The IRA and 401-K Experts

09 Mar

How Secure Is Social Security?

Posted by: Brad Neve / Category: Economy and Stock Market, Uncategorized

If you’re retired or close to retiring, then you’ve probably got nothing to worry about–your Social Security benefits will likely be paid to you in the amount you’ve planned on (at least that’s what most of the politicians say). But what about the rest of us?

The media onslaught

Watching the news, listening to the radio, or reading the newspaper, you’ve probably come across story after story on the health of Social Security. And, depending on the actuarial assumptions used and the political slant, Social Security has been described as everything from a program in need of only minor adjustments to one in crisis requiring immediate, drastic reform.

Obviously, the underlying assumptions used can skew one’s perception of the solvency of Social Security, and even experts disagree on the best remedy. So let’s take a look at what we do know.

According to the Social Security Administration (SSA), approximately 54 million Americans currently collect some sort of Social Security retirement, disability or death benefit. Social Security is a pay-as-you-go system, with today’s current workers paying the benefits for today’s retirees.

How much do today’s workers pay? Well, the first $102,000 of an individual’s annual wages is subject to a 12.4% Social Security payroll tax, with half being paid by the employee and half by the employer (self-employed individuals pay all of it). This money is put into a big holding tank–the Social Security trust fund–and is used to pay out current benefits.

The amount of your retirement benefit is based on your average earnings over your working career. Higher lifetime earnings result in higher benefits, so if you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily.

Your age at the time you start receiving benefits also affects your benefit amount. Currently, the full retirement age is in the process of rising from 65 to 67 in two-month increments, as shown in the following chart:

Birth Date	Normal retirement age
1940	65 and 6 months
1941	65 and 8 months
1942	65 and 10 months
1943-1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 and later	67

You can begin receiving Social Security benefits before your full retirement age, as early as age 62. However, if you retire early, your Social Security benefit will be less than if you had waited until your full retirement age to begin receiving benefits. Specifically, your retirement benefit will be reduced by 5/9ths of 1 percent for every month between your retirement date and your full retirement age, up to 36 months, then by 5/12ths of 1 percent thereafter. For example, if your full retirement age is 67, you’ll receive about 30 percent less if you retire at age 62 than if you wait until age 67 to retire. This reduction is permanent–you won’t be eligible for a benefit increase once you reach full retirement age.

Demographic trends

Even those on opposite sides of the political spectrum can agree that demographic factors are exacerbating Social Security’s problems, namely, life expectancy is increasing and the birth rate is decreasing. This means that over time, fewer workers will have to support more retirees. According to the Social Security Administration (SSA), in 1950, there were 16 workers per beneficiary, today there are 3 workers per beneficiary, and within 40 years there will be just 2 workers per beneficiary.

The SSA predicts that in 2017, Social Security will begin paying out more money than it takes in. However, by drawing on the Social Security trust fund that, on paper, is supposed to receive today’s payroll surpluses, the SSA estimates that Social Security should be able to pay promised benefits until 2041.

The caveat is that money in the trust fund isn’t exactly like money in your pocket–various administrations have used the money to pay for general government spending, leaving the trust fund with only a legal obligation to be paid back. To do so, the federal government would need to reduce other spending, borrow money, or raise taxes–a hurdle that might factor into the final solution.

Possible fixes

While no one can say for sure what will happen (and the political process is sure to be contentious), here are some solutions that might make the final cut:

Allow individuals to invest some of their current Social Security taxes in "personal retirement accounts" (the centerpiece of President Bush’s plan)
Raise the current 12.4% payroll tax
Raise the current ceiling on wages currently subject to the payroll tax
Raise the retirement age beyond age 67
Reduce future benefits, especially for wealthy retirees
Tie initial benefit levels to a more modest price index instead of the current wage index
Allow the Social Security program itself to invest in assets other than government bonds

Uncertain outcome

Members of Congress and President Bush still support efforts to reform Social Security, but progress on the issue has been slow, and domestic priorities are shifting. However, the SSA continues to urge all parties to address the issue sooner rather than later, to allow for a gradual phasing in of any necessary changes. Although debate will continue on this polarizing topic, there are no easy answers, and the final outcome for this decades-old program is still uncertain.

In the meantime, what can you do?

Aside from following the news to learn of any legislative developments, you should periodically check your Social Security earnings record to make sure that your earnings have been properly credited. You can find this information on your Social Security Statement, which the SSA mails annually to every worker over age 25. You will receive this statement about three months before your birthday. Review it carefully to make sure your paid earnings were accurately reported–mistakes are common. Call the SSA at (800) 772-1213 for more information.

