13 money tips for 2013

CBS News
By Jill Schlesinger
December 31, 2012, 7:00 AM

(MoneyWatch) Next year is going to be a long one if you suffer from triskaidekaphobia, fear of the number 13. To lessen the anxiety, consider these 13 money tips for 2013.

1. Track your expenses. …[Without] understanding where your money goes, it's nearly impossible to make different choices about how to spend. The good news is that there are plenty of software programs to help you out, or you can use a plain old spreadsheet.

2. Establish adequate emergency reserve funds. Perhaps the single best way to protect yourself from unforeseen circumstances is to hold 6 to 12 months of living expenses in cash or cash equivalent accounts. For those in retirement, consider carrying 12 to 24 months of expenses. Don't forget to replenish cash reserves for any bills that are coming up over the next year.

3. Earn more on your safe money. … Go to www.depositaccounts.com, where you can find longer-term CDs with low penalties; shop around at credit unions that offer better interest than most banks; and consider "I-bonds," a kind of savings bond issued by the U.S. government, from treasurydirect.gov.

4. Get a handle on your risk tolerance. Before you make big changes to your investment accounts, take a risk assessment questionnaire, like this one from Vanguard. The results should help you re-balance your portfolio in a manner that is consistent with your needs and takes into account your emotions.

5. Determine whether you should manage your money or hire someone to do it. Do you have the time, energy, acumen and temperament necessary to successfully manage all of the components of your financial life? If not, it could be time to interview a financial professional. The National Association of Personal Financial Advisors is a good place to start the process.

6. Stop trying to beat the market. … Charles D. Ellis, a consultant to large institutional investors, … conducted research that found that only one in five mutual fund managers beats the index over the long run. With those odds, investors would be wise to replace actively individual stocks and managed mutual funds with index or exchange-traded funds.

7. Calculate your retirement number. Many people say they are worried about retirement, but most of them haven't done any planning to help themselves. … The Employee Benefit Research Institute's "Choose to Save Ballpark E$timate" tool is easy to use, or check out your retirement plan/401(k) website for more retirement tools.

Logo of the United States Thrift Savings Plan. (Photo credit: Wikipedia)

8. Maximize retirement contributions. The federal government is helping on this front by increasing the 2013 limit for employees who participate in 401(k), 403(b), most 457 plans and the government's Thrift Savings Plan to $17,500 from $17,000. The catch-up contribution limit for employees aged 50 and over remains unchanged, at $5,500. The limit on annual contributions to traditional and Roth IRAs will rise by $500 to $5,500.

9. Consider buying a home. The real estate market is recovering, which means that those who have been sitting on the sidelines may want to take the plunge on a new home. Still, make sure you weigh whether you are better off renting or buying with this NY Times calculator.

10. Refinance your mortgage. Mortgage rates are at historically low rates and appraisals are starting to rise, so even if you haven't been able to refinance in the past couple of years, try again. Use this re-fi calculator to determine how much you may be able to save or how many years you could potentially shave off the term of your mortgage.

11. Assess your property insurance, … The best time to review your policy is before an event occurs, not after. The three biggest mistakes people make with homeowners insurance are: 1) under-insuring; 2) shopping by price only and not comparing apples to apples; and 3) not reading policy details before a loss occurs.

12. Review life, disability and long-term care insurance coverage. This is the part of your financial life where an error can cause huge damage to your family. For life insurance, make sure you have enough with this online calculator. Nine times out of 10, term life insurance is the best bet. For disability insurance, enroll in your company's plan, if offered. If you are self-employed, shop around and buy at least some coverage. If you're over 50, time to shop around for long-term care insurance.

13. Create/review/update estate documents: Hire a lawyer to prepare a will, power of attorney and health care proxy/living will documents. … As part of the process, create a go-to list of documents, which can include key information about investment accounts, insurance policies, auto titles, income tax returns. Estate records and final instructions also should be stored in a safe place -- don't forget to provide copies to your executor or trustee.

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  Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.
  

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Advisors Press Business-Owner Clients To Update Valuations

Financial Advisor Magazine

(Dow Jones) The weak economy has dragged down the value of many small businesses and made getting an updated appraisal a discouraging task.
But some financial advisors are pressing business-owning clients to get one anyway, because up-to-date valuations are needed to adjust their retirement and estate plans accordingly. …

Many business owners are so focused on growing the business––or maybe just surviving––that they haven't thought about what has happened to its value. Some businesses are worth 30% less than a few years ago, says Denver financial advisor Dave Seems, who encourages clients to get the appraisal. "It's sort of a wake-up call," he says.

A relatively precise value is needed to make planning decisions, such as whether an owner needs to be saving more outside the business, or whether it is a good time to pass a stake in the business to heirs.

When owners find out their company is worth less than they believe, many make a decision to delay retirement or a sale in the short term. Some are prompted to put more effort into building up business, "to be able to sell at some future point," Seems says.
Kurt DeLucero, owner of Arrowhead Landscape Services in Colorado, wasn't too surprised by the numbers in his company's recent valuation, but he says that the information is useful because it highlights what needs to be done if he wants to be able to sell the business in 10 years.
"I truly like to know [the value]," he says. "It shows me where we are doing well, and where we can make some improvements." …
An owner typically has 50% to 70% of their net worth in their business, says Steven Faulkner, head of specialty assets, J.P. Morgan Private Bank. Often, their investments outside of the business are largely cash, Faulkner says, and he encourages them to have a more diversified portfolio.
Owners often have buy-sell agreements with partners in case one dies, and if such a pact values the business too highly, it can leave survivors with too high a bill to pay. That could even wind up requiring the whole business to be sold.

One silver lining to a lower valuation is the impact on taxes, particularly when passing a business on to heirs. Estate taxes are expected to rise next year and new restrictions on use of trusts could also be coming soon. "Because values are so low and interest rates are so low, there's never been a better time to move assets to the next generation," says Steve Parrish, national advanced solutions consultant for the Principal Financial Group.

Image via WikipediaCopyright (c) 2010, Dow Jones. For more information about Dow Jones' services for advisors, please click here.

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Tax Break Promotes Big Gifts To Grandchildren

Financial Advisor Magazine

Dow Jones) While this year's one-year lapse in the estate tax hogs the spotlight, a lesser-known gap is offering many affluent older people a tax-free way to pass on some of their wealth to grandchildren.

Gifts have to meet certain conditions to get a break on the generation-skipping transfer tax, or GST, which also has been repealed for 2010. Only outright gifts qualify as opposed to, say, putting money in a trust, but the definition of a gift is broad enough: Someone who sets up a partnership and gives away units in it can get the tax break, for example.

David Pratt, managing partner of the personal planning department of the Boca Raton, Fla., office of law firm Proskauer Rose, says his firm is doing a lot of planning for gifts to grandchildren using family limited partnerships. The idea of putting a gift into a vehicle like this is to keep a youngster from getting control over assets all at once and possibly squandering them.

