, Shoes & Handbags – If you’re like me, you have items in your closet that you haven’t worn in years and chances are, you will never wear them! Consignment shops are a great option for helping you free up some closet space while making a little extra dough. A quick Google search will bring up consignment shops in your area. If you don’t have one nearby, try www.thredup.com. Thredup will mail you a bag for your unwanted items, with a shipping label so you can send your goods to them at no cost to you. They review your items and pay you up to 80% of the resale value of your clothes. Items that they don’t accept are either donated to a charity, recycled or mailed back to you.

    If you have luxury clothing, jewelry or bags, you can try selling them through www.therealreal.com. They pay up to 70% of the item’s sale price. Like Thredup, The RealReal will send you a bag to mail in your luxury items. Alternatively, you may schedule a “White Glove Pick-up” with your Luxury Manager.

    Furniture & Home Accessories – Like selling used clothing, consignment shops may be a good solution for selling your unwanted furniture and home accessories. These shops generally charge 50% of the sale price, but there are some advantages to selling this way. Namely that the consignment shops do the marketing for you and secondly, you don’t have to worry about strangers coming to your home. If you want to cut out the middleman, try www.Craigslist.com. Craigslist allows you to list items for free and buyers come to you. 100% of the sales proceeds are yours.

    CDs and DVDs – Many independent music stores sell used CDs and DVDs. Search online for local shops in your area. Depending on the number of CDs and DVDs you are wanting to sell, they can often sort through your goods and let you know how much they can offer while you wait.

    Books – There are plenty of online companies that are willing to buy back your unwanted books and text books. www.BookScouter.com will simplify the work for your by scanning 40 other websites and let you know which one will offer you the best price. For text books, www.amazon.com offers the most competitive buyback prices according to www.ExtraBucks.com.

    With a little effort and some “letting go” you can free up some extra space and make a few extra bucks!

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    Seven Deadly Sins of investing

    [from a post scheduled to appear on www.millennials-money.com when launched in 2015]

    The single most important risk to a portfolio of investments is a poorly defined or constantly changing strategy. You must have a long-term approach to which you adhere over time regardless of the current favor of the particular strategy. You will need to resist the psychological pressures of investing:

    Consider these “seven deadly sins of investing”:

    • gluttony– hoarding cash when you should invest or evaluating by only one category when you should look at the big picture;
    • greed– looking for big winnings when time and patience pay off;
    • pride– not selling your losers or old, familiar holdings when a new idea is better;
    • lust– listening to the information barrage and adjusting your portfolio constantly rather than filtering it out to stick with a plan;
    • envy– chasing fads or looking at a friend who has “winners”, making investing look more like gambling, when actually you should sell your best and buy trailing but good positions (as in the “dogs of the Dow” technique);
    • anger– not forgiving yourself for mistakes and moving on; and
    • sloth– changing beliefs to fit your decisions or portfolio rather than applying the lesson that you should review a portfolio intellectually and objectively and decide if you would still buy the holdings today.

    You should review your asset allocation at least annually. A stock market rise will leave you over-weighted in stocks, meaning that you should sell out of stocks and buy into bonds and cash to maintain the allocation. If the stock market goes down, you should do the reverse. In fact, you should sell from your better mutual fund managers and buy the managers that have not done as well recently because those excelling and those lagging are both likely to return to the mean over time. Reallocating may seem wrong, especially when bond yields are low and CD rates are low. Nonetheless, history tells us to override the psychological urges, take “profits” from those currently doing well, and re-deploy them with assets that are more likely to provide future returns.

    Adhering to a sensible investment strategy is how money is made over time. You may feel that you missed out compared to someone who is all in the right stocks now. However, you will also be glad to miss out when that person’s holdings go down faster than the market and you have non-stock investments that increase in value. Also, when there is a new influx of capital, you need to have a strategy so you can sensibly filter the barrage of information from people wanting to help you handle you finances.

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    Ignore Most Financial Planning Rules

    [from a post scheduled to appear on www.millennials-money.com when launched in 2015]

    General rules of thumb for financial planning rarely work. Here are some with my critiques:

    “Stocks minus your age should equal 100” Bad rule– your investment allocation depends on your risk tolerance, the rate of return required to achieve your goals, when you add to investments from annual savings or stock option exercises and when you remove investments to fund lifestyle needs.