This statement will also estimate the amount of Social Security benefits you will be eligible to receive in the future, based on your actual earnings and projections of future earnings. If you don’t receive this statement in the mail, you can request one by calling your local SSA office or through the Social Security website at www.ssa.gov.

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24 Feb

Growth vs. Value: What’s The Difference?

Posted by: Brad Neve / Category: Investment Strategies

With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task. Many investors feel it’s useful to have a system for finding stocks that are worth buying, deciding what price to pay, and realizing when a stock should be sold. Bull markets–periods in which prices as a group tend to rise–and bear markets–periods of declining prices–can lead investors to make irrational choices. Having objective criteria for buying and selling can help you avoid emotional decision-making.

Even if you don’t want to select stocks yourself–and many people would much prefer to have a professional do the work of researching specific investments–it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.

There are generally two schools of thought about how to choose stocks that are worth investing in. Value investors focus on buying stocks that appear to be bargains relative to the company’s intrinsic worth. Growth investors prefer companies that are growing quickly, and are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price. Either approach can help you better understand just what you’re buying–and why–when you choose a stock for your portfolio.

Value investing

Value investors look for stocks with share prices that don’t fully reflect the value of the companies, and that are effectively trading at a discount to their true worth. A stock can have a low valuation for many reasons. The company may be struggling with business challenges such as legal problems, management difficulties, or tough competition. It may be in an industry that is currently out of favor with investors. It may be having difficulty expanding. It may have fallen on hard times. Or it may simply have been overlooked by other investors.

A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock’s fair value. Value investing takes into account a company’s prospects, but is equally focused on whether it’s a good buy. A stock’s price-earnings (P/E) ratio–its share price divided by its earnings per share–is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.

Value-oriented data

Here are some of the questions a value investor might ask about a company:

What would the company be worth if all its assets were sold?
Does the company have hidden assets the market is ignoring?
What would the business be worth if another company acquired it?
Does the company have intangible assets, such as a high level of brand-name recognition, strong new management, or dominance in its industry?
Is the company on the verge of a turnaround?

Contrarians: marching to a different drummer

A contrarian investor is perhaps the ultimate example of a value investor. Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.

The challenge for any value investor, of course, is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason. Value investors who do their own stock research comb the company’s financial reports, looking for clues about the company’s management, operations, products, and services.

Growth investing

A growth-oriented investor looks for companies that are expanding rapidly. Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved. A growth investor would give more weight to increases in a stock’s sales per share or earnings per share (EPS) than to its P/E ratio, which may be irrelevant for a company that has yet to produce any meaningful profits. However, some growth investors are more sensitive to a stock’s valuation and look for what’s called "Growth At a Reasonable Price" (GARP). A growth investor’s challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.

Growth-oriented data

A growth investor might ask some of these questions about a stock:

Has the stock’s price been rising recently?
Is the stock reaching new highs?
Are sales and earnings per share accelerating from quarter to quarter and year to year?
Is the volume of trading in the stock rising or falling?
Is there a recent or impending announcement from or about the company that might generate investor interest?
Is the industry going up as a whole?

Momentum investing: growth to the max

A momentum investor looks not just for growth but for accelerating growth that is attracting a lot of investors and causing the share price to rise. Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up. They often buy even when a stock is richly valued, assuming that the stock’s price will go even higher. If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, and then buy more of what’s working.

The most extreme momentum investors are day traders, who may hold a stock for only a few minutes or hours then sell before the market closes that day. Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, however. A momentum strategy is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.

Why understand investing styles?

Growth stocks and value stocks often alternate in popularity. One style may be favored for a while but then give way to the other. Also, a company can be a growth stock at one point and later become a value stock. Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data rather than stock tips or guesswork can not only assist you as you evaluate a possible purchase; it also can help you know when to sell because your reasons for buying are no longer valid.

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16 Feb

Trust Basics

Posted by: Brad Neve / Category: Estate Planning, Investment Strategies

Whether you’re seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility–many types of trusts exist, each designed for a specific purpose. Although trust law is complex and establishing a trust requires the services of an experienced attorney, mastering the basics isn’t hard.

What is a trust?