The generation-skipping tax is separate from income, estate and gift taxes. Its purpose is to keep people from transferring property too many generations out without paying tax. The tax is imposed if the transfer avoids gift or estate tax.

Take the example of a man who dies with a multi-million dollar estate, leaving his property in a trust with income payable to his children. On his death, trust assets are to go to the grandchildren. The man's estate would owe estate tax, but on the death of his children, the trust property would not be taxable in their name, so the family would have skipped a generation of estate tax. Therefore, the generation-skipping tax would apply.

The tax applies not just to grandchildren but to all so-called "skip" persons, including unrelated heirs at least 37-and-a-half years younger than a donor.

This year's donors still must pay the gift tax, at a top rate of 35%. That is the lowest level since 1934. The lifetime exemption this year on the gift tax is $1 million. Next year, unless Congress acts, the gift tax will rise to 55%, where it was before the Bush tax cuts of 2001 started taking effect.

Each donor is allowed to exempt up to a certain amount in generation-skipping gifts. Last year it was $3.5 million, and next year will be in the neighborhood of $1.06 million. (The government has not yet confirmed the new amount for 2011.) So, a donor will not owe generation-skipping tax on the first $1.06 million or so in 2011, but will owe the gift tax and the GST on any amount over that.

J.P. Morgan, in a recent analysis on taxable gifts, found that the net benefit to a recipient from a $1 million gift made in 2010, as compared to 2011, would be $305,565. That benefit grows proportionally to the assets' growth.

Making a taxable gift to a grandchild or other skip person, even in 2011, is still a smarter tax move than simply leaving the same amount to the person through the estate, according to J.P. Morgan. For every $100 of a gift in 2010, the grandchild gets $74, as compared to $42 in 2011. …

Image via WikipediaCopyright (c) 2010, Dow Jones. For more information about Dow Jones' services for advisors, please click here.

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Brinton Eaton Warns of Big Tax Hikes if Congress Doesn’t Act

Non-spouse beneficiaries could experience rates as high as 55%

Advisor One
September 27, 2010 | By Michael S. Fischer

The Bush income and estate tax cuts of 2001 are set to expire in three months, and Robert DiQuollo, president of the boutique advisory firm Brinton Eaton, is more than a little concerned about congressional inaction in the run-up to November midterm elections.

“If the Bush tax cuts of 2001 are not extended, we will witness one of the largest tax increases in history,” DiQuollo said in a commentary released by Brinton Eaton on Friday.

Nine years ago, Congress passed several income and estate tax reductions through a “reconciliation” process that resulted in their being sunsetted after 2010.The commentary noted that, absent congressional action, marginal income tax rates for the top fifth and top income brackets would increase to 36% and 39.6%, respectively, from the current rates of 33% and 35%. Net capital gains rates for these two brackets would go up to 20% from 15%.

Image via Wikipedia

The biggest change, however, would come in the qualified dividend area, which would increase from 15% to a maximum of 39.6% if Congress did not extend the cuts, according to the commentary. Moreover, tax rates for 2013 when the new health care laws are effective would impose an additional 3.8% tax on individual taxpayers whose modified adjusted gross income exceeds $200,000, or $250,000 for married couples filing joint returns.
The estate tax in 2011, and going forward, would also be significantly more onerous if Congress did not act, the commentary said. In 2009, an individual could leave up to $3.5 million to a non-spouse beneficiary without incurring a federal estate tax.

Image via Wikipedia“For the current year, 2010, there is no federal estate tax,” DiQuollo said in the commentary. “You may recall hearing that the heirs of George Steinbrenner, the late owner of the New York Yankees who died in July, saved almost $500 million in federal estate taxes, on a $1 billion estate. This pales in comparison to Dan Duncan, owner of a natural gas processing plants in Texas, whose heirs will inherit over $10 billion with no estate tax.”

The commentary concluded that without congressional action, the federal estate tax will be reborn on January 1, 2011, and will tax all inheritances to non-spouse beneficiaries in excess of only $1 million dollars, with progressive rates going as high as 55%. DiQuollo pointed out that if billionaire Dan Duncan had died in 2011 rather than 2010, “his estate would have paid up to $5.5 billion to Uncle Sam (assuming the estate was left to his children) versus the actual amount of ‘zero.’ ”

About the Author

Michael S. Fischer

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Clock Ticks On Estate Tax

Financial Advisor Magazine

(Dow Jones) As Congress appears ready to let the federal estate tax lapse on January 1, a dramatic question is what a repeal will do to millions of less affluent taxpayers.
Many who now would owe neither estate nor capital gains tax on inherited assets will owe significant capital gains. And that's just one of the troubling aspects of a repeal.
There are also serious questions about how families with ailing relatives would be affected--a subject of gallows humor since a one-year repeal of the tax was first envisioned for 2010 years ago. …
Under current law, the estate tax disappears for a year in 2010 and then is reinstated in 2011…
For many advisors, the most striking aspect of a repeal is that, along with the estate tax itself, a step-up in cost basis for income tax purposes would go away. …
So, at a relative's death, "families that would not have had to pay the estate or capital gains tax now may have to pay a capital gains tax on assets that have appreciated in value during the deceased person's lifetime," said Warren Racusin, chair of the trusts and estates practice at law firm Lowenstein Sandler in Roseland, N.J.
Racusin mentioned a client whose parents gave him Microsoft Corp. stock when he was younger, purchased for relatively little, that is now worth $6 million. If the man were to die in 2009, his family would not owe capital gains tax on the appreciation. And, with good estate planning by the man and his wife, there might be no estate tax due either, because a couple can shelter up to $7 million from federal estate tax.
If the man were to die on January 1, 2010, however, his wife could owe capital gains of around $340,000 on the $6 million, figuring in a $3 million exemption for spouses, and another $1.3 million exemption for whoever inherits.
As for a retroactive tax, it would likely raise some complications if lawmakers wait too long to enact it. Relatives of some people who die in a prospective estate-tax-free period--after the end of the year but before a new tax is enacted--would surely not be pleased. Quite certainly, some would challenge the constitutionality of the tax, according to tax analysts.
Nonetheless, both the lower courts and the Supreme Court historically have defended retroactive taxes. …
Copyright (c) 2009, Dow Jones. For more information about Dow Jones' services for advisors, please click here.

