The massive legislation known as the 2010 Tax Relief Act opens a brief window of opportunity for a unique estate planning technique. Under this law federal estate tax exemptions are “portable” between the estates of a married couple. But the favorable estate tax treatment isn’t automatic, and now the IRS has issued a new ruling (Notice 2011-82) providing guidance on electing this tax break. In addition, the tax agency says that it will soon issue regulations clarifying the finer points of portability.
To understand the current rules, it helps to retrace the progression of the estate tax law during the past decade. In 2011, the estate tax exemption could effectively shelter only $1 million of assets from estate tax, and tax rates on estate were as high as 55%. But a law passed that year gradually increased the estate tax exemption to $3.5 million in 2009 and reduced the top estate tax rate to 45%. Then the 2001 law completely repealed the estate tax for 2010. After that, however, if Congress hadn’t acted, the tax would have returned to 2001 levels. At the eleventh hour, the 2010 Tax Relief Act created a $5 million exemption for 2011 and 2012 – the highest level ever for that tax break – and a top 35% estate tax rate.
The law also authorized portability of exemptions between spouses. That means that if certain requirements are met, the estate of a surviving spouse can claim any unused portion of the exemption from the estate of the spouse who died first. That is a change from the old rules which required leftover exemptions to be forfeited. So now a married couple may be able to shelter up to $10 million of assets from federal estate tax.
…….Please read the rest of the article in FWM’s 1st Quarter 2012 newsletter.
Posted in Estate Planning by .
Feb 12
24
How to Choose A Financial Advisor
Lots of people with a variety of backgrounds call themselves financial advisors. Sorting through their credentials and determining who might best be able to meet your needs is a daunting task. Many people get frustrated and give-up before they find the right person or firm.
We believe a good place to start evaluating advisors is to first determine if they act as a fiduciary for their clients. Registered Independent Advisors (RIAs) are subject to a fiduciary standard and are legally obligated to represent their clients best interests. Many financial advisors are only subject to a suitability standard and do not act as fiduciaries.
As a fee-only advisor, we also believe that how a financial advisor is compensated can decrease potential conflicts of interests. Fee-only advisors only get paid directly from clients and do not receive commissions or referral fees.
Finally, we believe many people benefit from financial advisors with a comprehensive financial planning education and experience. Comprehensive financial planning includes investment planning, retirement planning, education planning, tax planning, estate planning, and risk management planning. The CFP and CPA/PFS designations are two credentials that do indicate that an advisor has comprehensive training.
In October 2011, Smart Money magazine ran an article “How to Find a Good Financial Adviser,” which we think is worth reading before you choose an advisor. The article also includes a 2 minute video which gives a quick overview of what to consider in selecting an advisor.
Posted in Fee-only Financial Advisor by .
Feb 12
3
2012 Global Economic Outlook
2012 Global Economic Outlook
On January 19th, we participated in a conference call featuring the co-CIOs (Chief Investment Officers) of PIMCO, Bill Gross and Mohamed El-Erian, who presented their firm’s current outlook for global economic growth in 2012 and beyond. In 2012, their firm anticipates that one of the biggest challenges for investors will be the “unusually uncertain” outlook, in the words of Federal Reserve Chairman Ben Bernanke. This uncertainty stems from:
- the ongoing deleveraging in many developed economies
- global realignments as growth shifts
- stress on important anchors of the global markets, especially Europe
- how effectively policymakers and institutions can deal with these transformations
PIMCO’s outlook incorporates a “bimodal world”, one in which the global economy is characterized by two potential ranges of outcomes, with much depending upon the course of events in Europe.
For the global economy:
- The potential “left tail” event is deflation, as global growth slows over the next six to twelve months.
- The potential “right tail” event is inflation, as sustained low interest rates and other central bank policies “reflate” many economies over the next couple of years.
Their regional economic views reflect an outlook in which extremes are increasingly likely:
- Europe: 2012 will be the make-or-break year for the Eurozone. Two extremes are possible: fragmentation with a return to domestic currencies, which would disrupt the functioning of the markets, or reestablishment of a stronger Eurozone that would look somewhat different.
- U.S.: Recent economic data points to a slow healing, but the debt crisis in Europe is a strong headwind that could push the U.S. back into recession.
- Emerging markets: Although these economies are in better financial shape than the developed countries, they cannot provide the tail wind that the global economy needs for strong growth.
All in all, an “unusually uncertain” outlook. Only time will tell whether 2012 turns out to be a year of recovery or a year of continuing risk-on/risk-off fluctuations in the capital markets.
Jan 12
31
Saving for College
Saving for college is a daunting challenge. Some of the most expensive colleges in the country now estimate the cost of attendance at $58,000 per year. That comes to $232,000 for 4 years of school. To accumulate that amount of money by the time your child goes to college, you need to save around a $1,000 a month starting at birth. Few people can afford that amount.
But any amount of savings can help get your kids through college with fewer loans. Thus, saving for college is a top goal for many families. The 529 college savings plans are the best college savings option for most families. These plans have a combination of parental control, parental asset in financial aid calculations, and tax-free growth. For more information about other options, check out Morningstar’s recent article detailing alternatives to 529s. Kiplinger wrote last year about why the 529 plan is a great option for grandparents, aunts, and uncles who want to help pay for a relative’s college cost
For Connecticut residents, the state sponsored CHET 529 plan managed by Fidelity is the best option since contributions receive a state tax deduction. For Massachusetts residents, there is no tax deduction for 529 plan contributions so they can pick any plan. The website www.savingforcollege.com has details on all of the plans. For people interested in a socially responsible investment option, the Oregon College Savings Plan, managed by TIAA-CREF is worth considering.
