Personal Finance
By Sumeet P. Shah Business owners devote much of their time building their business and improving their profitability; however, they often neglect to devote time to protecting their business by addressing succession considerations and asset protection. Business owners should consider the following: 1) Preparing for business succession in the event of death, and, 2) How to implement business agreements designed to protect and enhance business value while providing for seamless succession in the event of incapacity, retirement or departure from the business. Succession Considerations:?If you co-own a business with others, such as a partnership, LLC or corporation, you will want to sign a buy-sell agreement, or buyout agreement, with your co-owners that will control what happens to your ownership interest when you die. Some owners agree that the business should have the opportunity to buy your share of the business back from whoever inherits it. A buyout agreement can even call for the company to purchase life insurance on the owners so that it can be used to fund the purchase of a deceased owner’s interest, turning the buyout agreement into a business continuation plan. Other business owners want to keep the business in the family and in that case the buyout agreement can be turned into a succession plan. Asset Protection: There are basic legal documents that should be considered by business owners to protect business value including a non-compete and confidentiality agreement, buy-sell agreement, and perhaps even a deferred compensation or bonus plan for key employees or associates. There are very few events that can severely affect the value of a small business such as a key employee or associate leaving the business and starting a similar business, an employee departing with trade secrets, confidential information or even customer lists. All business owners should require their employees to sign non-compete and confidentiality agreements to prevent an event like this from occurring. If the terms of such an agreement are considered reasonable under state law, the agreement should be valid and enforceable. Expanding Your Business through Franchising By Sumeet P. Shah You have a great business concept and are evaluating ways to expand your brand and your operations. Have you thought about franchising your business? Franchising is a method of distributing products or services. This business model involves a Franchisor who lends his intellectual property and business concept and a Franchisee who pays a royalty and an initial fee for the right to do business under the franchisor’s name and system. Once this contractual agreement is reached by the two parties, a Franchise is created. What is needed to offer a franchise? Sumeet P. Shah is Principal Attorney at Shah Legal Group, LLC in Atlanta, Georgia. His areas of practice include franchise, corporate, real estate, and estate planning and business litigation. He can be reached at sumeet.shah@shahlegalgroup.com or (678) 274-9335. Roth: To Convert or Not to Convert The Many Uses of Variable Life Insurance By Narendra Dixit *All guarantees are based on the claims-paying ability of the issuing company. Values in variable investment options and rates of return will fluctuate and shares may be worth more or less than your original contribution when redeemed. **Loans and withdrawals will reduce the life insurance policy’s death benefit and cash surrender value. Loans and withdrawals may also cause tax consequences in certain situations, and increase the chance that the policy will lapse. GE-45397 This article is not intended to provide legal, tax or investment advice. AXA Advisors and its affiliates do not provide legal or tax advice. Consult your tax or legal advisor regarding your individual situation. Bonds: Taxes and College Savings The Federal government and the states have helped those saving for college by providing tax benefits. Coverdell Education Savings Accounts (CESAs) and Section 529 plans offer tax-free growth of any investment earnings and tax-free withdrawal of proceeds for qualified educational expenses, which makes them attractive if you are saving for the education of a child, grandchild or any other child under age 18. Now is the Time to Save for College With the cost of four years at a top private college already exceeding $180,000,*** there is no time to waste in putting money aside for educational expenses. Whether the child is a few months old or nearly college-age, talk to your financial advisor now about ways to make college a reality. Investors should consider the investment objectives, risks, charges and expenses of 529 plans carefully before purchasing. More information about 529 plans can be found in the issuer’s official statement. Please read the official statement carefully before investing. * As with other investments, there are generally fees and charges associated with participation in a 529 plan. There are no guarantees regarding the performance of the underlying investments. ** Under “sunset provisions,” Section 529 tax rules are scheduled to expire on December 31, 2010 unless extended by Congress. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors. *** According to the College Search tool at collegeboard.com, one year’s expenses for a student at Stanford University are $ 51,187 in 2008. Be advised that this document is not intended as a legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. Consult your tax or legal advisor regarding your individual situation. GE-45396 Why Wills and Trusts? Eight Pillars of Investment Wisdom Providing Financial Independence for Children and Dependents with Special Needs Those caring for family members who are physically or mentally disabled know how much time and attention are required to maintain quality of life for these loved ones. They worry what will happen to them when the caregiver is no longer there. Who Will Inherit Your Traditional IRA? Women Business Owners – Planning for Retirement Annuities Explained As employer-sponsored pensions become increasingly rare, retirement-minded investors have begun looking to annuities to create lasting income streams. Understanding the fundamentals and various options available can help you decide if an annuity might be an appropriate addition to your financial portfolio. The Basics Funding: Single Premium vs. Flexible Premium Pay Me Now or Pay Me Later Annuities and Risk Tolerance The Guarantee of Minimum Income: Protection when the market’s up: How Annuities Pay Fixed Payout: A monthly payout of the owner’s choosing will be paid until the money runs out. It is possible that the Annuitant could outlive his/her money. If the Annuitant dies before all monies are paid, beneficiaries will receive the remainder. Fixed Period: The Annuitant designates a set period of time (i.e. 10 years) in which all monies will be paid out. As with the Fixed Payout, beneficiaries would receive the balance of payouts if the Annuitant dies before the period ends. Lifetime (also called Straight Life): The Annuity pays out for the entire lifetime of the contract owner. This type of payout structure could potentially give Annuitants the greatest monthly income since insurers base it on life expectancy averages. Regardless of when the Annuitant dies, beneficiaries do not receive any payout. Therefore, people who die prematurely leave money in the Annuity- which is kept by the company- and that makes up for the people who live beyond average life expectancy. This structure should be considered by those interested in income for life without needing to provide for a beneficiary. Life with Period Certain: Similar to the Lifetime Payout, Life with Period Certain will pay out until the Annuitant dies. However, a minimum period is designated. Therefore, if the Annuitant dies before the specified period concludes, beneficiaries receive payments until the end of that period. Of course, the longer the period, the lower the payments. Installment Refund: This payout structure gives Annuitants income for life while guaranteeing that if the Annuitant dies prematurely, beneficiaries receive the remainder of the contract owner’s initial investment. Joint & Survivor: There are several options for joint and survivor contracts, which designate how co-annuitants are paid as well as how the payout to a surviving spouse changes after the death of the first spouse. If this type of annuity is of interest to you, consult a licensed professional to learn more about the various options. Since Annuities are intended for retirement, early withdrawal – before age 59 1/2 - is possible but will generally result in normal income tax treatment and a 10 percent federal income tax penalty. Be aware of whether your contract has a “bail out” provision that lets you cash in the annuity without a surrender charge if its return falls below a certain stated amount. Check to see if there is any kind of bonus offered for keeping the contract for a certain length of time. Protecting Your Finances From Disaster Recent catastrophic events, ranging from natural disasters to terrorist attacks, have clearly demonstrated that the homes and livelihoods Americans have invested in over many years can be wiped out in a matter of hours. Once displaced, many victims of disasters like Hurricane Katrina struggle to get back on their feet financially. Even if you are not the victim of a disaster, you could still feel the effects of one from a financial standpoint. This was the case with Americans living far away from the Katrina disaster who felt the effects in the form of higher energy prices and other types of inflation. While there is little you can do to prevent a disaster from striking, there are steps you can take to protect you and your family from financial ruin should some type of disaster occur. Store important documents in an “evacuation box.” Collect and make copies of all your key financial and personal documents, including passports and birth certificates, marriage licenses, wills, property deeds, insurance policies, mortgage records, car titles, and stock and bond certificates. Make copies of the front and back of all credit cards and driver licenses. Then make a list of all your account and credit card numbers, as well as a written and photographic inventory of all your valuables. You should also prepare an envelope with enough cash or travelers checks to last your family about three days. All essential documents should be stored in a bank safe deposit box located some distance from your home or in an airtight, waterproof, and fireproof safe or container that can be easily taken with you in an emergency evacuation. Inform family members or trusted friends of the location of the box in case you are not able to retrieve it yourself. Make sure you have access to cash. Avoid tying up all of your assets in real estate or investments that cannot be tapped without incurring significant penalties. Maintaining funds equal to three to six months’ income in a savings or money market account should be among your top financial planning priorities. You may also want to have on hand several credit cards with high available balances or arrange in advance a line of credit that could be used in an emergency. If you have a 401(k) account with your employer, find out whether your plan allows you to take a loan out against your savings. Consider making contributions to a Roth IRA, which may carry fewer penalties for early withdrawal than most other tax-deferred retirement accounts as long as certain requirements are met. Purchase necessary insurance coverage and review your policies regularly. Many people who have lost their homes to disasters find their insurance