Required Minimum Distribution Rules Change After This Year

401khelpcenter.com

NEW YORK, NY, December 7, 2009 -- "The 2008 tax legislation to give senior citizens a reprieve from the requirement to take 2009 required minimum distributions (RMDs) from employer-sponsored tax-qualified retirement plans and IRAs was a relief to many," says Lesli Laffie, tax analyst for the Tax & Accounting business of Thomson Reuters. "… However, there may be sound tax reasons to either take or stop taking RMDs before 2009 ends," she advises. "And, seniors who are well-off and charitably inclined may want to consider transferring up to $100,000 of IRA funds directly to charity before 2010."
The RMD Quandary
… In years other than 2009, the failure to take an RMD could trigger a 50 percent penalty on the undistributed RMD. The 2009 RMD 'holiday' is available to taxpayers who own or are beneficiaries of retirement plan accounts (generally, 401k, 403(b), or 457(b) plans), or who are traditional IRA owners or beneficiaries, or Roth IRA beneficiaries. The holiday means they can withdraw less than 100 percent of their RMDs for 2009, without incurring the penalty. The suspension without penalty applies only to RMDs otherwise required for 2009, not to RMDs for 2008 that had to be taken by April 1, 2009. Taxpayers who turned 70 1/2 in 2009 still must take an RMD by Dec. 31, 2010.
"There are a number of issues to bear in mind when deciding whether or not to withdraw in 2009," says Laffie. "For those who have inherited Roth IRAs, withdrawals are tax free, so the only decision for those beneficiaries is whether to leave or withdraw account assets."
Consider taking RMDs before 2009 ends if:

• Your tax rate may be lower in 2009 than in 2010. … Rates are always subject to change, "but if a taxpayer believes he will be in a higher tax bracket in 2010 (due to higher income and/or fewer deductions), he may want to take RMDs in 2009 to incur tax at the lower rate," advises Laffie. In addition, a 2009 RMD would lessen the amount of future RMDs. "If a taxpayer anticipates that tax rates will go up in the future, acceleration of RMDs into 2009 may be an appropriate strategy."
• You have offsetting deductions. Taxpayers with high 2009 deductions relative to income, such as medical expenses, may be able to offset an RMD, but will lose the part of the medical deduction that equals 7.5 percent of their adjusted gross income (AGI). A taxpayer with a charitable contribution deduction carryover that will expire soon, or with a net operating loss, may also be able to offset the increase in income from an RMD.
• You receive social security. A taxpayer whose Modified AGI (MAGI) is below the level requiring taxability of social security payments should consider taking an RMD to the extent those payments will continue to escape taxation…
• You decide to roll over the distribution into a Roth IRA. Because RMDs are not required for 2009, a 2009 withdrawal is not considered to be an RMD. Therefore, it can be rolled over into a Roth IRA (as long as MAGI does not exceed $100,000 or you are not married filing separately). …"In 2010, more lenient rules take effect in rolling over a traditional IRA to a Roth IRA, but they won't apply to RMDs," notes Laffie.

Consider taking the RMD holiday (i.e., suspending RMDs) for 2009 if:

• More of your social security payments will become taxable. Taxpayers receiving social security, but whose payments have not yet triggered 85 percent taxability (joint filers with MAGI under $44,000, or under $34,000 for singles and HOHs), should consider forgoing RMDs. …
• Your income is high. If taking an RMD would subject you to a phaseout of itemized deductions and/or personal exemptions, it is probably beneficial to skip the RMD.
• You have other sources of income to pay bills, and therefore do not need the RMD. …

"Skipping or taking the RMD holiday, or taking only partial RMDs, is an individual decision requiring analysis of various factors," advises Laffie. "Before 2009 ends, taxpayers should take a look at their overall tax picture and make the decision that's optimal for them."
Donating IRA Funds to Charity
Until the end of 2009, those age 70 1/2 and older can contribute up to $100,000 from their IRAs directly to one or more charities. This transfer is not included as income on the federal tax return. But you do not get a charitable deduction, and the withdrawal does not count as an RMD because RMDs are not required for 2009.
So why consider such a donation now? "For those who are very charitably inclined, the technique may hold appeal, in part because these donors won't reach the ceiling on charitable deductions," observes Laffie. "Also, by using IRA money to make the donation, a taxpayer retains more of his other savings for his own use. In addition, because the amount transferred isn't included as income on the federal return, it won't trigger deduction and/or exemption phaseouts. Finally, it may be a good strategy for people who don't itemize, because they are not losing out on a charitable deduction."
"While the RMD holiday and the ability to transfer IRA funds directly to charities end when 2009 ends, it's possible one or both of these tax breaks could be extended into 2010 or beyond," says Laffie.
About Thomson Reuters
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The Roth of Con(versions)

Tax Increase Protection and Reconciliation Act of 2005 (TIPRA)

TIPRA has a forward-looking provision regarding Roth conversions. It repealed the MAGI limit of $100,000 for 2010 and beyond on conversions. The contribution limits remain intact.
TIPRA also provided for a special tax treatment of Roth Conversions made in 2010. Unless a taxpayer elects otherwise, income from the conversion is taxed over a two-year period, beginning in 2011. So, if a taxpayer converts $100,000 of Traditional IRA money to a Roth IRA in 2010, he will add $50,000 to his tax return for the 2011 tax year, and $50,000 to his tax return for the 2012 tax year. If the taxpayer elects, he may add the entire $100,000 to his tax return for the 2010 tax year.

Cents and Sensibilities

The feasibility of a Roth Conversion depends on tax rates at the time of conversion, tax rates at the time of distribution, availability of funds to pay the taxes, expectations of portfolio growth, and likelihood of passing the account to non-spouse beneficiaries. Many of these factors are unknown; a decision needs to be made based on reasonable expectations. By evaluating the following questions, a Traditional IRA owner can to determine what the practical approach is:

1. Will tax brackets rise after 2010?
   
2. Will tax brackets remain above current rates for an extended period of time?
   
3. Do you expect the account balance to increase meaningfully during 2010?
   
4. Do you have non-retirement funds that you can use to pay the tax liability upon conversion?
   
5. Will the Roth IRA likely survive both you and your spouse?; also,
   
6. Will Congress initiate new taxes in 2010 that will be retroactive?
   
7. Will a conversion trigger Alternative Minimum Tax or other surtaxes, or will it accelerate the phase-out of deductions and exemptions?
   

The more confident the taxpayer is that the answers to questions 1-5 are "Yes" and the answers to questions 6 and 7 are "No," the more confident he can be that a conversion early in 2010 would be practicable. The taxpayer should also consult his tax advisor before committing to any conversion.