A trust is a legal entity that holds assets for the benefit of another. Basically, it’s like a container that holds money or property for somebody else. There are three parties in a trust arrangement:

The grantor (also called a settler or trustor): The person(s) who creates and funds the trust
The beneficiary: The person(s) who receives benefits from the trust, such as income or the right to use a home, and has what is called equitable title to trust property
The trustee: The person(s) who holds legal title to trust property, administers the trust, and has a duty to act in the best interest of the beneficiary

You create a trust by executing a legal document called a trust agreement. The trust agreement names the beneficiary and trustee, and contains instructions about what benefits the beneficiary will receive, what the trustee’s duties are, and when the trust will end, among other things.

Funding a trust

You can put almost any kind of asset in a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust will depend largely on your goals. For example, if you want the trust to generate income, you should put income-producing assets, such as bonds, in your trust. Or, if you want your trust to create a fund that can be used to pay estate taxes or provide for your family at your death, you might fund the trust with a life insurance policy.

Types of trusts

There are many types of trusts, the most basic being revocable and irrevocable. The type of trust you should use will depend on what you’re trying to accomplish.

Living (revocable) trust

A living trust is a trust that you create while you’re alive.

A living trust:

Avoids probate: Unlike property that passes to heirs by your will, property that passes by a living trust is not subject to probate, avoiding the delay of property transfers to your heirs and keeping matters private
Maintains control: You can change the beneficiary, the trustee, any of the trust terms, move property in or out of the trust, or even end the trust and get your property back at any time
Protects against incapacity: If because of an illness or injury you can no longer handle your financial affairs, a successor trustee can step in and manage the trust property for you while you get better. In the absence of a living trust or other arrangement, your family may have to ask the court to appoint a guardian to manage your property

A living trust can also continue after your death–you can direct the trustee to hold trust property until the beneficiary reaches a certain age or gets married, for instance.

Caution: Despite the benefits, living trusts have some drawbacks. Property in a living trust is generally not protected from creditors, and you cannot avoid estate taxes using a living trust.

Irrevocable trusts

Unlike a living trust, you can’t change or end an irrevocable trust. You can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. Irrevocable trusts are most often used to minimize estate tax. The transfer may be subject to gift tax on the value of the property at the time of transfer, but the property, plus any future appreciation, is removed from your gross estate. That means your ultimate estate tax liability may be less, resulting in more property that can pass to your heirs.

Tip: Each taxpayer has a $1 million lifetime exemption from the federal gift tax, so you may not actually have to pay the tax. You may owe state gift tax, though, if you live in one of the handful of states that impose gift tax. Additionally, property transferred through an irrevocable trust will avoid probate, and may be protected from future creditors.

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10 Feb

Balancing Your Investment Choices with Asset Allocation

Posted by: Brad Neve / Category: Investment Strategies, Retirement Distribution Strategies

A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s right for you.

Getting the right mix

The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash equivalents, accounts for most of the ups and downs of a portfolio’s returns.There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types. Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation. It doesn’t guarantee a profit or insure against a loss, but it does help you manage the level and type of risks you face.

Balancing risk and return

Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start.

Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be–as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.

Many ways to diversify

When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash equivalents. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio. Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.

Asset allocation strategies

There are various approaches to calculating an asset allocation that makes the most sense for you. The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to achieve your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to. Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called "market timing," is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed. Some people try to match market returns with an overall "core" strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management.Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.

Things to think about

Don’t forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.
Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.

Even if your asset allocation was right for you when you chose it, it may not be right for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.

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01 Feb

Is Nationwide on Your Side?

Posted by: Brad Neve / Category: Article Only

The financial service giant Nationwide has a corporate slogan "Nationwide is on your side." However in a class action suit originally filed in the United States District Court in Connecticut 2001, Nationwide is charged it with accepting "revenue sharing payments" from mutual funds as the cost of being included as investment options in its retirement plans. The suit claims that receipt of these payments violates the Columbus, Ohio-based company’s "fiduciary duty.,.

Nationwide denies any wrongdoing and denied that it was a fiduciary to the plan. In a preliminary ruling issued Nov. 6, 2009, the Court found Nationwide "may be a fiduciary", but this really begs the issue: Whose side is Nationwide on when it selects investment options for 401(k) plans?

Click this link to read the entire article. http://www.dailyfinance.com/story/retirement/is-nationwide-on-your-side-not-everyone-thinks-so/19326327/

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26 Jan

Business Succession Planning

Posted by: Brad Neve / Category: Estate Planning

When developing a succession plan for your business, you must make many decisions. Should you sell your business or give it away? Should you structure your plan to go into effect during your lifetime or at your death? Should you transfer your ownership interest to family members, co-owners, employees, or an outside party? The key is to pick the best plan for your circumstances and objectives, and to seek help from financial and legal advisors to carry out this plan.