policies do not cover the cost of rebuilding. If you have homeowners insurance, review your policy annually to ensure it reflects the actual replacement cost of your home and its contents. This is especially important if your home has risen significantly in value or if you have made improvements to the property. Be aware that your policy may not cover damage due to specific causes, such as flooding. If the insurance you need is not available through private companies because you live in a disaster-prone area, find out whether state or federal insurance pools would provide coverage. In addition to homeowners insurance, you should consider disability coverage to protect you and your family in case you are injured in a disaster and unable to work for a period of time. If you receive health benefits through your employer but lose your job, you can keep your coverage in force under a federal law known as COBRA. You should also make sure that your life insurance coverage is sufficient to meet the needs of your family. Keep in mind that it may be possible to withdraw some or all of the cash value from a whole or universal life insurance policy, if necessary.* Your individual circumstances will ultimately determine what steps you should take to protect you and your family from a possible disaster. You may also want to consult with an attorney about whether your family would benefit from additional legal protections, such as trusts, powers of attorney, or living wills. Remember, disasters strike with little or no warning—the time to prepare is now. *Withdrawals will reduce the policy’s death benefit and accrued interest. (GE-35585) Elder Care Issues—Planning for Today and Tomorrow Annuities for Retirement Income While annuities can be an important component of retirement planning, they are complex. What type of annuity will best meet your goals? Before purchasing an annuity, you should know what the different types of annuities are and how they work. Fixed annuities allow you to lock in a fixed rate of return for a specified number of years. With this guaranteed* rate of return, there is little risk of loss of principal. However, there is the risk that the rate of return may not keep pace with the rate of inflation. Also, there may be fees and surrender charges if you withdraw funds from a fixed annuity before the annuitization phase begins. Variable annuities enable you to invest in a portfolio of funds, (usually referred to as sub-accounts) at differing levels of risk. A charge is taken from the sub-accounts to pay for the mortality, expense and administration costs of your annuity. Variable annuities usually have an array of optional features that provide living and death benefits, for an extra cost. Some examples include bonuses, guaranteed* minimum income benefits, and guaranteed* minimum death benefits. Variable annuities are sold by prospectus. You should consider the charges, risks, expenses and investment objectives of variable annuities carefully before investing. Your financial professional can provide you with a prospectus, which contains this and other important information. There are also hybrid annuities that combine features of fixed and variable annuities. For example, with an equity-indexed annuity, your money is invested into a fixed account from which you may earn additional interest depending on the performance of a stock index. Payout Period. When an annuity begins paying out, it is known as the payout or liquidation period. An annuity that begins payout within one year of purchase is known as an immediate annuity. The payout benefit may be monthly, quarterly, semiannually, or annually. The benefit may be payable for your entire life, or guaranteed* for a certain number of years. Additionally, you may be able to have payments based jointly on your life and someone else’s. Payouts can be fixed or variable. The amount of benefit you receive will depend on a variety of factors, including your age, the age of the secondary annuitant (if any), the underlying interest rate(s) used to compute payments, the type of payout and other factors. Consult your financial professional for more information about the different annuity types. Considerations before investing in annuities. Annuities are long-term retirement vehicles. There are numerous factors to consider when choosing an annuity, including your time horizon, your tolerance for risk and your investment goals - that is, how you will use the money. For example, when deciding between fixed and variable annuities, consider how long you want your money to grow. If you are nearing retirement and have maxed out on your 401(k) contributions, then you may want to consider the stability of a fixed annuity. If you have many years before you retire, you may want to consider a variable annuity since those with longer time horizons may be able to ride out market fluctuations in exchange for potential long-term growth. Consult your financial professional for the best mix of investments for your needs. Versatility is key. Choose an annuity that fits your long-term needs, taking account of your age, risk tolerance and your other financial assets. Diversification is key. Your overall portfolio should be balanced between equity and fixed components. To that end, if you are a current annuity holder looking to make a switch, it may be simpler and more cost-effective to adjust the holdings in your current annuity rather than buy a new one. Remember the insurance features. Look for annuities that not only provide you the best lifetime income benefits but also offer the insurance features that work best for you and your beneficiaries. Surrendering an annuity can mean loss not just of income but also death benefits. Penalties can hurt. Early withdrawals (under the age of 59 1/2) may be subject to a 10 percent IRS penalty in addition to any penalties