Steven A. Branson, Esq. – Financial Strategies

Administrative:
Since March, about 5 or 6 people out of 500 or so to whom we send e-mails did not receive them. The only possible issue we found on our side is that the office router/network/firewall could add something that causes recipient servers to block the message. Messages from my apartment or my iPhone seem to work fine.

So, if you are expecting something from us and have not heard, say so and we can see if you are experiencing this e-mail issue. (And for those that have, thanks for your patience)

Thank you,

Steven

Merrill Lynch PanelWe attended the Merrill Lynch Market update 2012 last Monday.

David Gergen, from the Harvard Kennedy School, moderated the panel of Danni Rodrik, of the JFK school, Glen Creamer, of Providence Equity Partners, and Chris Wolfe of Merrill Lynch (please see attached summary bios)

The comment Gergen drew from the recent Duke commencement is that we are now “living through history,” with the Euro changes, a possible Greece exit, with a resulting financial impact that is small but the psychological hit is greater, and the possibility that Spain follows (the panel said 50/50 chance)

Chris added that the markets have already discounted already all of this, so Gergen asked if investors should avoid Euro companies. Chris agreed that they could be forced into selling off. On the other hand, as banks that now hold assets in place of loans foreclosed are bad at unloading them could lead to investment opportunities.

The panel went on to discuss all this uncertainty and how that creates possible discounts, i.e. investment opportunities. However, the risk is great, especially if Germany leaves the Euro Union. So making a wise move comes down to timing.

Another area that the panel discussed was emerging markets, but in a country-specific way for investing. One theme was that countries that have been building their middle class that:
1. Have low public debt (Brazil),
2. Have robust democratic politics, and
3. Are insulated from financial links to other economies (as in not go for China, which has moved manufacturing to Viet Nam and other countries, but instead Africa and Brazil.

They ended this investment piece focusing more on avoiding risks, and even making tactical moves, rather than seeking big wins.

The panel then touched on entitlements like health care and on the need for growth. Chris sees higher taxes for Medicaid and other entitlements, which is a stability not a growth focus. That means that we really have a job crisis, not a debt crisis, and makes our immigration policy crucial.

The viewed the Tea Party as possibly okay in the short-term but it is very bad long-term for Republicans. The lack of compromise leads to waiting, and that can increase the risk.

David concluded by quoting Churchill: “you can always count on the US to do the right thing after trying everything else first.”

At dinner, we sat with James Carville, the “Ragin’ Cajun.” As you would guess, he is very interested, very knowledgeable full of strong opinions

After diner, he joined his wife, Mary Matalin, on stage and they spoke about election year and their issues to watch.

Matalin sees no self-disqualifying (Goldwater, McGovern) and no suburban tax cut swell (some past Republican victories). Instead, she expects the independents and undecideds to turn the final vote, based on anger and dissatisfaction, which would me Romney.

Carville thinks that economy is getting better, but the middle class may not feel it yet. If they do, that can have an impact, re-electing Obama. In the end, he sees the final vote as turning on the whites as in 2004 and 2010, for example. If the number is 72%, Obama wins; if it is 78%, then Romney.

Reminders on your finances:
Please set aside time to review your estate plan, do a memorandum to your executor and others recording IDs and passwords, locations of life insurance policies, stock certificates, etc. and where the safe deposit box key is, and any other information and wishes that will aid in handling your estate.

Also review your finances for need to change anything from investment allocation to the deductible on your auto policy, increasing your umbrella policy, changing beneficiary designations and so on.

See Finance Health Day page
And Estate Planning Overview with definitions, tax impacts and “to do” list

Administrative:
Since March, about 5 or 6 people out of 500 or so to whom we send e-mails did not receive them. The only possible issue we found on our side is that the office router/network/firewall could add something that causes recipient servers to block the message. Messages from my apartment or my iPhone seem to work fine.

So, if you are expecting something from us and have not heard, say so and we can see if you are experiencing this e-mail issue. (And for those that have, thanks for your patience)

Let me know what you think and if you have questions or comments

Thank you,

Steven

Estate planning remains stuck in limbo. That is, after 2012, the $5 million credit for gift and estate taxes goes away and we could be back at a $1 million credit. Also, the generation skipping tax limit now at $5 million would decrease. Finally, the portability of estate tax exemptions between spouses expires, meaning that the survivor can no longer use any credit amount not used by the first spouse, which would allow more to pass on estate tax free.
So far, Congress has taken no action. Many expect the 35% rate and a credit of at least $3 million to be the law for 2013 on. However, Congress failed to fix the estate tax for 2010 so nothing is certain.

Planning: This means you need to review your estate plan, especially your gifting strategies, and act now to take advantage of the higher gift tax credit. You can gift up to $5 million of assets free of gift tax now, or $10 million for married couples. The benefit is that all future income and appreciation on these gifts is removed from your estate. The downside is that the gifts are irrevocable, so you must be certain that what you pass on now you will not need later.
You always want to select assets that you expect will grow in value. If the assets decline, the strategy is frustrated. An example of what could go wrong is gift of a home at peak values that is now worth far less.