Fortunately, not everyone pays the list price for college. Many students receive grants and work study employment that reduces the total family cost. To get an idea what you might expect to pay at various schools you might want to check out the College Navigator run by the National Center for Education Statistics which is part of the U.S. Department of Education. On its website, you can look up specific schools and find the average “net price” paid by families at different income levels. Be careful to add back federal loans to the “net price” to get a realistic picture of what people are paying.
College costs are daunting, but setting up a savings plan does not need to be.
If you are looking to maximize your retirement savings this year, you may need to double check your automatic paycheck withdraws for your retirement plans. Back in October 2011, the IRS raised the annual elective contribution limits to 401(k), 403(b), and 457 retirement plans from $16,500 to $17,000. The catch-up contribution limit for people over the age of 50 stayed the same at $5,500. Thus, a person over the age of 50 can now contribute $22,500 to his or her retirement plan.
Many people don’t realize that even if you maximize your contributions to your 401(k) plan you can also make a $5,000 contribution to your IRA or Roth IRA. Your spouse is also eligible to make a contribution to his or her IRA or Roth IRA. The big but is that there is a phase-out of the tax deductibility of IRA contributions based on your income, whether you are married, your tax status, and if you are covered by a retirement plan at work (like a 401(k) plan). For example, a married couple filing jointly and covered by a retirement plan at work starts having tax deductibility of IRA contributions phased out at $92,000 of Modified Adjusted Gross Income.
Additionally, there are phase-outs that restrict contributions to Roth IRAs by high income earners. Depending on your circumstances, it is possible to make a non-deductible IRA contribution and immediately convert it to a Roth IRA, which does legally get around the restrictions on Roth IRA contributions. But if you want to attempt this and you already have an IRAs there are some tricky tax rules you may want to consult a tax professional about.
The bottom line is for a married couple in their 50s who both work and are both covered by retirement plans, they can now contribute $55,000 per year to tax deferred retirement vehicles ($22,500 x2 + $5,000 x2 = $55,000). Most people will not be able to take advantage of all of this opportunity to save on a tax-advantaged basis. For those people that do have the capacity to save at this level, it is a goal to shoot for and surpass.
More details are available from the IRS at
http://www.irs.gov/newsroom/article/0,,id=248482,00.html.
Posted in 401(k) Plans 403(b) and 457 Plans IRAs Retirement Planning Roth IRAs Uncategorized by .
Last week Jeremy Grantham released his quarterly newsletter which advises investors to be more cautious than usual. His caution stems from his belief that the stock market continues to be above long term historic fair value and the ongoing debt situation in Europe which he classifies as “terrifying.” Yet, Grantham maintains a generally positive short term outlook on stock market prices as long as corporate profits remain strong.
At FWM, we appreciate both the big picture vision of Grantham’s newsletters as well as his dry British wit. The latest newsletter was a bit short on wit but Grantham did reiterate some of his big picture themes. He remains committed to his “seven lean years” thesis which espouses that the world is faced with low economic growth while we work through debt issues and the population in the developed world ages. He also reemphasized that high quality blue chip stocks may be the best global investment.
Grantham does not always make specific recommendations but this time he ended his letter with some ideas to consider.
- Focus on investing in high quality stocks and a normal weight in equities
- Stay focused on safety
- Stick to short term bonds and consider holding some cash
- Consider investing in natural resources in the long-term (in the short-term they may be overvalued).
You can read the entire newsletter on GMO’s website.
News of the European sovereign debt crisis has continued to dominate the finacial news this past month. Here in the U.S., the Congress is struggling to develop a deficit reduction strategy. The continued impasse on debt issues and the resulting uncertainty is eroding public confidence and slowing the growth in the economy.
Bill Gross, the manager of the world’s largest bond fund, commented recently that his expectations for a “new normal” of low growth have been reduced even further by the unresolved debt issues. It
seems unlikely that this situation will change in the near future and we will be experiencing a period with continued high volatility and low growth.
Gross further commented that the US will likely handle its debt burden by going through a period of “financial repression” where interest rates are maintained artificially low and savers are penalized. This will allow the government to borrow at low rates and repay with cheaper money in the future. Gross noted that the US undertook a similar policy from 1945 to 1979 to deal with the combined debt burden of the Great Depression and the Second World War. In effect, the US would be devaluing its currency relative to other countries.
For investors, and particularly for retirees, a period of “financial repression” will mean that safe investments in CDs and treasury bonds will likely not keep pace with inflation. In effect, savers will be subsidizing the U.S. debt repayments. In order not to have the value of their money slowly eroded over time people may need to take on additional risk and have a greater potential for loss than they may find ideal. We can see the impact of “financial repression” today. Millions of people who have diligently saved over their lifetimes are facing a reduction in their income as the rates from FDIC insured CDs and savings accounts continue to fall. Many retirees in this situation are now being forced to make a choice. Accept interest rates of 1%, which is far below the official Consumer Price Index inflation rate of 3.6%, or invest in alternatives that pay higher rates but have less security. The choice for many is to spend principal or take a risk of losing principal.
That is not an easy choice and calls for diligence in determining appropriate levels of risk in meeting annual cash flow.
Blog articles are provided for informational purposes only and are not a solicitation any investment or financial service. Information contained within is believed to be accurate, however, Family Wealth Management, Inc. makes no guarantee to this fact and has no control over the accuracy of websites found through the links within. Postings by blog visitors are not necessarily the opinions of Family Wealth Management, Inc. or any employee thereof. Your access to and use of this website is subject to the Terms of Use.