    “Life insurance must equal six times compensation” Bad rule– your spouse or partner would use all of your resources, including insurance, to fund lifestyle needs after you die. If you review this and determine a short-fall, that is the amount to be funded by insurance. It could be more or less than the six-fold multiple but ensures that your survivors have adequate resources to be protected.

    “Save 10% of income annually” Decent rule– however, some may need to save even more and others may have no savings need. As with life insurance, the question is whether the return from assets plus annual savings over your life expectancy will fund your lifestyle.

    “You only need 70% of income in retirement” Bad rule– in fact, many people spend more in the first years of retirement as they travel more while spending far less in their 70’s and 80’s as their needs become fewer. This can be further complicated by estate planning goals of gifting to children or charities.

    “Hold six months after-tax income for a rainy day” Decent rule– however, this depends on liquidity, borrowing ability (e.g., home equity line) and cash flow. If annual income permits substantial savings, such that you could pay for a new roof without affecting lifestyle, your “rainy day” reserve can be much less.

    “Monthly payments on debt should not exceed 20% of income” Decent rule– in fact, the rule is somewhat irrelevant in that most lenders apply rules to limit mortgage payments plus home insurance and property taxes to a percentage of income. As with the savings rule, your level of debt may be more or less depending on assets available, risk tolerance and lifestyle costs.

    “Do not refinance until rates drop 2%”–Bad rule– the test is simple: how soon will the cost of refinancing be recouped by lower payments? With no points/no closing cost loans, this can a year or less. Buying down a rate by paying points will make sense if the pay-off is in 12 to 24 months and if you plan to stay in the residence for seven years or more.

    “Delete collision coverage on a car more than 7 years old” Decent rule– as with the “rainy day” reserve, this depends on cash flow and other resources. It also depends on whether the car is your “antique.”

    “Do not spend more than 7% of income on long-term care insurance”Uncertain rule– some people may have sufficient assets to self-insure. Some people will not risk nursing care due to bad family health history; they will want to pay for full insurance.

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    Budgets? “We Don’t Need No Stinkin’ Budget”

    [from a post scheduled to appear on www.millennials-money.com when launched in 2015]

    Budgets rarely work. It takes tremendous effort to accurately record all transactions so that you have a valid budget. Then, frequently, after all this effort, you rarely come back to the budget. That means that the work had no payoff. Furthermore, people often claim that they had nonrecurring expenses. Doing so, they artificially understate their expenses, not realizing each year has some nonrecurring event.

    A much easier way to test savings is to take a twelve-month period, look at cash and credit card balances at the beginning and end, check for any inflows from gifts or other non-salary items, and then measure the change. Did the cash accounts go up or did the credit cards go up? That is your savings/dis-savings for that year.

    Rather than doing a budget to adjust behavior, force a change. You can do that by removing money from your discretionary spending by contributing the maximum to a 401(k) plan, by an auto debit that put funds into an investment account, and other auto payments. If your credit card balances go up, then you have to make a decision to alter behavior, such as cutting entertainment, or decide to delay goals (retire later, no new car now, etc.)

    How does cash flow relate to debts? Managing your debt means getting the lowest after-tax interest rate so that you pay as much principle with each payment to pay off the loan as quickly as possible. You can deduct the interest paid on a mortgage and an equity line of credit debt. You can deduct up to $2,500 of student loan debt. But you cannot deduct the interest on most other debt, unless used for your business (watch for a post on side hussles).

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    Planning for the ever-changing Medicaid rules

    The Affordable Care Act fills in current gaps in coverage for the poorest Americans by creating a minimum Medicaid income eligibility level across the country. Beginning in January 2014, individuals under 65 years of age with income below 133 percent of the federal poverty level (FPL) will be eligible for Medicaid.

    For many of our clients, Medicaid coverage is not an option. Nonetheless, there are still important steps that one can take to guard assets, protect your estate, and prepare for the possibility that you or your spouse will need long-term care: purchase long-term care insurance or self-insure.

    Long-term care insurance generally covers home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer’s facilities. From a tax perspective, premiums paid on long-term care insurance product may be eligible for an income tax deduction and benefits paid from a long-term care contract are generally excluded from income.

    Self-insuring fits if your investment assets are sufficient to earmark a portion of your net-worth to cover possible long-term care needs. Before you decide, keep in mind that, once a change of health occurs, insurance may not be available. As always with financial planning, the best time to think about your long-term care strategy is before you need it.