Remember that you have the annual gift tax exclusion allowing you and your spouse can each give $13,000 per year to any individual without eating away at your gift and estate tax credit. And note: any payments made to colleges or hospitals for the benefit of another person are not counted at all. (No gift tax return is required for these excluded amounts.)

How do you effectively structure the gift? Here are some examples:
• Family limited liability company (FLLC): With real estate or business assets, you can transfer minority interests in the FLLC to children or grandchildren. You retain control and the amount you gift is discounted because the minority interests lack control and lack marketability. You will need an appraisal for the value and the discount.
• Dynasty trust: This type of trust is designed to pass assets on multiple generations. Distributions can be made to the first generations, but they never actually receive a final amount – they rely on the trustee for any amounts to be distributed to them.
• Grantor retained annuity trust (GRAT): This trust transfers assets to children after a specified term while retaining a fixed annuity. The amount you gift is discounted, because children do not receive it until the end of the term. If the amount transfers, you succeed in transferring a discounted amount that becomes worth much more to the next generation.
• Qualified Personal Residence Trust (QPRT) Like the GRAT, your children receive your house in the future, so the value of the gift made now is discounted. You can even stay in the house after that term, but you have to pay rent, which is in effect another gift.

One note of caution: some have expressed the concern that if Congress does not act, the IRS could try to take back the excess in some fashion. Be sure to consult with your estate tax advisor before taking any moves.
We added gifting as a “to do” on the Finance Health Day page .

(This is a summary of a recent post by Kiplinger’s)

You may have selected a card for points or for cash back. However, there are many other benefits to keep in mind, from on-line purchase protection to vacation and travel insurance.

Prices: many gold and platinum cards, and now the Citi premium card, will give you up $250 back if you find an item you purchased for a lower price within 60 days.
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Avoid checked-baggage fees. You can redeem points for an airline ticket with your U.S. Bank FlexPerks Travel Rewards Visa Signature card and receive a $25 credit toward the checked-bag fee. Gold Delta SkyMiles cards from American Express cover the cost of checked bags (up to $50 per person round-trip) for up to nine people on the same reservation. American Express’s platinum card offers a $200 annual credit for flight-change and baggage fees.

Free admissions: Bank of America and Merrill Lynch cardholders receive free admission to 150 museums in 85 cities on the first weekend of the month. Participating institutions include New York’s Metropolitan Museum of Art, Chicago’s Art Institute, Nashville’s Country Music Hall of Fame and the National Cowboy & Western Heritage Museum, in Oklahoma City.

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Getting back home: Chase customers can call Global Lifeline (the number is on the back of their card) and get help with hotel and airline reservations and medical assistance. For example, Chase helped a cardholder stranded in the Dominican Republic get a flight back to New England this past winter after a massive snowstorm forced flight cancellations.

We added checking these benefits to the Finance Health Day page .

Let me know if you have questions or comments.

Maybe the last few days of investment market turmoil need to be put in the same category along with legislation and sausage – that you don’t to watch while it’s being made….

You investments will ultimately provide returns, but you probably did not need to watch as the stock markets slid last Thursday and again Friday, bounced around Monday and then shot back up on Tuesday

It may have been confusing or even scary. However, as you always hear us say, the key is sticking to your investment allocation and long-term strategy… that is what works over time.

Here is an interesting example of why investment allocation is so important.

* On Monday, many investments were down, but not all. There are funds we use that were up significantly on that day.

* The same funds were also up on Tuesday

In contrast, if you panicked and sold some time on Friday to sit in cash or gold, you missed the upswing of the last few days. Staying invested worked better than any timing attempts.

Therefore, diversification by asset class, and staying with your strategy, can provide positive results even in times of turmoil.

Let me know if you have questions or comments …. and good luck!

While Congress and the President continue the political battle on the “deb crisis,” here is more for proper perspective:

First, the yield on Treasuries if falling, not rising. If there were a serious issue about the US ability to repay, then US bonds would see high rates. That is, unlike Greece, which is in real trouble, or even Spain or Portugal, the US is still able to borrow at very favorable rates. So, the markets in general, up to this point, believe that the “crisis” has nothing to do with the economy or the strength of the US relative to other nations.

Second, the debt issues have come about after the extended bull market ended in 2008. That is, high stock values and prosperous markets yielded high tax revenues. With this, there were years of budget surpluses, even after tax cuts were enacted. But, post 2008, that has changed. The change in the economy and stock values, even with some markets approaching their 2008 high points, has led to much lower tax revenues.