Selling your business/ Selling your business outright

You can sell your business outright, choosing the right time to sell–now, at your retirement, at your death, or anytime in between. The sale proceeds can be used to maintain your lifestyle, or to pay estate taxes and other final expenses. As long as the price is at least equal to the full fair market value of the business, the sale will not be subject to gift taxes. But, if the sale occurs before your death, it may result in capital gains tax.

Transferring your business with a buy-sell agreement

A buy-sell is a legally binding contract that establishes when, to whom, and at what price you can sell your interest in a business. A typical buy-sell allows the business itself or any co-owners the opportunity to purchase your interest in the business at a predetermined price. This can help avoid future adverse consequences, such as disruption of operations, entity dissolution, or business liquidation that might result in the event of your sudden incapacity or death. A buy-sell can also minimize the possibility that the business will fall into the hands of outsiders. The ability to fix the purchase price as the taxable value of your business interest makes a buy-sell agreement especially useful in estate planning. Agreeing to a purchase price can minimize the possibility of unfair treatment to your heirs. And, if your death is the triggering event, the IRS’ acceptance of this price as the taxable value can help minimize estate taxes. Additionally, because funding for buy-sells is typically arranged when the buy-sell is executed, you’re able to ensure that funds will be available when needed, providing your estate with liquidity that may be needed for expenses and taxes.

Private annuity

With a private annuity, you transfer your ownership interest in the business to family members or another party (the buyer). The buyer in turn makes a promise to make periodic payments to you for the rest of your life (a single life annuity) or for your life and the life of a second person (a joint and survivor annuity). Again, because a private annuity is a sale and not a gift, it allows you to remove assets from your estate without incurring gift or estate taxes. Until very recently, exchanging property for an unsecured private annuity allowed you to spread out any gain realized, deferring capital gains tax. Proposed regulations have effectively eliminated this benefit for most exchanges, however. If you’re considering a private annuity, be sure to talk to a tax professional.

Self-canceling installment note

A self-canceling installment note (SCIN) allows you to transfer your interest in the business to a buyer in exchange for a promissory note. The buyer must make a series of payments to you under that note, and a provision in the note states that at your death, the remaining payments will be canceled. Like private annuities, SCINs provide for a lifetime income stream and they avoid gift and estate taxes. But unlike private annuities, SCINs give you a security interest in the transferred business.

Gifting your business

If you’re like many business owners, you’d prefer to have your children inherit the result of all your years of hard work and success. Of course, you can bequeath your business in your will, but transferring your business during your lifetime has many additional personal and tax benefits. By gifting the business over time, you can hand over the reins gradually as your offspring become better able to control and manage the business on their own, and you can minimize gift and estate taxes.

Gifting your business using trusts

You can make gifts outright or use a trust. You can even structure a trust so that you keep control of the business for as long as you want. You can establish a revocable trust, which will bypass probate and allow you to change your mind and end the trust, or an irrevocable trust, such as a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT) that can provide you with income for a specified period of time and move your business out of your estate at a discount.

Gifting your business using trusts

You can transfer your business interest using another entity, such as a family limited partnership (FLP). An FLP is a limited partnership formed to manage and control a family business. You (and your spouse) can be the general partners, retaining control of the business itself and receiving income from the business, while your children can be limited partners. By transferring the business to an FLP, you may be able to use valuation discounts and substantially reduce the value of the business by making annual gifts to the limited partner children.

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20 Jan

Charitable Giving

Posted by: Brad Neve / Category: Estate Planning

Charitable giving can play an important role in many estate plans. Philanthropy cannot only give you great personal satisfaction, it can also give you a current income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die.

There are many ways to give to charity. You can make gifts during your lifetime or at your death. You can make gifts outright or use a trust. You can name a charity as a beneficiary in your will, or designate a charity as a beneficiary of your retirement plan or life insurance policy. Or, if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund.

Making outright gifts

An outright gift is one that benefits the charity immediately and exclusively. With an outright gift you get an immediate income and gift tax deduction.

Tip: Make sure the charity is a qualified charity according to the IRS. Get a written receipt or keep a bank record (cancelled check) for any cash donations, and get a written receipt for any property other than money.

Will or trust bequests and beneficiary designations

These gifts are made by including a provision in your will or trust document, or by using a beneficiary designation form. The charity receives the gift at your death, at which time your estate can take the income and estate tax deductions.

Charitable trusts

Another way for you to make charitable gifts is to create a charitable trust. You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust.