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    To be launched soon: Millennials-Money.com

    Millennials, like older generations, do not enjoy financial planning. There are two principal causes: concern for fees, especially hidden fees, and complexity, from definitions to implementing the planning suggestions. The Millennials-Money, LLC hopes to change this by offering a completely transparent website that supplies tools and how to steps that anybody can use.

    Millennials-money.com (“M$M”), our website, provides on-line analysis and resources, incorporates marketing and social media learning from Facebook and Twitter, insights from using Evernote and QuickBooks, and a brokered market for planners, based in part on concepts used by Uber, AirBnB and others.

    Millennials want to know how well they are doing and whether they are missing something. Our website will provide answers to these and other financial planning questions. Each user will answer a series of demographic and financial questions. When they complete their input, they will arrive at our “results page.” This page displays what the users need to save to retire, how much life insurance they need to purchase (above what they now own) and how much to save for college for their children. Access up to this point would be free.

    For a fee, users access our simple “how to” steps, addressing investing, using company benefits, tax strategies, evaluating renting versus buying a home, life insurance and so forth. Users will also have access to the market place of planners, where they can obtain specific advice.

    To more fully inform our users, we will have a blog with a forum for responding to questions. Blog posts will address a variety of finance-related subject that Millennials can apply to their own lives. Those paying a fee can comment and ask questions.

    The financial planner marketplace mentioned above is inspired by the model that companies like Uber and AirBnB have used. The marketplace will pair financial planners, who have marginal time to sell, with Millennials, based on bids made in response to questions that Millennials ask.

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    Estate planning overview update – key issues to consider when designing and executing the best estate plan

    This overview presents the key issues to consider when designing and executing the best estate plan. The work does not stop at signing your estate plan documents, you must also complete the follow up work of beneficiary designations, memorandum to fiduciaries, etc. (Note: the two biggest issues we see are (1) that no plan has been done or (2) that wills and trusts are in place but the asset ownership and beneficiary designations frustrate the plan by having assets pass to the spouse and not the trust.)

    If you do nothing else after reading this, write and deliver a “Memorandum to Survivors” and review asset ownership, all as described at the end of this post.
    A comprehensive estate plan can accomplish many goals, such as providing for survivors, ensuring your children are cared for, determining the flow of your assets upon your death, and reducing the amount of taxes your estate will pay while administering your estate. The most important goal is that you have peace of mind knowing that your estate will be administered in accordance with your wishes.

    Estate Planning Pyramid
    Constructing a pyramid can be helpful for understanding all that goes into an estate plan, much like nutrition and investments. Each level of the pyramid addresses a new level of complexity in your family and financial situation – that is, everyone needs level one, but not all need the later, more complex levels.

    Pyramid: Level One
    The first level of estate planning provides the most basic protections so it is most suitable to single individuals with no children and few assets. This level of estate plan typically includes the following forms:

    • Health Care Proxy: This document allows you to appoint people to make decisions about your health care and treatment when you are not capable of doing so. You typically select the surviving spouse and then have a first and second alternate if you wish. Some states call such documents “medical directives” or “medical powers of attorney.”
    • Living Will: This makes your wishes clear as to whether or not you want to have heroic means used to prolong your life.
    • Anatomical Gift Instrument: This allows you to have a hospital use organs and other body parts for others in need of a transplant.

    Pyramid: Level Two
    The second level is most appropriate for individuals in committed relationships. This level includes all the forms listed in the first level, but adds a durable power of attorney. This document grants a power of attorney to the other to manage your financial affairs if you are absent or you become incapacitated.

    Pyramid: Level Three
    When you have children, you want to ensure that they will be both cared for and provided for in the manner you wish. To achieve this, you need a will to appoint a guardian, for the “care,” and create a trust to manage assets, for the “providing.”

    A will is a formal document that designates your personal representative or executor, any alternates, plus a guardian and any alternates for children under age 18, then instructs your personal representative to pay off your debts, and distribute your estate per your wishes.

    A trust is an entity that you create and can be used for many purposes. The trustee acts as the owner of what the trust holds, while the beneficiaries get all the benefits from what the trust holds. For estate planning, trusts are used to reduce estate taxes in various ways. Trust vehicles can also describe how and when assets are distributed. For example, the grantor of a trust could insist that assets not go to children until they are age thirty-five. The trust vehicle could also provide where assets flow if all family members die without issue. For example, assets could flow to a charity or educational institution.