Finally, from Floyd Norris in the New York Times today (see: http://economix.blogs.nytimes.com/2011/07/25/debt-crises-real-and-fake/?hp ), we have this summary:

“If rationality does prevail, the debt ceiling will be raised. For that matter, there is no good reason to have a debt ceiling other than to give politicians a chance to grandstand. The important decisions for Congress and the White House concern spending and taxing. Borrowing, or paying back debt as happened for a couple of years before the Bush tax cuts, is a result of the interplay of those decisions and the state of the economy.”
And
“There is a risk that many analysts now are making the opposite mistake. Deficits have skyrocketed in recent years for reasons that are clearly temporary, or that will be temporary if the economy recovers. In some of the debate, the short-term problems are mixed up with longer-term demographic concerns caused by the aging and retirement of the baby boomers and the rising costs of Medicare, the health insurance program for Americans over the age of 65.”

So, with fingers crossed for the prevailing of rationality soon, that is my update. Let me know if you have questions or comments

First, the on-going budget battle in Washington, or “the debt ceiling crisis,” should be kept in perspective. The battle is more a game of chicken, where one side will eventually blink and the ceiling increased. This political battle is not likely to have an impact on investments, as the markets have already accounted for the outcome, as usually happens well before the event. In fact, by way of example, this is much like 1989 when the municipal bonds of the Commonwealth of Massachusetts we downgraded to a rating just above that for Louisiana. Many investors panicked. However, the underlying economy had not changed. Therefore, the smart investment strategy at the time was to buy Massachusetts bonds. After Governor Weld came to office, the rating went back up and investors who held or bought the bonds had a nice profit. The equivalent today would be to buy treasuries.

Second, as it is shaping up, the deficit reduction package contains major tax reform provisions as well as huge spending cuts. This could ultimately be good for the economy and our markets, as it would bring corporate tax rates in line with other countries, falling in the 23 to 29% range. However, the base would be broadened, possibly including depreciation over longer periods, eliminating deductions for domestic production and trimming or dropping the R&D credit.
The tax overhaul raises substantial revenue, $1 trillion over 10 years. However, this less than half the amount that would have been raised by simply letting the Bush tax expire as scheduled.

New Tax Law: Many specifics will not be known until a new tax law is enacted, which is not likely to occur this year. What Kiplinger’s Tax Letter and others are predicting the following: Instead of six tax rates or brackets, with the highest at 35%, three are expected: one in the 8 to 12% range, the next in the 14 to 22% range, and the in the last in the 23 to 29% range. The Alternative Minimum Tax (“AMT”) would be repealed. The earned income credit and child credit would remain.

To do all this, there will be pain: itemized deductions would be significantly reformed, changing home interest and property tax deductions as well as charitable deductions. For example, deduction of interest might be limited to a mortgage of $500,000 used to purchase a home, but not any for a second home. In addition, the deduction of equity line of credit interest may be eliminated (no one knows what will be grandfathered, so better to have a line in place than to wait). Higher bracket taxpayers may see the deductions converted into a 12% credit.
Something of a surprise, given the push over the last ten years or more to increase personal savings, the deductions for retirement contributions may be cut back, lowering the ceiling and amount of the contributions that will be allowed for 401(k), IRA, Keogh, SEP-IRAs, profit-sharing plans and so on. Similarly, flex plan and health savings accounts may be curtailed or repealed.

We will continue to monitor the information on tax reform, and post updates when appropriate.

Any changes that are this sweeping will require serious tax planning, so that should be on your “to do” list for this fall!

For this summer, we have suggested financial matters for you to review:

1. Asset allocation and investments – taking all IRAs, 401(k)s and taxable accounts as a single portfolio, reviewing the allocation and checking to see if it is time to rebalance;
2. Interest rates, investing and inflation – rates are likely to stay low, inflation is likely to stay low as well (there is no wage component, in fact wages may be deflationary now, there is only commodity inflation), so that leaves looking at any investment that equals or beats the 10 year Treasury bond at a 3% yield: good municipal bonds, dividend paying stocks, or packaged stocks like Berkshire Hathaway or the Permanent Portfolio mutual fund;
3. Refinancing – rates are back down some, so that you can bring a 30 year loan down to a 4.5% 25 year loan, or 4.25% 20 year, or 3.75% 15 year fixed (please see iPod Mortgage Calculator App);
4. Home Equity Line of Credit – rates are still under 3% and no closing costs, so be sure to set one up so you have a fall back source of funds to cover the unexpected
5. Estate plan – reviewing your wills and trusts, and any letters to fiduciaries, to be certain that you account for such matters as the portable credit, which requires an election at the first death;
6. Tax planning – reviewing your information for 2011 against 2010 and checking your options to be you minimize your 2011 and 2012 taxes (e.g., max out 401(k), 402(b), ESPP plans, convert to Roth IRAs in low income years, etc.); and
7. In fact, you could do a Finance Health Day (you own financial planning focus) – please check out Finance health day….

Let me know if you have questions or comments, or if anyone you know wants to ask about any of this material. Also check out Time Saving Tips…

Coming soon…. credit card benefits with real value

Ben Franklin taught us that “time is money”. In addition, we all know that we have limited time, so every instant is important to us. In fact, each minute involves a choice about how you spend that time.
However, the best use is often hard to sort out. Moreover, tracking time minute by minutes can cloud the real issue, which is what the best use of your time may be.