imposed by the issuer. Be sure you understand product fees and surrender charges, and talk to a financial professional to get a realistic picture of the weighted benefits and penalties before you buy or switch an annuity. While annuities have many benefits, they are not for everyone. They are not suitable for short-term goals because company imposed surrender charges are imposed in the contract’s early years. Variable investment options within variable annuities are subject to fluctuation in value and market risk, including the possibility of loss of principal. In addition, annuity policies have exclusions and limitations. Also substantial tax penalties may apply if you withdraw your money prior to age 59 1/2. Withdrawals are regarded as income and are subject to normal income tax treatment as well. Talk to your financial professional to determine if an annuity is a suitable choice, as a supplement to your retirement needs. Variable annuities are not a deposit of any bank; are not FDIC insured; are not insured by any Federal Government Agency; are not guaranteed by any bank or savings association; may go down in value. For more information about establishing a financial plan, contact your financial professional. This article is not intended to provide legal, tax or investment advice. *Guarantees are based on the claims–paying ability of the issuing insurance company. GE-31637 (03/05)(exp. 05/09) Rattled Retirees Cope with a Roller Coaster Market When the AARP conducted a nationwide phone survey in October 2008, asking working Americans aged 45 and older how the turbulent U.S. economy is affecting them personally, 65 percent said they will have to delay retirement and work longer to compensate for losses. That’s grim news for a populace eager to reap the rewards for decades of keeping their nose to the grindstone. And, it’s just one more bit of proof that we are facing serious times filled with serious financial challenges. Unfortunately, retired people and those within arm’s reach of their Golden Years are experiencing a perfect storm: fuel prices have been at record highs, driving the price of everything from gas to eggs through the roof. Investment earnings are also down… way down. We’ve been financing a war, picking up the pieces from natural disasters both here and abroad, watching the housing market disintegrate, and facing the worst economic crisis since the Great Depression. Dual-income, working households are struggling, but quite probably those hit hardest are the Americans trying to get by on fixed incomes that simply do not stretch as far. For the first time in a long time, Americans are rethinking their relationship with money. Uncertain Times According to the Employment Benefit Research Institute’s 2008 Annual Retirement Confidence Survey, only 29 percent of Americans believe they’ll have a financially secure retirement, down 12 percentage points from 2007 – the largest drop since the survey began 18 years ago. Healthcare cost concerns and declining home values weigh heavily into this perception. As Americans have become almost solely responsible for their own financial independence in the absence of pension plans, and with many retirees’ money linked to Wall Street in one way or another, wild 700-point market swings are not for the meek. Reality Check So, what can you do if you’re at or near retirement age? For starters, you can rethink when you retire. Delaying retirement by a few years, or even just one year, may help you save more and offset market losses. It may not be what any soon-to-retire worker wants to hear, but keeping your job for a while longer is probably the best way to add new money into your retirement savings. Consider holding off on retirement account withdrawals as long as possible. The longer you can let them work (and hopefully grow), the better off you’ll be. If you have already retired but are able-bodied and so inclined, you may consider getting a part-time job doing something that interests you. The money you make can replace the income you would otherwise take from your retirement accounts – but be conscious of how much you earn as it may trigger a decrease in your social security benefits. If you are younger than full retirement age in 2008 and you opt to work, Social Security will deduct $1 from your benefits for each $2 you earn above $13,560. When you reach full retirement age, your benefit will be increased. Making Savings Last Experts usually suggest retirees withdraw four percent of their investment savings in the first year of retirement and then increase it each year to account for inflation. This model gives reasonable assurance – though no guarantees – that a person’s nest egg should last 30 years or more. The four percent strategy is also an effective way to ensure that a big market hiccup during the early years of retirement will not be impossible to overcome. For those currently living on a fixed income, there are two other savings-preservation options to consider. First, withdrawals can be decreased to even less than four percent, assuming the retiree can still survive at the reduced income level. Second, withdrawals can stay level for a few years rather than being adjusted for inflation. Both options help the retiree withdraw less and keep more money in play to potentially capitalize on future market returns. Annuities Can Offer a Port in the Storm If an annuity contract has been part of your overall financial strategy, you may be in better shape than most since one of the strongest selling points of annuities are their guarantees. Depending on the type of annuity you hold, it may have a guaranteed income benefit and/or a guaranteed withdrawal benefit, in which case your payments would remain level regardless of market swings. That’s because annuity guaranteed annual payments are based on the amount of money used to