    • Providing for Survivors: You need to address how your assets and any life insurance flow after your death in order to ensure that your resources allow those who survive you to maintain the same standard of living, during their life expectancies, that you all had during your life. If your investments are not sufficient, even after making liquid certain kinds of personal property (e.g., a second home), then there is a need for life insurance.
    • Life Insurance: Term insurance, providing only a death benefit, funds the shortfall between assets required to maintain the lifestyle of the survivors and actual assets available. Whole life, variable or other types of insurance should only be used when permanent insurance is required, as in the case of maintaining estate liquidity throughout your lifetime.
    • Flow of Assets: After you determine the assets required to support the lifestyle of the survivor, you determine to whom the assets flow. For example, at Levels One and Two, you can leave everything directly to survivors, while at Levels Three to Six, you use a trust, and at Level Six you may even separate some portion of the assets by gift now.
    • Control Over Assets: In Levels One and Two, the survivors have complete control over the assets. At higher Levels, trust vehicles are used for the estate tax savings. However, you also gain a heightened level of attention on the assets: you have engaged a trustee to focus on providing for the surviving spouse, maintaining his or her lifestyle, while still attending to the interests of other beneficiaries, such as children. In this way, the trustee will try to preserve the trust assets in the best way possible for the longest duration. Finally, the trustee must distribute the assets per your instructions; if assets went to a survivor, they are not bound in any way to follow your wishes, so you may not achieve your estate planning goals.
    • Fiduciaries In designing the estate plan, many choices revolve around the fiduciary that you select for a particular role.
      • Personal Representative or Executor: This is the person who “marshals” all assets of the estate together, pays death expenses and transfers ownership of property to the surviving spouse or trust. This is approximately a nine-month task.
      • Guardian: This is the person whom you select to love and care for your children in your absence. The spouse selects the surviving spouse and then a second or third choice beyond that. This job lasts until each child has reached majority (age eighteen).
      • Trustee: This person has potentially the longest-term job because he or she must manage the trust assets and make distributions of income and sometimes principal to the surviving spouse, children and even grandchildren. Depending on the terms of the trust, this job could last until the children are young adults.
    • Beneficiary Designations and Ownership: ownership and how life insurance proceeds and retirement plan assets flow is described below.

    Pyramid: Level Four
    This level of planning addresses state taxes. When the potential combined estate of a husband and wife exceeds $1 million, and they have other beneficiaries for whom they want to maximize the estate after taxes, then trusts are typically used. States such as Massachusetts impose an estate tax over $1 million. Other states have similar amounts, but many are increasing, such as New York which will match the federal credit in 2019. Therefore, additional planning is required if you reside in a state with an estate tax.

    Pyramid: Level Five
    The fifth level contains trusts that address federal estate taxes, as well as state. Congress has retained the unified gift and estate tax credit, now at approximately $5.34 million (inflation adjusted) with a 40% estate tax rate (up from 35% last year). In addition, the unused portion of the estate tax credit of a deceased spouse is “portable”, allowing it to pass to the estate of surviving spouse.
    With the trust structure, sub-trusts can be created so that both the credit and the marital deduction are used. This structure takes advantage of the credit at the first and second deaths. In contrast, wills that pass all assets outright to the surviving spouse would only take advantage of the credit at the second death. The total tax savings for an estate of $10 million or more is excess of $1.75 million for the combined estates.

    • Life Insurance Trust: You can also make an irrevocable trust the owner of any insurance on your life to exclude all proceeds at death from both estates, avoiding estate taxes. That is, the proceeds are completely estate tax free. However, this requires an irrevocable transfer to the trust; you cannot get the insurance back out. You can use this trust to receive insurance proceeds that can pay for estate taxes, thereby preserving more of your estate after taxes without increasing the taxable estate.

    Pyramid: Level Six
    The final level is for complex estate planning that minimizes federal and state estate taxes through multiple generations. An example of this is a generation-skipping trust. These trusts transfer assets from the grantor’s estate to his or her grandchildren. This is what allows the grantor’s estate to avoid taxes that would apply if the assets were transferred directly to his or her children. The grantor’s children can still enjoy financial benefits of the trust by accessing any income that is generated by the trust while leaving the assets in trust for grantor’s grandchildren.

    • Other entities: Separating assets by gift now would be important if you wanted to ensure some minimum funding for children, such as guaranteeing coverage for their college expenses.
    • 529 Plans: you can use 529 plans or trusts for gifting to cover college costs of a child.