Tracking your time: However, as a starting point, Laura Vanderkam suggests keeping a journal of how you spend each day. This can show you how much time you spend, say, checking your e-mail every 15 minutes. If you can evaluate your habits with some clear-headed objectivity, you may find ways to spend your time better.

What is your time worth? Here is a financial perspective on the use of your time. Ms. Vanderkam “what is your Minimum Wage” as way to have you test your use of time financially. Her example is the difference between buying and making your own tortillas. When she factored in the time spent against any cost savings, she arrived at a wage of $1.40 per hour. So, was that a good decision for the use of your time? Maybe if your tortillas taste so much better… but often, tortillas are tortillas.

Here are two more taken from my experience: driving an extra 25 miles to save ten cents per gallon on gas probably nets out to the same total expenditure, after factoring in the gas used to get there, let alone the time. Replacing the brakes or McPherson struts on your car may seem to save money. However, when you factor in six hours or more spent, and the clean up, you have a fairly low minimum wage calculation. It is often better hire an expert and spend time with family.

Dangers of Technology: Another author suggests three time wasters from new technology: texting, remote access and last minute preparation. Geoffrey James finds that each of these appears to save time, but embodies significant risks. For texting, the response is immediate and you have a full record of the communication. That may not be to your advantage in business or personal relationships. Remote access may mean you are never really on vacation, never really relax and recharge, so return in less than par shape. Easy access to information makes last minute work tempting. So much can be reviewed easily. However, this process is usually rushed, and rarely forms permanent memories like long-term studies. Therefore, technology in general can be good, but there are some technologies, or at least the ways in which we use them, that do not save you time and make you more productive.

Now, some ideas that payoff
One time saving idea that pays is gathering your tax information as it comes, saving you from hunting for it last minute. Also, saving each year’s information in an organized manner will save time if ever questions arise or, worse, you have an audit to counter. Finally, if you let your tax preparer know about any changes during the year, you have a chance to react and adjust your tax planning, rather than being told what you should have done when it is too.

The same holds true for evaluating any other financial change. Address it at the time, and save the documentation. For example, when you get a new document, you can now scan and save files on your computer (but be sure to have backups). This way, your information is more easily retrieved and searchable, so you can find the correct item quickly.

Investing: This is an area where too much attention is not the best use of your time but also risks making investment errors. Please see our comments at Investing, faults of the individual investor…. Too much attention can lead you to override your long-term plan so spend the time on other matters. Your portfolio will be better off.

If you create or update your estate plan, be sure to change your beneficiary designations right away. You may even choose to fund trusts you have created, saving time for your executor (or the attorney he or she hires). See Estate planning overview…

If you have suggestions, or questions, let us know.

I was invited to attend this presentation by Merrill Lynch mid-May.

First – The panels
Frist discussion had as penal memebers Paul Romer (Stanford Institute for Economic Policy Research), Kate Moore (Merrill Lynch Global Research), and Bennett Goodman (The Blackstone Group co-founder), as moderated by Ron Insana (CNBC). The second discussion had as penal memebers Ron with Kevin Kajiwara (Director of Global Markets, Eurasia Group).

Second – Messages
Here is what I want to pass along from those panels:

1. China is a key to any planning. The 9% per year GDP growth may not last forever, but it will continue and slowly ramp down. India is also important. Any investment decision has to factor in the impact China (and India) could have on that company, that market or even the politics and government surrounding that investment. China will rival the US in vying for resources as well as politically
2. Resources – materials for all goods will also be a key factor. Investing in materials makes sense, as so many countries have improving standards of living, requiring more for consumer goods as well as infrastructure. This purchase and use of materials will impact global investing, so you will want proper exposure.
3. Inflation – the panel members expect low inflation for some time. We bounce between low inflation and deflation as themes, but the consensus seems to be that inflation will remain low for now.
4. Euro – Greece and its debt is clearly a big problem for Europe now, not because the total amount is a big number but how because however it is handled could lead to a contagion for the next countries that teeter on the edge of default. Also, there are political issues, such as the German populace not wanting their hard earned resources supporting a country with subsidized early retirement and now potential to grow their way out of their debts. These are political issues that could impact investment strategies.
5. Middle East/North Africa (MENA) – the resources in this area are not so much the issue. For example, Saudi Arabia alone could replace the exports of petro resources from Libya. Nonetheless, again, the political outcomes could impact investing.
6. Opportunities – Brazil and Russia – your investments should include emerging markets. Within that sector, you will want exposure to companies within these countries

The panel was asked to detail what could derail any of this thinking:

a. Inflation – if it hits higher double digits instead of staying low.
b. Debt markets – if the problems like the debt of Greece are not remedied without substantial fallout, as noted in 4 above
c. Inability of key government bodies to make decisions and act – then the predictions get mired in political issues, and capital markets no longer move as they need to

Some clients to whom I sent my summary felt that Russia was too risky, so that you really had to rely on your investment advisor. Others felt that new opportunities would come in the CIVETS (C = Colombia, I = Indonesia, V = Vietnam, E = Egypt, T = Turkey, and S = South Africa). The idea is that these contries are all high-potential, medium size and have strong growth curves

What do you think? Let me know … and tell me if you have questions or concerns.