fund the initial account balance, which can go up if the market performs well, but which cannot decrease due to poor market performance. In volatile times, annuities can provide a reliable income stream no matter what’s going on around them. It’s important to note that annuities are long-term financial products designed for retirement purposes. In essence, annuities are contractual agreements in which payment(s) are made to an insurance company, which agrees to pay out an income or a lump sum amount at a later date. There are contract limitations, fees and charges associated with annuities which include, but are not limited to, mortality and expense risk charges, sales and surrender charges, administrative fees and charges for optional benefits. A financial professional can provide cost information and complete details. It is also important to note that guarantees are based on the claims paying ability of the issuing insurance company. Little Cuts Equal Big Savings Living on less means finding more places to cut costs. Consider turning the heat down a degree or two, going without air conditioning if possible, clipping coupons, and cooking at home rather than eating out. Insurance deductibles can be increased to lower premiums, and you can trade in a gas-guzzler for a fuel-efficient automobile. Vacations may need to be postponed (or kept closer to home) and movie nights may involve a rental rather than going to the theater. There are usually places to cut back thousands of dollars a year if you are willing to make some sacrifices. Don’t Panic You may be scared. But, the one thing you should not do right now is pull all your money out of the market. Diversification is still a prudent investment strategy for the long term. If the ups and downs are too much to handle, consider moving some, not all, of your money into lower risk investments such as bonds, CD’s, or annuities, but do not opt for safety at the expense of losing out on significant growth should the markets steady themselves. Even if you are 65, you do not need all of your retirement savings immediately. Some will not be accessed for a decade, which is why a big picture investment mix is best, helping protect what’s there & make gains down the road. Going forward keep your long-term strategy and your timeline in mind: small portfolio shifts can loosen the knot in your stomach, but major pull-outs, especially when the market is down, are not a good idea. For help understanding the current market and how it impacts your investment plan and retirement horizon, be sure to contact your financial professional. GE – 46998B This article is not intended as legal or tax advice. Accordingly, any tax information provided here is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the tax payer. Seek advice based on your particular circumstances from an independent tax advisor.
Succession Considerations and Asset Protection for Business Owners
Business owners should also consider preparing a will or trust to dictate what happens to their business interests in the event of a death. Through a will, business owners can state their wishes about who they want to inherit the business, and dividing the business assets however they see fit. If you don’t leave a will with directions about who you want to own the business, state law does it for you and usually close family members will receive everything. The rules vary from state to state, but generally surviving spouses and children share the estate.
If you’re not married and don’t have offspring, assets will go to your parents or siblings. Writing a will gives you the chance to name someone to serve as executor, to carry out the terms of your will. That person will be in charge of gathering your assets, paying debts, filing tax returns, and eventually distributing your property in the way you directed. That can be a big job, particularly if you leave a business behind.
Although a will is a great start for anyone who’s decided it’s time to do some business succession planning, a trust can also be a very effective succession tool. A trust lets your family avoid lengthy and expensive probate court proceedings after your death. Assets in a trust can be transferred quickly to the people who inherit them, a big advantage if you want a business to keep running smoothly.
A buy-sell agreement accompanied by proper planning should provide the exiting owner a fair value for his or her ownership interest while providing the remaining owner a means to purchase the exiting owner’s interest without depleting the business of cash flow and its value. It is crucial that planning be done to ensure there are sufficient funds available to implement the buy-sell provisions when triggered. Funding at an owner’s death with life insurance may be the easy part. More problematic may be how to buy-out a departing owner’s interest in the event of disability, retirement or voluntary termination, especially if a portion of the business’ cash flow must be devoted to that purpose. Further, once in place, a buy-sell agreement should periodically be updated to reflect changes in the business value and the owners’ objectives.
Finally, business owners should consider putting into place a deferred compensation or bonus plan designed to reward key employees or associates who meet certain performance targets. This in turn serves as a valuable tool for asset protection. A well-planned deferred compensation arrangement can serve two purposes. First, the plan can be designed so that employees are rewarded for achieving benchmarks that not only protect but increase the business value. Second, such agreements, for example through gradual vesting schedules, can place so called “golden handcuffs” on valuable employees or associates by making it extremely difficult for them to leave the business without forfeiting very important benefits.