    After the Plan has been Executed

    Ownership and Beneficiary Designations
    Once the documents and insurance are in place, make sure to review and complete the following:

    • Qualified Plans (IRA’s, 401k plans, etc.):
      • Primary Beneficiary – to the surviving spouse (so he or she can roll over the proceeds to an IRA and thereby defer income taxes); and
      • Secondary Beneficiary – to your children (or your own revocable, depending on whether you want the assets controlled or available to children).
    • Life Insurance and Annuities:
      • Primary Beneficiary – when not owned by an irrevocable trust, such as group term, to your own revocable trust (for estate tax benefits, e.g., using credit at first death); and
      • Secondary Beneficiary – to the surviving spouse (in case of trust has been terminated for some reason).

    Other Assets
    Consider changing ownership of any jointly held assets to ownership by one of you. Any assets held as joint tenants with rights of survivorship will go to the survivor by operation of law and never get to your revocable trust. (You want to be sure that you have sufficient assets going to the trust to realize the full tax reduction effect.)
    You may even want to fund your trusts, moving investment accounts over to your own revocable trust. This has no impact on your income taxes.
    You can also choose to fund your revocable trust now. This will save a significant amount of time for the executor, and the attorney he or she hires, as this will need to be done after your death otherwise.

    Memorandum to Survivors
    Compile a reference book or add to your financial plan book photocopies of important papers, identifying where the originals are, then adding a list of important contacts, instructions to your executor and trustee and other important notes for family and friends. You would update this at least annually with new asset statements (consider this as you gather information for preparing your taxes). To be more specific, the list (and copies) should include:

    • Location of original will, trust, etc.;
    • Location of health care proxy and durable power of attorney;
    • List of professionals with contact information: doctor, attorney, CPA, etc.;
    • List of fiduciaries with contact information: health care proxy, guardians, executors and trustees, attorney-in-fact for durable power of attorney, etc.;
    • Location of insurance policies and valuables such as original titles, etc.;
    • Location of safe deposit box for valuables and items in #5 or 7;
    • List of all bank and investment accounts and location of any stock certificates or other documentation for investments;
    • List of all mortgages, loans and credit card accounts;
    • Any appraisals or other listing of items by value;
    • All automatic debits that need to be addressed (stopped, changed); and
    • List of all password protected accounts (e-mail, on line banking and credit cards, etc.) and where to locate the passwords… and the password to access the password.

    Please see our post Planning for the inevitable – online end-of-life services for more ideas on such memoranda. Also, after you review this overview, let us know how we can help you get your estate plan in order.

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    Year-end tax planning – how to minimize the total tax paid in 2014 and 2015

    This year, when projecting your potential taxes, you have to factor in the changes from 2013 that affect 2014 and 2015, which can be daunting. That is:

    • You have the standard plan: “defer income/accelerate deductions unless you are in the alternative minimum tax (“AMT”)” (see below).
    • But then you also have the new 3.8% surtax, with rules that do not play well with the others!
    • Finally, the tax rates changed again for 2014 (see the table below).

    If any of this is not clear, please ask questions.

    Can you act?
    To make your review of 2014 planning less daunting, take these separate steps: (1) ask “can you act?” – determine what you can do reviewing the “what can you act on” list below; then (2), if you can act on any of the items in 2014 or 2015 – moving from one year to the other, or delaying further – then ask “what impact does your acting have?” ; and finally, ask “what happens if I take all of these actions?” – determine the impact of all possible moves in concert, especially vis a vis the AMT. Preparing tax projections for both years is the best way to find out how to act most effectively to reduce taxes. It permits you to see which moves have the best results in which years, so that the total tax paid in the two years is minimized.

    What can you act on?
    Wages – Can you defer or accelerate between years or even convert income into deferred income, such as stock options, or income to be received at retirement? Can you convert compensation into tax-free fringes?

    AMT – the AMT is the 28% flat rate calculated differently than the marginal rate of up to 39.6%. If your deductions bring the regular tax down too low, the AMT kicks in, so that the deductions are wasted and need to be moved to another year, if possible. Otherwise, you will want to increase income for that year to “pull yourself out of the AMT.” The AMT exemptions amounts for 2014 are $52,800 for individuals and $82,100 for married couples filing jointly.