(Please also relate this to your thoughts on our investment post, Investing: Faults of the Individual Investor to Avoid (Reasons for Impartial Advice)

Individual investors historically act as a contrary indicator. That is, looking at recent events, they assume that a market going up will continue to go up, or that a falling market will continue to fall. The individual investor fixates on the past, as if it will continue, rather than gauging the future. With this perspective, the behavior of the individual investor is to buy at the peak and sell at the trough, hence making them a contrary indicator to what will really occur. Countering this behavior takes substantial discipline, experience and information, and usually a good advisor.

A good advisor should add value through asset allocation and fund selection, but foremost by guiding you to counter bad investment behaviors. You need to stay invested when you fear a fall and sell when you are convinced of sure upswings. Advisors need to provide value-added guidance that will:
(1) avoid giving any serious weight to short-term indicators;
(2) avoid trying to pick “winners”;
(3) closely examine expenses, as high costs result in much lower net returns;
(4) investigate riskier classes as a component of a good overall asset allocation (e.g., emerging markets);
(5) look for funds that stick to their own goals, rather than trying to match any index, as such discipline pass off over time;
(6) take a contrarian view at times because too often a fund doing well at a given time will ultimately revert to the mean of all funds; and
(7) be clear with clients on the risks being taken (that is, measure the risks for say a bond differently than stocks).
All these are ways in which advisors increase the chance that you achieve good investment returns over time.

Recent history provides a good example. With the crash in 2008, we spoke to many clients and started a flow of e-mail updates and strategy suggestions. This became our newsletter on our web site. The key advice was that, if you have a good allocation, and good investments, stick to your long-term plan, do not sell. Those of our clients who followed the advice returned to their pre-crash peak values by last year, something none of us thought would be possible so soon. However, those that sold were selling as investments declined in value. Moreover, they had no clear signal in mind as to when to reinvest. That meant that most missed the rise of greater than 11% in the beginning of 2009. That upswing can never be regained. Therefore, they sold at a low point and were forced to buy back in at a higher point.

How could those that stayed invested be back to their peak when most indices have not returned to their all-time highs? A well-managed portfolio, employing good asset allocation, will not drop as much so it will have less to recover to be “whole.” Therefore, it could regain its peak value more easily, and with less risk. Again, this points to all that we have published before on the need for asset allocation analysis and diversification within each investment type as well as among investment types. It also makes clear how important not losing capital is: losing 50% requires a 100% gain to recover, while losing 25% takes only a 33% gain.

Good investing will lead you to avoid the behaviors that constitute what Carl Richards dubbed the “Behavior Gap” (April/May issue of Morningstar Advisor), meaning the gap between investment returns and investor returns. Simply opting for index funds is not a quick fix that works. Instead, individual investors require guidance. They can have the best possible investment approach “only to blow it up completely with one big behavioral mistake at the wrong time.” He goes on to write that all approaches are tested over time, so the advisor’s role is one of helping “rid the world of negative behavioral alpha, to close the Behavior Gap.”

In another article, he writes that “ … if 83% of mutual fund investors are getting advice from advisors and are doing poorly, maybe we advisors are part of the problem. (See First, Do No Harm by Carl Richards 02-10-11) To state the opposite side, “Still the trend seems clear. Investors who were inclined to invest for the long term were likely to have better returns. A look at how the markets have worked during the past 10 years illustrates why that is. We had two bear markets and two dramatic rallies. Those who sold equities in the bear market missed out on the rally and therefore nearly all would have been better off riding out the bear market.” (Inside the Vanguard Science Project Vanguard’s more-patient shareholders outperformed the rest. by Russel Kinnel 05-05-11)

Investors doing all the work with no advisors have access to good tools, such as E-Z Planner for retirement planning, but that can be dangerous. Again, the risk of bad input, generating bad outcomes, comes from the same issues of perspective and bad investment behavior. With an objective source to counter your own bias or “bad investment behavior,” this can be avoided. For example, in addition to the investment issues reviewed above, most individuals understate spending. “Oh, yes, we did buy [something] last year, but that was a one-time event.” Each year will have “one-time” events. Building a good plan takes some means by which tough questions like cash flow and investment risk are addressed. Otherwise, the best software will produce results with erroneous conclusions.

Conclusion
You need terrific discipline or good advice to resist psychology of risk aversion and the urge to use recent events as a gauge for what will occur next. Otherwise, your investor returns will fail to match investment returns over time.