To Bifurcate or Not To Bifurcate, That Is the Question

Assuming we convert to a Roth IRA in 2010, we have a choice of when to pay taxes. For conversions that occur in 2010 only, the taxpayer may pay the tax liability by April 15^th, 2011, or they can add one-half of the converted amount to the tax return they file by April 15^th, 2012 and the other half on the tax return they file by April 15^th, 2013.
At first blush, you would think that we want to defer taxes until later. However, we are making the conversion in the first place to take advantage of the known lower tax rates currently in effect. Things are not as they seem—it is, as if, something is rotten in Denmark (or D.C.).
First off, converting to a Roth IRA becomes more advantageous if tax rates rise. Whether we pay the tax from the IRA or not, we are in essence betting that taxes will go up. Taxes are at historically low levels. Many political and economic pundits say that ballooning deficits will put pressure on the Government to raise taxes.
Secondly, the current tax law expires on December 31, 2010. Unless Congress acts, tax rates will return to 2006 levels on January 1, 2011. Tax brackets shift from the current 10%, 15%, 25%, 28%, 33%, and 35% rates to 15%, 28%, 31%, 36%, and 39.6%. Taxes on capital gains and dividends will rise, and certain credits will cease or be reduced.
Barring the unknown of Congressional action, we know the tax structure will be higher in 2011 and 2012 than it is in 2010. Unless a taxpayer knows that his taxable income will be significantly lower in the latter years, it makes sense that he pay taxes on the conversion in 2010. (As a broad supposition, if many taxpayers convert great amounts of IRA dollars and choose to pay the tax with their 2010 returns, it may ease the pressure on Congress to raise taxes in 2011 or 2012 beyond the de facto increases in place.)

Diversify, Diversify, Diversify

Investment advisors recommend that we diversify across asset classes to reduce purchasing power risk. They recommend we diversify within asset classes to reduce systematic risk. They recommend we diversify among banks and insurance companies to reduce unsystematic risk. We now have an opportunity to diversify among taxable, tax deferred and tax favored ownership to reduce income tax risk.
We know that mechanisms are in place to change taxes in the future, as they have changed over the past 100 years. Tax deferred assets such as qualified plans and IRAs are exposed to future tax risk. Taxable assets are exposed to both current tax risk and future tax risk. Roth IRAs (and their similar ownership forms such as 529 plans) are exposed to current tax risk, but avoid future tax risk—barring an outlying event such as a retroactive tax law change. As our assets accumulate in tax deferred ownership, we become over-weighted in future tax risk. Roth IRA conversions allow us to diversify this risk, just as we attempt to diversify to reduce the other risks.

What Good Hath Roth?

On May 24, 1844, Samuel P. Morse officially opened the Baltimore – Washington telegraph service by sending the message "What hath God wrought?" The telegraph led to the telephone. The telephone led to the cell phone. Following the trail of the cell phone leads to my teen-age daughter. I too lament, "What hath God wrought?"
Moving from the meta-physical and inter-personal to the financial, we can ask: "What good is a Roth IRA?" I admit that, when Roth IRAs were introduced, I thought they were a ploy to get people to pay taxes sooner rather than later. Looking more closely at the provisions and the mechanics of this ownership form has convinced me that Roth IRAs have a place in most people's retirement portfolio.

History

Roth IRAs were created by the "Taxpayer Relief Act of 1997." Under the Act, an individual may establish an IRA under which all distributions are free from federal income taxation if certain conditions are met. There is no income tax or penalty tax on distributions if the Roth IRA has been in existence for five years and the owner would qualify for a penalty-free withdrawal from a Traditional IRA—the owner attaining age 59 ½ being the most common qualification. After the five year period, contributions can be withdrawn income tax and penalty tax free even if the owner is younger than 59 ½. If a distribution is made from a Roth IRA without meeting the requirements, there is a 10% penalty tax on it plus income tax is owed on any portion that wasn't previously taxed.
One feature of a Roth IRA is that it is not subject to the Required Minimum Distribution rules as long as it's owned by the Contributor or spouse. Non-spouse beneficiaries may maintain the Roth IRA in its tax-free state, subject to a new 5-year hold and Required Minimum Distributions. A non-spousal beneficiary has to take the balance of the account within 5 years, or start lifetime payments before the end of the calendar year following the year of the contributor's death. Generally, there are no IRD issues involved. Additionally, since they bypass probate, Roth IRAs can be an efficient way of passing assets to heirs.
There is a catch to Roth IRA contributions. A married couple cannot make a contribution to a Roth IRA if their Modified Adjusted Gross Income (MAGI) is over $176,000 ($120,000 if single). A conversion of a Traditional IRA to a Roth IRA is prohibited if the taxpayer's MAGI is over $100,000 (married or single). (This limit to conversions is removed as of 1/1/2010 by TIPRA. See "The Roth of Con(versions).")

Pay Now or Pay Later?

Whether it is financially advantageous to convert to a Roth IRA or not is based on tax rates at the time of conversion and at the time of withdrawal. For comparison purposes, let us assume that a 50-year old has $100,000 in a Traditional IRA and is in the 35% marginal tax bracket. He will withdraw all of the funds in 20 years. If he converts to a Roth IRA, he will owe $35,000 in taxes, which he has available in a taxable account. Let us further assume that all accounts earn 6% annually, although the taxable account pays tax on its growth annually. He can either keep the $100,000 in the Traditional IRA and pay taxes on withdrawal, plus have $35,000 grow at an after tax rate; or, he can convert the $100,000 to a Roth IRA and pay the $35,000 in taxes now. On the day after he converts the funds he is either in a much lower (15%), lower (28%), same (35%), higher (42%), or much higher (55%) tax bracket. The table below shows the after-tax outcome of these five scenarios.

	Roth IRA	After-tax Traditional IRA + Taxable Fund
Much lower tax rate	$320,714	$272,607 + $94,650 = $367,257
Lower tax rate	$320,714	$230,914 + $81,549 = $312,463
Same tax rate	$320,714	$208,464 + $75,228 = $283,692
Higher tax rate	$320,714	$186,014 + $69,374 = $255,388
Much higher tax rate	$320,714	$144,321 + $59,632 = $203,953

For the Traditional IRA + Taxable Fund to equal or exceed the value of Roth IRA, the marginal tax bracket must drop 9% or more immediately after the conversion.
Now, let us assume that the 50-year old wants to consider a Roth conversion, but doesn't have funds to pay taxes with, other than the IRA. He will owe ordinary income taxes plus a 10% penalty tax on funds withdrawn to pay taxes. This time, we assume tax rates change some time before withdrawing everything from the Traditional IRA in 20 years. Using the assumptions above, we have the following outcomes:

	Roth IRA - Taxes	After-tax Traditional IRA
Much lower tax rate	$195,995	$272,607
Lower tax rate	$195,995	$230,914
Same tax rate	$195,995	$208,464
Higher tax rate	$195,995	$186,014
Much higher tax rate	$195,995	$144,321

Even with the 10% penalty tax, it does not take much of a tax increase to make the Roth IRA worth more. A tax increase of 4% or more makes the Roth IRA beneficial, even if taxes are withdrawn from it.
The conclusion we can draw from this analysis is that: (1) if a Traditional IRA participant has outside funds to cover the taxes, a Roth IRA Conversion is advantageous as long as tax rates do not drop more than 9% immediately after conversion; (2) if a Traditional IRA partyicipant pays for the conversion from the Traditional IRA and incurs the 10% penalty tax, the Roth IRA Conversion is still beneficial if taxes rise 4% or more by the withdrawal date. These conclusions do not necessarily apply to new contributions—we are analyzing Roth Conversions only.