    The 3.8% Medicare surtax – This affects all income for 2014 and beyond, but only to the extent of the lesser of (a) net investment income or (b) the excess of modified adjusted gross income (“AGI”) over the threshold, which is $250,000 ($200,000 for single taxpayers). Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income but excludes pensions and IRA distributions. The 3.8% surtax must be covered with your withholdings and estimated payments to avoid penalties and interest. See our post at Update on the impact of the 3.8% Medicare surtax .

    Standard Deduction – up in 2014 to $6,200 for single taxpayers and married taxpayers filing separately, $12,400 for married couples filing jointly, and $9,100 for heads of household.

    Schedule A itemized deductions – can you shift income and deductions for the maximum benefit, given the income-based deduction thresholds?

    • Miscellaneous – only the amount above 2% is allowed on Schedule A. Miscellaneous expenses include items such as unreimbursed employee expenses, tax preparation fees and investment-related expenses.
    • Other Deductions – certain itemized deductions are phased out once your AGI exceeds $305,050 for married filing jointly ($254,200 for singles), so that your itemized deductions are reduced by 3%, on up to 80% of the deduction, for the excess of your AGI above $305,050 ($254,200 for single filers).

    N.B. – (a) many of the deductions affected by the phase-out are the ones not allowed in the AMT calculation and (b) investment interest is not subject to reduction on Schedule A.

    Schedule C income and expenses – can you defer or accelerate between years so that the net income falls in the best year?

    Investment income – can you shift interest, dividends, and capital gains? The tax rate on capital gains was as low as 0% in 2013, with a cap at 15%. However, that cap went up to 20% in 2014 for AGI over $457,600, for married filing jointly ($406,750 for single; $12,150 for trusts and estates). You net losses against gains, with up to $3,000 of an excess loss over gains being allowed to shelter other income and losses you do not use carry to the next year.

    Notes

    • (a) capital gains include the sale of a primary residence (above the $250,000 per owner shelter);
    • (b) if you sell to recognize a loss, and want to hold the stock again, be aware of the wash sale rule which bars recognition of the loss if you re-purchase substantially the same security within 30 days, even if it is in different accounts you own, including repurchasing in your IRA;
    • (c) an installment sale that spreads gain over several years; a like-kind exchanges involve investment property, which means you can swap, rent and later convert to residential; and
    • (d) purchasing mutual funds late in the year can lead to dividend and capital gains distributions where the mutual fund price changes but your investment does not, such that you have no economic gain for the distribution on which you pay taxes – you are effectively pre-paying taxes because you did not purchase after the declared distribution date.

    Investment income also includes passive income and losses (rental property, limited partnerships and LLCs). If you can re-characterize any activities as material participation rather than passive by grouping together to meet the material participation rules, you have a one-time election to regroup (see final regulations on when and how you elect issued early in 2014).

    Roth conversions – can you convert an IRA to a Roth IRA, so that future distributions are not subject to tax? Be sure to pay the tax with funds outside of the IRA so that the conversion has maximum benefit.

    Stock options – can you exercise a non-qualified option (“NQ”), which is treated as ordinary income, or instead exercise ISOs, which can be investment income (but create an AMT)? Disqualifying an ISO converts it into a NQ, so that you have control over the type and timing of the income.

    Required minimum distributions (“RMD”) – If you turned age 70½ in 2014, you can take a distribution in 2014 instead of next year to decrease your 2015 income – but the IRA distribution is not subject to the surtax so this would be done for the Schedule A phase outs (see below).
    A direct distribution from an IRA to a charity allows you to give up to $100,000 (per person) of your RMD and lower your AGI for purposes of determining taxes.

    Estate taxes – Federal Estate Tax Exemption for estates of decedents who die in 2014 is $5,340,000, up from $5,250,000 for 2013.

    Gifting – can you shift assets by gifting within the $14,000 per year/per person annual gift tax exclusion, or even by filing a gift tax return to use some of your unified credit now, so that income is in the lower tax bracket of new owner? You may want to combine this estate tax savings strategy with income tax savings ideas so that you shift an income-producing asset to someone in a lower tax bracket.

    Inherited IRA – be sure to divide an inherited IRA among beneficiaries to get the maximum life expectancy for RMD calculations for each.

    If you made it this far, I hope you have a good idea of your 2014-2015 tax plan, or else a set of questions to ask so we can help devise one for you! Please contact us.

    Federal Tax Rates for 2014:
    2014 federal tax rates2014 federal tax rates

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    The results from retirement calculations on different websites vary. Why?