Having said that, what is the Next Step:
First, review how your portfolio performed in recent times, did you react from fear and leave your strategy or hold on?
Second, review your portfolio; does it fit your risk tolerance and financial goals?
Third, take a second look at your portfolio, but from a contrary perspective; did your answer on risks match the actual investments made? (For example, someone claiming worry about the economy should not be 80% in US stocks.)
Finally, check to see if the portfolio, with any on-going savings, will be sufficient to achieve your financial goals. If you are not certain, then advice from an objective source could make a substantial, and very important, difference.

Need help? Contact us Begin Planning Now

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 gives us a two year window for significant estate tax planning, ending December 31, 2012. However, this comes with some serious planning issues. Here are two:

One pitfall of the new law: The new portable credit requires a proactive election by the executor at the first death. Like the frequent failure to make proper QTIP and GST allocation elections, this is an area subject to risks. For example, if the assets are in trust, the survivors may choose not to appoint an executor, missing the opportunity to save the unused credit for the second death.

Also, the portable exemption amount only applies to the unused exemption from the last spouse. For multiple marriages, only the most recent spouse’s amount is available. In addition, an election must be made in the estate of the first spouse to die to preserve the unused exemption and allow for its use by the last deceased spouse.

Second, old trusts that had too much going to the credit portion, the beneficiaries of which are not your spouse, then he or she could be left with very little from your estate.

Please see Estate Planning overview, definitions and tax impacts, and “to do” list.

The change in the tax law from the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 gives us a two year window for significant estate tax planning, ending December 31, 2012.

Instead of a $1 million lifetime cap, you can now gift up to $5 million. When your spouse joins in, a major amount of wealth can be transferred. This makes it important to act now, because the law could change in for 2013.

Leveraged Gifting – you can use a defective irrevocable trust (the defective grantor trust is discussed below) to fund an installment purchase of assets from you to the trust over time. The trust is “defective” so that there is no taxable transaction and no gain; it is as if you are selling to yourself. With the installment sale, a note is used and has to bear interest at the IRS mandated rates, the lowest rate of interest allowed. The goal is to repay the note using appreciated assets, where the transfer back to you is also not taxed, and complete the repayment before you die. If it is not completed, the note is an asset taxable in your estate.

Dynasty Trust – you can use the increased generation skipping transfer tax (GST) to pass more to grandchildren and future generations. Again, the new limits allow you to pass far more on to future generations.

Life Insurance Trust – an irrevocable trust that holds insurance for whatever purpose you design, while be excluded from your taxable estate. Your trustee would purchase insurance on your life. The risks of this alternative are that it is irrevocable and that the cost of the permanent insurance is very high.

Second-to-die Life Insurance – a trust that purchases second-to-die life insurance crates a source to pay estate taxes while not increasing the taxable estate.

GRAT – Another alternative is the grantor retained annuity trust (“GRAT”), which uses some portion of your unified credit as a window through which to pass assets at a discount created by the IRS tables that tell us what the asset gifted will be worth at the end of the term of the trust. You receive annuity payments during the term and the principal passes to your children at the end of the term. (This is why it must be funded with “excess” wealth – if you give the trust a term of 20 years but live many years thereafter, there will be many years during which you have foregone the benefit of the assets gifted). The expectation is that the principal will actually be worth more than the amount you gift to the trust, with such increased value escaping estate taxes. Under the new law, there are no GRAT or value limitations.

Cautions: First, the securities laws will treat you as the owner of trust assets for any restrictions on dealing with publicly traded stock. Second, if you die before the end of the term, assets revert to your estate and the structure collapses to look as if nothing was done. Last, a twist: if you stipulate that the trust will not terminate at your death, you substantially reduce the amount that gets thrown back to your estate, reducing the risk of not living through the term of the trust.

Tax inclusive and exclusive – the Sam Walton strategy can used when you want to transfer more than your unified credit alone will allow. If you make a taxable gift, it is tax exclusive (the tax comes from other assets). Thus, the tax is calculated as a percent of the gift. If you die owning the asset and it then passes to your children, it is tax inclusive as the tax is calculated as the total amount, so less of the assets pass to your children. QPRT – The qualified personal residence trust (“QPRT”) uses the unified credit and discount of a future value like the GRAT but applies it to your residence. Thus, both the benefits and risks are similar; it is the asset that differs.

“Defective” grantor trust – The “defective” grantor trust is effective for gift tax purposes and “defective” for income tax purposes so that assets are not included in your estate and yet you pay the tax on their appreciation. Paying the income taxes without any gift tax cost effectively gives away additional wealth. Again, you can leverage this with an installment sale.

Family Limited Partnership – the family limited partnership (“FLP”) is a partnership that you form, acting as the general partners and the limited partners. You transfer assets into the FLP such as any commercial real estate or your shares in your company. When this is complete, you can gift limited partnership interests to your children. Because only the general partners have any say in the management of the FLP, the IRS allows for a discount to the value of the limited partners interest. This discount is 35 to 40%, so more is passed to children without using up your unified credit. Unlike the other alternatives delineated below, when you transfer limited partner interests, your children receive the benefit now. In addition, you have the burden of tax returns for the FLP, as well as tax liability for children who may not receive distributions from the FLP to cover the taxes.