Take Backs; or, A Question of Character

We have looked at a number of "what-if's." Here is another "what-if": What if an IRA owner converts an IRA early in the year and the value goes down after that. For example, on January 2^nd the owner converts a $100,000 IRA to a Roth IRA. On December 1 the Roth IRA is worth $60,000. The owner would have a tax liability on $100,000 but would get no benefit from 40% of that liability (the tax paid on the value that disappeared). Fortunately, you can "take-back" a Roth Conversion as long as it is done by the filing deadline. This process is called re-characterization. The IRA custodian will have forms that provide the proper information to perform a re-characterization acceptable to the IRS.
Let us follow the mechanics of conversion and re-characterization. The owner converts a Traditional IRA to a Roth IRA in January, 2010. (The earlier in the year that you convert the IRA, the more time you will have to take advantage of any tax planning.) On April 1, 2011, he compares the Roth IRA's value to its conversion value. If the Roth IRA is higher, he pays tax on the lower conversion amount when he files his taxes. If the Roth IRA is lower, the owner re-characterizes it back into a Traditional IRA and cancels the tax liability. Re-characterizations take two weeks or more, so the owner wants to allow time to act before he has to file, although a taxpayer can also file for an extension to file as late as October 15^th.
If the owner re-characterizes the IRA, the money is back in a Traditional IRA but he wants it in a Roth IRA. The tax law says that re-characterized money can be re-converted by the later of the start of a new tax year or 30 days. The owner initially converted the IRA in the 2010 tax year. The money was re-characterized by April 15, 2011 for the 2010 tax year. Since he is past the end of the tax year, he waits 30 days and converts the Traditional IRA to a Roth IRA on May 15, 2011. The owner will pay taxes on the IRA's value when he files his taxes for 2011. Since the value is lower than when he initially converted the IRA, he will owe less tax on the conversion.
Setting aside the politics of deciding when we want to give the Government money to use or waste, Roth IRAs are an advantageous ownership form for most persons' retirement. They are an excellent estate planning tool: the owner is not forced to dissipate a Roth IRA through Required Minimum Distributions; Roth IRAs pass outside of probate as long as the estate is not the beneficiary; and, they can maintain their tax-free status for the heirs. Congress has made provisions that make converting a Traditional IRA to a Roth IRA especially advantageous in 2010. See the article "The Roth of Con(versions)".

LTC Insurance For The Affluent

Private Wealth magazine

By David Bidwell , Peter Gelbwaks - 03/5/2009

… Preparing for the possibility of a long-term illness should be an important component of every [individual’s] financial plan, including the affluent. …

There are an increasing number of alternative products for long-term care, including life insurance or annuities with long-term care riders. These products, however, usually do not deliver the robust benefits or tax advantages of a traditional long-term care insurance policy.

Solutions For The Affluent

…Wealthy clients … are typically open to the idea of using LTC insurance as a way to transfer the financial risk and responsibility for hands-on health care. The insurance also ensures that these responsibilities won’t fall into the lap of family members and that policyholders will have access to top-notch health care providers.

Once the math is done, affluent clients usually recognize that LTC insurance makes sense. This is particularly true of business owners, who can reap many advantages from long-term care coverage. These benefits include the ability to provide enriched employee benefits packages, which can improve worker productivity and provide for better retirement planning.

Business owners can also reap tax advantages from LTC insurance, including the ability to deduct premiums as a business expense, receive state tax credits or deductions or exclude premiums from an employee’s gross income…

…Most affluent [individuals] … want the best care available and they want it delivered in their homes. This type of service—it typically includes 24-hour home care in two shifts per day—can cost considerably more than conventional coverage that calls for nursing home care.

Doing The Math

Generally speaking, regardless of the age of the client or the plan design, it will only take three to 18 months of receiving benefits from an LTC insurance policy to recoup an entire lifetime of premiums.

For example, a 65-year-old married healthy person buys coverage with benefits of $200 a day or roughly $6,000 a month. We’ve assumed a 20-year life expectancy, so $3,335 per year in premiums would total $66,700, assuming no claims are paid before age 85. The $6,000 benefit doubles with a simple 5% inflation rider built into the plan, which means the policy pays $12,000 per month at claim time. After six months, the benefits will exceed the total premiums paid…

Flexible payment options are very attractive in the affluent market as they enable the policyholder to pay the full cost of the premiums within a specified time period. … The first is “10-pay” in which the premiums are paid in ten individual payments. The second is a “paid-up at age 65” option that enables those under age 55 to pay all premiums before turning 65, to avoid payments during their retirement years. Among the advantages of these options is that they expose [individuals]to less risk of a future rate increase. They are also attractive to business owners, allowing them to provide a paid-up LTC insurance policy before an executive or employee retires. …

A Planning Tool

Given the availability and flexibility of today’s products, it’s hard to argue against making LTC insurance a part of an affluent [individual’s] financial plan. Take the case of a wealthy client with more than $50 million in assets who purchased LTC insurance for himself and his spouse. He insures a $10 million home, a $2 million boat, $1 million in jewelry, $1 million in art and $500,000 in cars. … In fact, out of all his insurance policies, he believes he is most likely to use the benefits of his LTC policy…

Peter Gelbwaks is chairman of Gelbwaks Insurance Services Inc. of Plantation, Fla., and immediate past chairman of the National LTC Network, the largest LTC insurance marketing firm in the nation. He can be reached at peter@gelbwaks.com or at 800-826-1686.

David Bidwell is the southeast regional director for John Hancock’s LTC insurance division. He is a 16-year veteran of the long-term care insurance industry. He can be reached at dbidwell@jhancock.com.

Shortsighted Success

Private Wealth Magazine

By Mindy Rosenthal - 03/5/2009

The majority of ultra-wealthy family business owners have succession, personal trust and estate plans, but even the most successful owners are poorly prepared when it comes to protecting their wealth and planning for future generations.

… [According] to a 2008 study by Prince & Associates and Campden Research … [trust]and estate plans are often out of date and families simply are not implementing asset protection strategies, the study found.

The study, entitled “Protecting the Family Fortune,” is the first to focus on ultra-wealthy family business owners. …

Only 38.3% of those who have succession plans are implementing them, according to the study. … More than three-quarters of respondents have succession plans, but they are dominated by strategic business issues rather than family issues. When 183 high-net-worth families were asked to identify “highly important issues” in their succession planning, 72.7% cited strategic business issues and 55.2% cited family issues.