    Results from online financial calculators are not equal. But, why do the results differ? Usually, it is because different assumptions were used. That is, the calculators control the variables in different ways.
    Performing complete and accurate calculations well is difficult, and thus designing a web-based calculator can be expensive. The variables a retirement calculator must address include rate of inflation, rate of return on investment, life expectancy, how much of current salary you need to support yourself at retirement, and social security benefits. Some calculators offer Monte Carlo simulations (click here for an explanation of Monte Carlo Simulation ) to help you predict your retirement funding. On this, my vote is to ignore the Monte Carlo simulation for the same reason many websites will tell you not to count on past returns as to predict your future investment results.
    Some calculators allow you to alter their assumptions. However, none of them is able to accommodate either decreasing spending in later years, which is typical of most people during retirement, or the cost burden of major health problems. Any attempt to address these issues would be quite costly.
    Others take an easy out by limiting variables, e.g., keeping your contributions flat. This facile solution provides little insight into what your retirement savings will actually look like because it ignores your ability to save more as your income increases. Also, by assuming flat contributions, your need to act will look more urgent due to the big shortfall in saving to meet your retirement goal. The company using this assumption may hope you contact them to help you solve the retirement problem that their formula, in part, has created. A calculator that assumes annually increasing savings makes more sense.
    We have designed formula for our website, Millennials-Money, to be launched in 2015. It will allow you to alter almost all variables. This may or may not be a good thing, as shifting some variables too much could lead to unrealistic results and misdirect you. Nonetheless, it should allow you to test all of your concerns so you can establish a good retirement strategy.
    In the end, using any of these calculators gives you a sense of where you stand //vis a vis// your retirement goal. If you are far off, it gives you impetus to act so you get on track; and if you are on track, then you it gives you a sense of security. For me, the most important result from using any calculator should be assessing and sticking to a good strategy for saving and investing with a long-term perspective.

    Here are links to the most popular retirement calculators, which will come up in a web search: AARP, Bloomberg, CNN, Fidelity , Schwab and Vanguard.

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    On-line Scams – some to look out for to protect your finances

    Our society today has growing appetite for social media and most of us use it for legitimate purposes: connecting with our friends, pursuing our hobbies or building our businesses. Unfortunately, part of the population has a more insidious use for social media: they want to scam you. Thankfully, a little vigilance can go a long way in protecting you from these cybercriminals. Here is one list you can use, from Norton Antivirus, showing the top five social media scams:
    1. Hidden URLs – Those shortened URLs are convenient, but they may be links to websites you don’t want to visit, or worse, they could install malware on your computer.
    2. Phishing Requests – When you get an invitation to click on a link to see a picture of yourself at some wild party, think twice. Once you click, you’re taken to a fake Twitter or Facebook login page where you enter you user name and password. Doing this gives the cyber-criminals complete control of your account.
    3. Hidden Charges – Be wary of those on-line quizzes that offer to tell you interesting information about yourself like which 1960s sitcom star you resemble. If the quiz asks you for personal information, such as your phone number, stop. If you continue, you many end up subscribing to some service that charges a recurring monthly fee.
    4. Cash Grabs – It’s great to make new friends, but maybe not by “friending” strangers on Facebook. That person you just friended on Facebook may soon be asking you for money. You can avoid this situation by limiting your social media connections to people you know personally.
    5. Chain Letters – Sure, you want to be sure that Microsoft will donate the millions it promised to some worthy charity if you keep the on-line chain letter going. However, such “chain letter” e-mails are a way for scammers to access your friends to connect with them later.
    Sites that are popular with users are popular with criminals, too. Be vigilant, keep your anti-virus and anti-malware software up to date and think twice before clicking on a suspicious link!

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    Passive vs. Active Portfolio Management

    Choosing whether an active or passive strategy is right for your portfolio is an important and challenging decision and the answer may depend in the areas of the market in which you are investing. In more “efficient” markets, passive is traditionally preferred, but it is believed that active managers are able to outperform in areas like international-small cap stocks.
    Morningstar recently took a look at all the mutual funds from its international small/mid-cap categories and found that these categories have many underperforming funds. In a review of Morningstar’s international small-cap growth, value and blend categories, analysts concluded investors would have less than a 50% chance of picking an outperforming fund. As Abby Woodham pointed out in her 6/20/14 article “Passive vs. Active: Debating International Small Caps,” points out, “The average results are mediocre, but when we look at the list of funds that receive a Morningstar Analyst Rating, actively managed funds begin to look more attractive.”
    While the funds on her list have provid significant alpha recently, they can be relatively expensive and their outperformance may waiver. And that leads to the challenge: even if active funds add value, they may not be consistent over time and, if you fail to catch them when this happens, your returns will lag passive funds. If you are concerned that the outperformance will not continue, but you want international small-cap value, an alternative may be a passively managed ETF.