Charitable Remainder Trust – This charitable remainder trust (“CRT”) is a trust that pays a fixed annuity to you and then distributes the remaining principal to charities. You get a gift charitable deduction for the net present value of the future distribution to charities.

Charitable Lead Annuity Trust – This reverses the CRT, where a trust that pays a fixed annuity to charities selected by its trustees and then returns the remaining principal to you or to your estate. You get a gift tax deduction for the actuarial value of the annuity payments to charities or an estate tax charitable deduction.

Caution – you have an investment risk in each vehicle, where failing to generate the larger principal value in the future that you count on to use the strategy will frustrate its purposes. This is the risk of selecting assets that are expected to soar in value but instead collapse. Therefore, none of these alternatives should be considered until you are comfortable that you have “excess” wealth to pass to your children or to a charity and comfortable that you can make a commitment to do so that cannot be reversed. If you say “no” out of lack of comfort or confidence in any strategy, then you will want to stick to a basic plan for now.

What about the Future? Most observers expect the $5 million exemption to stay, along with the 35% estate tax rate. The exemption could be lower, or the rate increased. All of this is reason to review the ideas below and then update your estate plan.

Please see Estate Planning overview, definitions and tax impacts, and “to do” list.
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If you contribute to a Keogh, SEP-IRA, Money-Purchase or Profit-Sharing Plan as a self-employed taxpayer, or if you have made deductible contributions to an IRA, then you may have a tax issue on distributions from that plan or IRA. (Obviously, this does not apply to Roth IRAs but it can apply to roll-over IRAs.)

Many states follow the federal tax rules, allowing a deduction to these plans. However, Commonwealth of Massachusetts, among others, does not.

That is, in the case of contributions to all of these Plans and even a traditional IRA, Massachusetts gives you no deduction on the contribution. Therefore, you have to take a deduction for that contribution against later distributions. Otherwise, you have paid tax twice on that amount.

To say it differently, because Massachusetts does not allow a deduction at the time of the contribution, i.e., it was “after-tax” money when contributed, you must offset those amounts against withdrawals, amortizing over time, so that you are not taxed on the after-tax contribution when it comes back out as a part of the distributions.

Therefore, you will want to track the contributions made, so that the total can offset the amount taxed by Massachusetts when you withdraw.

We are addressing this issue in an appeal to the Massachusetts DOR Appellate Court, as certain plans face double taxation.

Please see Tax planning and 2011 estate tax law

The press is full of commentary on the meltdown, cooling system repairs, cobbling together power supply lines, the dearth of inventory as certain plants…

But few comment on the long-term view, other than perhaps how long the radiation may be in the ground, the water or plants…

That is why I wanted to share a portion of the interviews of managers by MorningStar:
“A large group of successful fund managers says the sharp decline in Japanese equities over the past week is overdone. by Morningstar Analysts 03-21-11
“The MSCI Japan Index has declined 11.7% this month through March 16. Meanwhile the S&P 500 is down 5.2% and the MSCI EAFE is down 8.5% over the same period.
“Ben Inker, of GMO-run Wells Fargo Advantage Asset Allocation EAAFX, wrote in a note to clients this morning that corporate Japan can bounce back.
“ ‘Given the long duration nature of equities, where the bulk of value comes from the present value of dividends that will be paid 10 or more years in the future, we believe this event is unlikely to have material impact on the long-term fair value of corporate Japan,’ Inker wrote.”
From the excerpt, you can see why holding on and staying the course is again the best advice. In fact, many US stocks are already resurging, as are stock in other countries.
In fact, some managers are buying Japanese stocks because the shares are “oversold”

As I said, there are opportunities in volatility!

On the human side, there are ways to donate to relief efforts, such as: Global Giving

If you have other ideas on donations or questions on any of this, let me know.

Good luck!

Steven

Our hearts go out to the families who lost loved ones in the earthquake, Tsunami and nuclear reactor catastrophe of Japan and will hope for the best for those fighting with their lives to contain the meltdown.

The globe was hit first with the turbulence in the Middle East, affecting petroleum availability and delivery, driving up gas prices at the pumps while hitting bond values so that mortgage rates fell down.

In the last week, the earthquake, Tsunami and nuclear reactor catastrophes have affected Japan at humanitarian, financial and political levels not seen in decades

These impacts have led to drops in our stock markets and others around the world. Japan supplies about 9% of G.D.P., so that is no surprise. As with any dramatic change, there are always opportunities.

So how do you react? What do you do?

The New York Times compared the nuclear meltdowns to the recent financial meltdown, only not many lives were lost from bad mortgages, economic downturn, house foreclosures and layoffs.