Charitable lead trust

A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits.

How a Charitable Lead Trust Works

Example: John, who often donates to charity, creates and funds a $2 million charitable lead trust. The trust provides for fixed annual payments of $100,000 (or 5% of the initial $2 million value) to ABC Charity for 20 years. At the end of the 20-year period, the entire trust principal will go outright to John’s children. Using IRS tables, the charity’s lead interest is valued at $1,267,630, and the remainder interest is valued at $732,370. Assuming the trust assets appreciate in value, John’s children will receive any amount in excess of the remainder interest ($732,370) unreduced by estate taxes.

Charitable remainder trust

A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members, or other heirs for a period of years, and then the principal goes to your favorite charity.A charitable remainder trust can be beneficial because it provides you with a stream of current income–a desirable feature if there won’t be enough income from other sources. Example: Jane, an 80-year-old widow, creates and funds a charitable remainder trust with real estate currently valued at $1 million, and with a cost basis of $250,000. The trust provides that fixed quarterly payments be paid to her for 20 years. At the end of that period, the entire trust principal will go outright to her husband’s alma mater. Using IRS tables, Jane receives $50,000 each year, avoids capital gains tax on $750,000, and receives an immediate income tax charitable deduction of $1,138,384, which can be carried forward for five years. Further, Jane has removed $1 million, plus any future appreciation, from her gross estate.

Private family foundation

A private family foundation is a separate legal entity that can endure for many generations after your death. You create the foundation, and then transfer assets to the foundation, which in turn makes grants to public charities. You and your descendants have complete control over which charities receive grants. But, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private foundation may not be worth it. Tip: One rule of thumb is that you should be able to donate enough assets to generate at least $25,000 a year for grants.

Community foundation

If you want your dollars to be spent on improving the quality of life in a particular community, consider giving to a community foundation. Similar to a private foundation, a community foundation accepts donations from many sources, and is overseen by individuals familiar with the community’s particular needs, and professionals skilled at running a charitable organization.

Donor-advised fund

Similar in some respects to a private foundation, a donor-advised fund offers an easier way for you to make a significant gift to charity over a long period of time. A donor-advised fund actually refers to an account that is held within a charitable organization. The charitable organization is a separate legal entity, but your account is not–it is merely a component of the charitable organization that holds the account. Once you transfer assets to the account, the charitable organization becomes the legal owner of the assets and has ultimate control over them. You can only advise–not direct–the charitable organization on how your ontributions will be distributed to other charities.

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12 Jan

Financial Planning- Helping You See The Big Picture

Posted by: Brad Neve / Category: Estate Planning, Investment Strategies

Do you picture yourself owning a new home, starting a business, or retiring comfortably? These are a few of the financial goals that may be important to you, and each comes with a price tag attached.

That’s where financial planning comes in. Financial planning is a process that can help you reach your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources.

Why is financial planning important?

A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you’ll be better able to focus on your goals and understand what it will take to reach them.

One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related–for example, how saving for your children’s college education might impact your ability to save for retirement. Then you can use the information you’ve gleaned to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you’ll have the peace of mind that comes from knowing that your financial life is on track.

The financial planning process

Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:

Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan
Establish and prioritize financial goals and time frames for achieving these goals
Implement strategies that address your current financial weaknesses and build on your financial strengths
Choose specific products and services that are tailored to meet your financial objectives
Monitor your plan, making adjustments as your goals, time frames, or circumstances change

Some members of the team

The financial planning process can involve a number of professionals. Financial planners typically play a central role in the process, focusing on your overall financial plan, and often coordinating the activities of other professionals who have expertise in specific areas.

Accountants or tax attorneys provide advice on federal and state tax issues.

Estate planning attorneys help you plan your estate and give advice on transferring and managing your assets before and after your death.

Insurance professionals evaluate insurance needs and recommend appropriate products and strategies.

Investment advisors provide advice about investment options and asset allocation, and can help you plan a strategy to manage your investment portfolio.

The most important member of the team, however, is you. Your needs and objectives drive the team, and once you’ve carefully considered any recommendations, all decisions lie in your hands.

Why can’t I do it myself?

You can, if you have enough time and knowledge, but developing a comprehensive financial plan may require expertise in several areas. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.

Staying on track

The financial planning process doesn’t end once your initial plan has been created. Your plan should generally be reviewed at least once a year to make sure that it’s up-to-date. It’s also possible that you’ll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

Your goals or time horizons change
You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
Your income or expenses substantially increase or decrease
Your portfolio hasn’t performed as expected

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