The study also showed that business owners are failing to keep their succession plans up to date. About 78% of the families have an estate plan, but 79.4% of those plans are more than three years old. The failure of families to update their plans is magnified by the fact that 89.4% of respondents say they have had life-changing events …

Failing to regularly review and update succession plans could be a costly mistake for many of these families, according to experts.

“Families need to work with an advisory team that not only … looks at estate and succession planning and asset protection but also tends to family dynamic issues,” says Chris Zander, managing director and head of the Multi-Family Office Group at U.S. Trust, Bank of America Private Wealth Management.

“The personal and financial objectives of the various family shareholders change and may become less cohesive as the family grows …,” notes Zander. “This makes it harder to find commonalities and can result in families not addressing important planning issues.” …

“Estate [and] wealth transfer plans need to address the allocation of asset ownership and voting control with an increasing number of family members as the business transitions further out in generations,” Zander says. “Ownership, control and management cover both financial and non-financial areas. …”

Psychological factors clearly play a role in families not keeping their estate plans up to date. About 55% of families surveyed say estate planning raises issues that are too difficult to confront. …

The study also found that many estate plans are flawed. For example, 93.4% say it is important for them to lower their tax obligation in a business transition, yet only 26.8% say it’s important to address this issue in a succession plan. Only 26.9% are using asset protection strategies, despite the fact that 89.7% say they are concerned about being involved in an unjust personal lawsuit or divorce. In fact, 64.5% have already been involved in an unjust suit or divorce. …

Mindy F. Rosenthal, managing director, North America, for Campden Media, specializes in the wealth management and family governance needs of ultra-high-net-worth individuals and families, with a focus on alternative investments and holistic family office services. More information is available at www.campden.com.

Preparing The Floodgates

Private Wealth Magazine

By Gary S. Shunk , Megan Wells

... People who find themselves overwhelmed by a sudden liquidity event express a ... mix of emotions: disbelief, elation and bewilderment—even grief, depending on their relationship with the person who left them the money. But people do not come out of this experience the same way and the outcome is not always positive. We’ve seen some clients careen off course before righting themselves and attempting a rational investment of what remains....

A Flood ... As new wealth floods in, a person’s identity and old ideas of self are suddenly tested. They are faced with numerous questions. “Will this new money change who I am?” “Will it change how I behave?” “Do I trust myself to remain true to my values or will I be tempted to pursue a lifestyle I previously disdained?” “How will my relationships change?”

No matter how stable and composed a client may seem, the new money will have a psychological impact. And the intensity of the emotional response is not entirely determined by the amount of wealth received. ... For some, new money brings exciting possibilities. For others, new money brings a downpour of disruption. ...

Trust And Fear The stress created by a big financial gain can be difficult. Change can be frightening. Certainly it can be uncomfortable. ... Sometimes money is imagined to carry the qualities of the person who bequeathed it. ... Consequently, the heirs might start furiously spending their inheritance—because they’re trying to be rid of it. ...

Curiosity And Resistance ... Studies show that people with curiosity respond to change better. On the flip side, a person resistant to change may shut down. Just waiting for wealth can trigger purposelessness. ... Their lives are “on hold” until the money comes. When it does finally arrive, the new wealth can stun their identity and derail their calling, as well as alter their character or cause it to disintegrate. ...

Gary Shunk is a consultant to families of wealth and the advisors who serve them. His primary mission is to help integrate wealth, character and calling. He is based in Chicago. His Web site is www.wealth-psychology.com.

Megan Wells is a writer and communications expert. She uses writing and storytelling for leadership, creativity and innovation. She works in Chicago. Her Web site is www.meganwells.com.

Premium Financing

Private Wealth Magazine

By Frank W. Seneco , Alan Kufeld - 12/4/2008

As Business Owners build PERSONAL wealth, they typically want to ensure that, in the event of their death, the value of their business equity will pass to a surviving spouse and heirs.

A variety of premium financing techniques—involving permanent life insurance comparable in value to the owner’s business equity and borrowed premiums—offer a potentially attractive solution to this challenge. ...

Borrowing the premiums could be a beneficial option for the following reasons: • Permanent life insurance policies have a cash surrender value that, under current laws and regulations, can provide collateral for a secured loan. • New types of permanent life insurance offer attractive options for the policy cash value that can diversify the business owner’s portfolio and outperform the cost of financing premiums. • Borrowing has federal estate/gift tax advantages when used with an Irrevocable Life Insurance Trust (ILIT). • A thriving industry of specialty lending, called “premium financing,” has evolved to facilitate this type of transaction by arranging personalized secured loans.

Fine-Tuned Leverage ... In a premium financing transaction, leverage can work on three levels: • The contract provides the immediate benefit of leveraging a first-year premium payment into a far larger death benefit. In the example cited earlier, this leverage is 75 to 1—a $15 million death benefit acquired for a $200,000 first-year premium. • The contract creates the potential over time for the cash value to compound on a tax-deferred basis and eventually exceed the cumulative cost of premiums. • The contract can have “tax leverage” because the death benefit is normally free of federal income tax. It also can be free of estate tax when properly structured and owned by an irrevocable trust.

The advantages of borrowing life insurance premiums are tangible and valuable. The strategy can potentially increase personal net worth modestly during the business owner’s lifetime and increase the after-tax estate substantially after death. Premium financing also creates the flexibility to adjust the amount of leverage built into the life insurance contract at the time of purchase and periodically over time.

For example, a business owner could “dial up” the premium financing leverage at age 40, reduce it in increments starting at age 50 by repaying some loan principal and eliminate it by retiring the loan as retirement approaches. For younger owners who are just starting to build serious net worth, premium financing can be a bridge until personal assets grow or a sufficient income stream becomes available to fund life insurance.

The Structure Of A Typical Transaction Although each premium financing transaction is customized, the basic terms and techniques are somewhat standard, as follows: • The loan typically is non-recourse—secured by the policy’s cash value and a letter of credit (LOC) equal to any shortfall between loan principal and cash value. • The policy is permanent life insurance in which coverage is guaranteed for life or to a very high age (e.g., 110). In form, it may be whole life, fixed universal life or indexed universal life with a “secondary guarantee” of coverage. Variable life insurance is typically not used in premium financing because of regulatory restrictions on borrowing against securities. • The loan interest is a floating rate typically tied to the 12-month LIBOR plus a spread. Spreads have recently ranged from LIBOR + 2.25% for loan commitments up to $2.5 million to LIBOR + 1.75% for commitments above $20 million. The loan interest is not tax deductible for an individual, trust or business entity. • A loan arrangement fee of 1.0% to 1.25%, depending on loan size, is charged and can be capitalized into loan principal. • The policy must be owned by a “bankruptcy-remote” entity so that the premium finance lender has clear priority claim against cash value collateral. An LLC or ILIT can qualify as bankruptcy-remote. • A common arrangement is to fund the policy at the maximum level for the first seven to 10 years, which can guarantee the death benefit. This creates rapid cash value build-up and leverages policy benefits. Funding should avoid Modified Endowment Contract (MEC) status. In a “non-MEC” policy, loans and partial withdrawals of cash value may be made on a tax-favored basis. • The policy is typically purchased by an ILIT so that the death benefit can be paid free of federal estate tax (a three-year look-back period applies on policies transferred to an ILIT). The business owner normally is the insured person. Some “survivorship” or “second-to-die” policies allow two lives to be insured—a business owner and spouse—with the death benefit payable on the second death. The trust’s beneficiaries may be a surviving spouse, children or, in the case of a business buyout arrangement, the LLC or other partners of the firm.