As important as it is for a business owner to develop their business and increase their bottom line, succession planning and asset protection are also very important considerations in protecting your business value. Consult a business attorney to help you plan for the future of your business and your family.
According to the U.S. Census Bureau, franchises make up more than 10.5 percent of employer businesses. In 2010, President Obama signed into law the Small Business Jobs Act that permanently increased Small Business Administration (SBA) loan limits from $2 million to $5 million. The Act also temporarily extends the 90 percent loan guarantee rate and reduces borrower fees in the SBA program. The law permanently increased microloan limits from $35,000 to $50,000 helping more entrepreneurs with start-up costs. This change in law has increased the access to capital for individuals looking to open a small business which in turn is helping franchisors expand their business through franchisees.
You may be asking what kinds of businesses lend themselves to franchising. Virtually every type of business you can imagine can be a franchise. The International Franchise Association now lists more than 75 different categories to describe its members. Typically, you would think of fast food and restaurants first when thinking of franchising, but franchising covers a wide spectrum from advertising/direct mail to construction to dating services to home inspection to security systems to video sales and rentals. Other examples of successfully applying franchising to established industries are: printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotels and motels, and travel agencies.
There are many legal aspects when beginning the process of franchising. Federal and State law govern franchising and the first legal requirement will be to prepare a Franchise Disclosure Document (FDD). This document, called the Uniform Franchise Offering Circular (UFOC) or the FDD is required of all companies by the Federal Trade Commission if they want to offer franchises for sale anywhere in the United States. The disclosure document “discloses” in plain English certain provisions of the franchise agreement and other pertinent information of the franchisor. The disclosure document includes such items as initial fees, royalty fees, estimated initial investment, financial statements and litigation history. The disclosure has to be provided to a potential franchisee 14 days prior to any contractual franchise agreement between the franchisor and franchisee.
Additionally, a number of states have their own registration requirements that must be met before offering a franchise in those states. The franchisor has to pay a registration fee and provide other disclosures that the state may require to register the franchise. Once the registration packet has been submitted and approved by the state, a franchisor can offer their franchise in that state. Once registered, an annual renewal registration of the franchise will have to be completed. If there is a material modification to the franchise agreement then this change will also have to be registered and disclosed.
There are also financial aspects to the franchising process. One of the disclosure requirements is to have audited financial statements of the franchisor by an independent certified public account of the past two or three fiscal years. These statements include balance sheet and income statements. Another disclosure that may be included is financial projections of the prospective franchise. The franchisor may also want to consider if they are going to create another company for the new franchise, or use the existing business entity to carry out the franchising. Utilizing an experienced accountant to help in preparing your financial statements and devising your business structure is highly recommended.
Before you can begin the franchising process, the business system will have to be developed and thoroughly documented. This includes the product and services to be provided and all the materials, products, and merchandise to be used to conduct the business. Other parts of the business system include any intellectual property such as a trademark or copyright that may need to be developed. A detailed training plan and operating manual that will help the franchisee understand the business and the operations is also necessary. A marketing plan that will help a franchisee get the business off and running and a sales plan for the franchisor to appeal to potential franchisees are also integral components of the business system.
The help of a skilled attorney in franchise law is essential when navigating the course of franchise creation. Creating a disclosure that complies with federal and state laws as well as a franchise agreement that protects the franchisor’s intellectual property including such proprietary information as training and an operations manual is extremely important to a franchisor’s competitive advantage.
If you are a business owner and have a great concept and are looking to expand your business, think about franchising your business.
By Arun K. Aggarwal
The retirement savings you are working hard to build now will one day become your retirement income, helping to fund the lifestyle you envision. But have you considered the impact that taxes may have on your retirement goals? One approach to managing taxes in retirement is to include a tax-free account— such as a Roth IRA—in your portfolio.
Roth IRAs offer several benefits. Rather than paying taxes when you withdraw the funds in retirement, you pay taxes on the assets when you invest in a Roth IRA. If you have a Traditional IRA or an employer-sponsored retirement plan, now may be a good time to consider converting those assets to a Roth IRA. There are a number of reasons listed below why and depending on your personal financial situation, converting an existing retirement plan to a Roth IRA could help you meet your financial goals.