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    The real problem facing retirement plans? Not saving enough

    Recently, two debates have been brewing over 401(k) plans. Specifically, are they too expensive and should we cap the amount Americans can accumulate in the total balance of their defined benefit and defined contribution plans as well as IRAs. Is that really where the debate should be?
    A recent PBS.org retirement study revealed some alarming statistics about Americans’ retirement savings habits. Specifically 30% of workers have $0.00 in retirement savings and 40% are currently not saving anything for retirement. Even factoring in Social Security, the average savings shortfall of a U.S. household will be $250,000 at retirement.
    For many, if they are contributing to their retirement plans, they are contributing too little. The current belief that contributing just enough to maximize an employer’s contribution will fund your retirement is irresponsible. Only a small number of Americans will amass $1million in their retirement plans by the time they retire. According to Don Phillips in his recent Morningstar article, Fighting the Wrong War, “At a 4% withdrawal rate, $1 million in savings will provide just $40,000 a year.”
    While the cost of the plans and amount we can accumulate in our retirement plans can be interesting debates, they don’t address the real issue. Will we, as future retirees, be able to fund our own retirement?

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    Be wary of these scams – IRS and investments

    It seems that we hear of a new internet or phone scam on a weekly basis. These scam artists are getting bolder and more sophisticated with each new endeavor. So, we wanted to alert you to a few new ones where the scammers are pretending to be IRS agents and financial planners.

    Taxpayer Scams
    This past year, the IRS issued a strong warning to consumers against an aggressive telephone scam. The scammers call taxpayers to inform them they owe outstanding taxes and demand payment over the phone. To lend to their credibility, the scammers will have the last four digits of the taxpayer’s social security number. If the taxpayer refuses to make a payment, the caller threatens the taxpayer with jail time, loss of driver’s license and, in some cases, deportation. When the taxpayer refuses to provide this information, the scammers call back pretending to be a local police officer.
    If you receive one of these calls, the IRS requests that you take these steps:
    • “If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
    • If you know you do not owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
    • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.”
    The IRS wants you to know that they never initiate contact with taxpayers via email to request personal or financial information. They also never ask for PINs, passwords or similar confidential access information for credit cards, banks for other accounts. If you receive an email claiming to be from the IRS, you should forward it to phishing@irs.gov.

    Investor Scams
    The Financial Industry Regulatory Authority (“FINRA”) recently published a warning to registered representatives about three different scams where registered representatives may be subject to “Firm Identity Theft”.
    The first scheme involves scammers fraudulently using the identity of legitimate registered representatives and brokerage firms to con investors out of their money by building websites that mirror legitimate websites of broker-dealers and registered representatives. The scammers claim they are registered with FINRA and SIPC. Victims who fall for this tactic are tricked into making payments or investments through the site. The scam artists collect the money and then disappear.
    The second one puts a new twist on an old tactic by perusing international investors with and “advance fee scheme” or “mirror fraud.” Again, scammers use the identity of a legitimate broker-dealer and contact investors with an attractive offer. Examples of these offers include lifting a stock restriction or purchasing investors’ shares for an amount significantly above their market value. In return, the investor is asked to pay certain fees and expenses in advance. Once the investor has paid the fees, the fake broker-dealer steals the money and disappears.
    The last scheme involves fraudulent checks. The scammer, using the stolen identity of a registered broker-dealer, contacts a customer is an attractive offer, like offering to overpay for an item on Craigslist. When the scammer sends the check, it’s for a much larger amount than the agreed-upon price. The scammer then requests the seller to mail the difference back to the scammer. In an effort to convince the customer of the stolen identity, the fraudster will use the broker-dealer’s true address as the return address on the mail sent to the customer. Believing they are dealing with a real broker-dealer, the customer is persuaded to send money. But, when the seller cashes the original check, it bounces.

    Protecting yourself from these scams requires vigilance. If someone contacts you with and offer that’s too good to be true, it likely is!

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