Estate And Gift Tax Advantages The ILIT can help to avoid inclusion of the life insurance proceeds in the grantor’s taxable estate. With a competent institutional trustee, it also can provide continuing management of assets and planned distributions to beneficiaries according to the grantor’s wishes.

There is, however, complexity involved in setting up ILITs funded with large amounts of life insurance. The trust normally owns the insurance and pays premiums, and the grantor can gift to the trust an amount needed to pay premiums annually. Such gifts can qualify for the annual gift tax exclusion—currently $12,000 per beneficiary—if they are of a “present interest.” Then, any premiums gifted to the trust in excess of the annual gift tax exclusion can be sheltered under the grantor’s lifetime gift tax exemption, which is currently $1 million. At the grantor’s death, lifetime gift tax exemptions previously used will reduce the “applicable credit” for federal estate tax purposes, dollar-for-dollar. ...

By reducing the out-of-pocket premium payment obligations, premium financing can soften the impact of gifted premiums on the grantor’s estate planning. The annual gift to the trust could be limited to the amount necessary for the trust to pay financing charges, which normally is far less than premium cost. ...

Exiting The Loan ... In addition to paying off the loan with liquid cash as it becomes available, the options include: • Having the trust or estate pay off the loan after death, using insurance proceeds. • Surrendering the contract and using its cash value to pay off the loan. • Restructuring the loan. • Using a combination of personal assets and policy withdrawals or policy loans to pay off the premium finance loan. This is not usually recommended because large withdrawals or loans may jeopardize the guaranteed coverage feature of the policy. ...

Policy Performance Premium financing works best when the policy has the potential to grow cash value at higher rates than the cost of financing. An analysis of prevailing interest rates over the past 20 years by the British Bankers Association shows that one-year LIBOR rates have averaged 5.19%. A premium financing arrangement at LIBOR + 1.75% would have averaged 6.94% interest annually over this period.

Most whole life policies’ cash value growth, including any dividends paid by mutual companies, is less than 7% annually. ... Fortunately, a type of permanent policy called Indexed Universal Life (IUL) has emerged to fill the gap. IUL credits to cash values an interest rate that is the higher of a percentage of returns produced by a market index such as the S&P 500 or a guaranteed minimum annual rate, such as 2.0%. Policy values are not subject to market fluctuations. Any cash value gains from year to year are locked into the contract.

We are seeing even more attractive “next generation” IUL products emerge. They credit cash value with interest based on an averaged “basket” of leading investment indexes, including those that invest in U.S. and international stocks. Other advantages of leading-edge IUL products include: • Lowest return dropped–The index that produces the lowest performance for the basket over a given period of time is dropped from the average. • Variable basket weightings–The highest performing index in the basket is given a greater weighting in the averaging process, on a look-back basis, than lower performers. • Five-year point-to-point measurement–Index returns are measured on a five-year rolling point-to-point measurement, which helps to smooth out temporary dips and produce the most favorable cash value crediting rates for policyholders. ...

When Does Premium Financing Work Best? Premium financing strategies can work best for business owners when the benefits align with owners’ personal needs, in the following ways: • The owner has a need for permanent guaranteed life insurance coverage and has limited liquidity or cash flow to pay premiums. • The owner expects liquidity or cash flow will improve at some point in the future and would like the flexibility to “dial down” life insurance leverage. • The owner has significant personal net worth tied up in the company and is confident it will keep performing well. • The owner believes the IUL basket of indexes has the potential to outperform the cost of financing premiums. • The need for life insurance coverage is large enough to create gift/estate tax issues because gifted premiums would exceed the annual gift tax exclusion.

Because IUL cash value crediting rates can fall below financing cost over intervals, it is essential to implement premium financing programs with the help of professionals who can monitor results and maintain program advantages. If the program begins to deliver less benefit than planned, it is best to know this fact and take remedial action sooner rather than later.

In the right circumstances, and with experienced professional support, premium financing can be a valuable technique for helping business owners pursue wealth accumulation and distribution goals, including protecting and ultimately cashing out the value of their business equity.

Alan S. Kufeld, CPA, is a tax principal in the Rothstein Kass Family Office Group, specializing in the federal, state and local tax matters affecting high-net-worth individuals. Frank W. Seneco is the principal of Seneco & Co., a Connecticut-based advanced planning operation that specializes in high-end life insurance solutions for the ultra-affluent and their advisors

Press Release "Financial Savvy for the Small Business Owner"

Press Release

For More Information: David M. Williams, CFP^©

FOR IMMEDIATE RELEASE

NEW BOOK OFFERS SMALL BUSINESS OWNERS STRATEGIES FOR SUCCESS AS WELL AS HOW TO AVOID MAKING CRUCIAL MISTAKES

Cordova, Tennessee wealth management firm featured in chapter one of “Financial Savvy for the Small Business Owner” discusses top mistakes and traps of small business owners.

January 2, 2009, Cordova, TN----In their newly published book for business owners, financial services industry journalists Lyn Fisher and Sydney LeBlanc highlight the nation’s top wealth management firms that advise small business communities. In their first chapter, principals Charles Auerbach, CFP®, CLU, ChFC, EA and President and Cofounder of Wealth Strategies Group, Inc., and David M. Williams, CFP® and Registered Investment Advisory Associate with the firm, shared their insight on key topics such as business succession and exit planning, staff selection and capitalization to name just a few.

Says David M. Williams, “Studies indicate that only 30% of family businesses survive into the second generation, only 12% survive into the third generation, and only 3% survive into the fourth generation and beyond.” He says that it is possible for the business to end or be passed down successfully, though, at any of these generations with advance planning. He and colleague Charles Auerbach illustrate in their chapter the six areas of tension in family businesses that can create problems at a succession or an exit event, one of which is sibling rivalry.

Williams explains that the challenges of family rivalry—as well as other business challenges---during a succession event can be moderated if planning is done in advance. “A succession plan requires a commitment for all parties involved,” says Williams. “Family members may be willing to work together if they recognize the ramifications of an unwritten ‘default’ plan. All parties must set aside their own competitiveness so they can work together, rather than tear the business apart.”