The comparison provides a bit of help. Therefore, other than any action you may take for relief efforts, the financial outlook is somewhat the same as a couple of years ago, recast this way:

 countries struggling to recover, including the US, will experience supply shortages such as the GM plant just shut down awaiting parts from Japan,
 this will frustrate those recoveries in the short-term while alternatives are found and Japan recovers,
 as with the oil availability, the Japanese production short fall should not have a long term impact, either from Japan rebuilding or other nations taking up new supply roles,
 if bonds are a measure, the confidence in the Japanese government has not altered dramatically (bond yields changed some, falling from .57% to .51%)
 Japan will bolster its own economy from government financing of repairs and possibly stepping in where earthquake insurance did not cover or was never purchased,
 Japan will have to rebuild its confidence as well as it sources of energy
 there may be investments to be made in Japan – so it is better to shift the investments that any wholesale sell-off

Summarizing, these events certainly will have financial impacts now, as well as human and emotional, but none of them are cause for selling stocks to buy gold or to go all to cash – just as with the fall of 2008, staying invested paid off (those who sold for cash never got back in time to recover their losses).

In fact, none of the impacts is cause for selling Japanese stocks to buy other international stocks – at least not in general. There will be moves to be made among the specific stocks you hold throughout the globe, but as with the financial meltdown, sticking to your investment strategy, and holding on to your asset allocation, during the nuclear meltdown will be the best course!Let me know your concerns and comments …. It is clearly not a happy time for many

Take care and good luck,

Steven

You can still decide as late as October 15th (if you extend filing of your tax returns) to either recharacterize or pay the taxes in 2011 and 2012 instead of on your 2010 taxes for your 2010 conversion to a Roth IRA.

Recharacterize – if you have the misfortune of losing value on the IRA after converting, you can “un-convert” by “recharacterizing” the Roth IRA as a traditional IRA using an IRA-to-IRA transfer (do not distribute funds to yourself, as that distribution voids the recharacterization). You can do this for all or a portion of the account. Once you do so, you cannot convert again until later of 30 days after the recharacterization or the year after the year of the original conversion.
This strategy is useful to address a decreased IRA value or to shift the conversion into future years with less income, so you are in a lower tax bracket.

Tax payments – 2010 is the only year where you can choose to have the income of the conversion split in half and carried onto your 2011 and 2012 tax returns. This (1) spreads the time to come up with funds to pay the taxes (you never want to use the funds in the IRA as that defeats the purpose) and (2) gives you earnings on funds already available to pay the taxes until the payment due date.

Note: if you are paying taxes on the conversion with your 2010 taxes, the amounts are due April 18, 2011, even if you extend to have the option of recharacterizing. If you do recharacterize, then you will have over paid and have a refund due …. until you convert again.

Clients often ask how long tax-related documents should be retained. There are two IRS rules:
 The general rule is 3 years from the date of filing the return.
 The second, in the case of fraud, is 7 years from the date of filing.
However, there is another reason to retain certain documents after 3 or even 7 years:
if ever you have to prove the basis of an asset that you sell, such as your house, then you need to keep all documentation of purchase price and capital improvements for as long as you own that asset, in case you are ever audited.
This applies to any other asset that is not traded on an exchange, such as a work of art, and other objects that appreciate over time.
In the case of mutual funds and stocks, the fund or broker usually has the cost basis on record these days.

As anticipated, Congress lifted the estate tax credit for 2011 from $1 million to $5 million, lowering the rate from 55% to 35%. Also, the date-of-death value again serves as the basis for estate assets. Also, the exemption is portable, viz. the un-used portion can be carried cover gifts by or the estate of the surviving spouse. Finally, the exemption will be indexed for inflation. (Estates can elect to use the 2010 rules for $1.3 million carry over basis for heirs).

There are some special rules: up to $1,020,000 of real property used for farming or business can get a discounted valuation; and when a closely held business comprises more than 35% of an estate, then as much as $476,000 of estate taxes can be deferred at a cost of 2% (charged by theirs).

In 2013, the exemption again falls back to $1 million and the rate goes back up to 55%, unless Congress again takes action.

For any 2010 estates, the retroactive action provides requires estates with a date-of-death valuation in excess of $1.3 million to file informational returns to report the carry over basis to the IRS and to heirs (as well as the $3 million for assets passing to a surviving spouse).

See more at Estate Planning overview, definitions and tax impacts, and “to do” list.

(or contact us with your questions at Contact Us.)

First, a quick reminder of what the Alternative Minimum Tax (AMT) is:

This the tax that Congress imposed over four decades ago, when very rich people with clever advisors were able to pay $0 taxes. Unfortunately, it was never indexed for inflation and has, especially over the last decade, grabbed more and more taxpayers. This has led to several patches, including the law just passed by Congress.

Today, the tax has a 28% rate and removes many deductions, such state income taxes, most exemptions and then adds in other items, or “preferences”, like the spread on incentive stock options purchased but not yet sold.

For the new law, middle class taxpayers are rescued from the AMT – at least for 2010 and 2011.

That is, the compromise tax package from Congress boosts the exemption levels for the AMT to cover over 20 million middle-income taxpayers.

Someday, perhaps an inflation adjustment will be added…..