In addition to business succession planning, both Auerbach and Williams are involved in strategic philanthropy and values-based legacy planning. With more than 50 years combined experience, they have the knowledge capital and skill to help business owners successfully navigate through the maze of pitfalls and obstacles they will encounter throughout their business lives.

Readers of “Financial Savvy for the Small Business Owner” will also find valuable information about employee benefit plans, entrepreneurship, goals, cash flow and other topics so vital to help owners make the best decisions for maintaining their company’ financial health.

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For more information about the book or for a review copy, please contact Financial Forum Publishing and Communications at 435-750-0062 or email info@ffpublish.com.

For more information about Wealth Strategies Group, Inc., please contact David M. Williams, CFP® at 901-473-9000 or email at dave@WSG-TN.com

Give Til It Hurts

Private Wealth

By Hannah Shaw Grove , Russ Alan Prince - 10/3/2008

Despite the wide appeal of philanthropy, most of the wealthy don’t capture the benefits of planned charitable gifts.

... In an effort to understand how actively the wealthy are involved in the stages of the giving process, we surveyed 446 individuals with a net worth of $5 million or more and a history of giving at least $50,000 a year to non-profit organizations.

One of the first issues that surfaced in our study was how much authority and control affluent givers want in the selection of the charities they support and, then, how the contributions are used. Almost three-quarters of survey respondents characterized themselves as wanting a high degree of both—we refer to them as high-influence givers. By contrast, the remaining quarter were less interested in participating in the process—low-influence givers (Exhibit 1).

Typically, most charitable gifts—regardless of the total wealth of the donor—can be considered “checkbook philanthropy,” meaning monetary gifts made in response to fundraising requests or one-off situations such as benefit events and auctions. While this form of giving is no less important, it often occurs without much advance thinking or planning and may not allow either the donor or the charitable organization to benefit as much as possible.

To ensure maximum effect, many wealthy individuals have begun planned giving to structure their philanthropic activities. More than half of our survey participants had already established a planned gift, but there was a greater disparity when viewed by segment. About two-thirds, or 62%, of the high-influence individuals had established a planned gift, while just 39% of low-influence givers had done so (Exhibit 2). ...

The opportunity to proactively reduce taxes was of material importance for 87% of high-influence givers, but far less significant to low-influence givers. Just 35% of that group cited tax implications as one of the major drivers in their decision to establish a planned gift (Exhibit 3).

A large portion of both segments, however, cited a broader planning effort as playing a principal role in their decision to create a planned gift. Of high-influence givers, 97% said the planned giving process was part of a broader effort that focused on financial planning, estate planning or both, as did 90% of low-influence givers (Exhibit 4). ...

... The most popular vehicle for high-influence givers was the charitable remainder trust, with 60% having established one. The second most frequently used structures were private foundations and supporting organizations, used by 34% of high-influence respondents. By contrast, almost three-quarters of low-influence givers used a simple will bequest as the way to structure their charitable gifts.

Donor-advised funds were the second most frequently used vehicle, established by 29% of the low-influence segment (Exhibit 5). ...

About half of the 247 wealthy individuals that have established planned gifts have additional planned giving needs. A much larger percentage of high-influence givers, 58 percent, expect to enhance their existing gifts or established additional gifts as compared to just 19% of the low-influence givers (Exhibit 6).

While high-influence givers cited the same gifting vehicles—private foundations, charitable remainder trusts and charitable lead trusts ... The vehicle of greatest interest to the low-influence group was a private foundation, as cited by 52% of the segment. After that, interest in other giving structures dropped off considerably with just 13% identifying the donor advised fund as a product of interest (Exhibit 7).

... The planned giving process can help all types of donors get the maximum benefit from their gifts as it provides a forum to have a dialogue with selected charities, creates opportunities to involve family members, and can ensure tax codes are interpreted and leveraged to the greatest degree possible. Still, many affluent givers continue to make contributions without any advance planning and, as a result, may be sacrificing some substantial benefits.

Hannah Shaw Grove

Ms. Grove is a respected author, columnist and speaker and a leading authority on the mindset, behavior, concerns, preferences and finances of high-net-worth individuals. She is the executive editor of Private Wealth, the first and only magazine for professionals with ultra-affluent clients, and Cultivating the Affluent, a practice management newsletter for financial professionals.

View all articles by Hannah Shaw Grove

Russ Alan Prince

Russ is an editor of Private Wealth magazine and the president of Prince & Associates, Inc., the leading market research firm specializing in private wealth. He is a highly sought consultant to the ultra-high-net-worth and elite advisors and originated the use of high-net-worth psychology in the financial services sector. He is the author of more than 40 books on private wealth and is frequently cited as an expert in the national and international press.

View all articles by Russ Alan Prince

Captives save business owners money

Special-purpose insurer ideal for pretax wealth accumulation, asset protection, other goals

InvestmentNews

By David T. Phillips October 5, 2008

Through the creation of a captive insurance company, businesses can cut their taxes and increase the value of their estate. [The] business can also use the captive for pretax wealth accumulation, to protect assets, for efficient estate planning and to retain key employees. ... The strategy works best for companies that generate at least $1 million in annual net income, making it viable for physician groups, associations, franchisees and other businesses. ...

Captives were established more than 30 years ago, and today, there are more than 6,000 captives and $100 billion in annual insurance premiums.

There are two broad ways to employ a captive.

First, a captive can replace existing insurance, such as workers' compensation, general liability, medical malpractice, auto liability, property or other conventional insurance.

Through a captive, the overall cost of insurance is reduced, and the captive owner can capture underwriting profit and investment income.

Second, the captive can purchase insurance that covers exclusions, deductibles and self-insured risk.

In the event that claims don't materialize, the captive will capture a substantial pretax nest egg that can be used for future business risks, or it can be used for distributions to owners, family members or key executives at favorable tax rates.

Moreover, under the U.S. tax code, if the captive receives less than $1.2 million in insurance premiums a year, the entire amount is received tax-free by the captive. The insured business might then deduct the $1.2 million annually, saving about $500,000 a year in taxes.

Remember that premiums paid to a captive ...can be invested in stocks, bonds, mutual funds, real estate and other investments. A captive can also hold life insurance.

Generally, these are specialized life insurance policies with a high cash surrender value to ensure that the policies qualify as a proper investment under insurance regulations. The captive can hold the life insurance directly or loan money to a life insurance trust to buy the insurance.

Also, the death benefit of the life insurance is outside the estate. This means that because of the captive, a $10 million or even $25 million death benefit is created for the estate's beneficiaries without any gift or estate tax liabilities.

David T. Phillips is the founder and chief executive of Estate Planning Specialists LLC in Chandler, Ariz., a national network of estate planners. He can be reached at david@epmez.com.