You don’t expect to need all of the funds when you retire.
With a Traditional IRA, you must stop contributing and start taking minimum distributions from your account at age 70½. Roth IRAs have no such age restrictions: there’s no contribution cutoff, provided income requirements are met, and no rule that you must begin tapping your account at age 70½. Your funds have the potential to grow tax-deferred as long as you want and you gain greater control over your income in retirement. You can tailor withdrawal amounts to your actual income needs—or eliminate them altogether in any given year.
So if you are past age 70½ and would like to quit taking those required minimum distributions, you may still have the option to convert some or all of your IRA into a Roth, allowing those funds to have the potential to grow tax-free for your own needs later in life or for your heirs. Note that you will need to pay taxes on the taxable amount of the IRA at the time of the conversion, so you should review this option carefully with your tax advisor before electing to convert to a Roth IRA. Also, the funds may only be converted after any current year required minimum distributions have been withdrawn.
You want to leave a lasting financial legacy to your heirs.
If you won’t need your IRA to fund your retirement income, a Roth IRA can be an effective wealth planning tool, since heirs can enjoy continued asset growth potential without paying taxes when they withdraw assets. By using a “stretch IRA” strategy, you can extend the tax-deferred growth potential and tax-free income benefits of your Roth IRA across multiple generations. This works by taking advantage of the fact that, while the beneficiaries of your Roth IRA (other than your spouse) will be required to take minimum distributions annually after your death, those distribution amounts will be calculated using a life-expectancy factor based on their own age, not your age. This allows more of the funds to remain in the account longer, continually reaping the benefits of tax-deferred growth potential, and if your beneficiary outlives the account, it can similarly be passed on to the next generation, and so on.
You’re concerned about taxes.
You are aware that diversifying your portfolio by investing in multiple asset classes, including stocks, bonds and cash, can be a way to mitigate risk. The same logic applies to tax diversification: by spreading your retirement assets across different types of accounts provides diversification. A tax-free Roth account combined with a taxable account, like a brokerage account or mutual funds account, and a tax-deferred account, like a 401(k) or Traditional IRA, can give you the flexibility to potentially keep taxes low in retirement. This is especially important if you’re concerned about future tax increases or you think that your tax liabilities may be higher in retirement. Converting some of your Traditional IRA to a Roth IRA can be an effective strategy that allows you to take income from different sources to potentially keep taxes low in retirement.
You think that you might need some of the money before you retire.
If you withdraw funds from a Traditional IRA before age 59½, not only will you be taxed on the value of the funds withdrawn, you will also be subject to a 10% early-withdrawal penalty unless an exception applies. With a Roth IRA, you can withdraw the original contribution at any time, without penalty. You can even withdraw earnings, but if you do not meet the requirements listed above regarding the length of time held, age and other considerations, you will be taxed on the earnings when you withdraw the funds.
A few additional points to consider:
• When you convert from a Traditional IRA or employer-sponsored plan to a Roth IRA, you will incur certain tax liabilities. These include taxes on any pretax contributions plus taxes on any earnings or growth.
• If you have pre-tax and after-tax funds in a Traditional IRA, there are certain rules that determine how these funds can be converted. Your tax advisor can help you determine which funds can be converted and the amount of taxes due on a conversion.
• It’s important to identify funds outside the IRA that can be used to pay the taxes due on the conversion to a Roth IRA. Tapping into the amount converted from a Traditional IRA or employer-sponsored retirement plan to pay taxes will reduce the amount available in the Roth IRA to earn tax free income—and trigger a 10% penalty if you’re under age 59½ (unless an exception to the penalty tax is available).
To help you decide whether a Roth conversion is a good idea for you, you should speak with your tax advisor, plus ask your financial advisor to prepare a customized Roth Conversion Analysis for you. The report will show the after-tax future value of an IRA balance, comparing the outcomes of a Traditional IRA or employer-sponsored plan with those of a Roth IRA. You’ll also be able to see the wealth planning advantages of “stretching” a Roth IRA over multiple generations.
Is a Roth Right for You?
We have touched on some key benefits of converting to a Roth IRA, but for many individuals a Roth conversion may not be the best strategy. If one or more of the following apply to you, it might be best for you to avoid conversion or to only convert a portion of your retirement account:
• You expect that your tax bracket will be the same, or lower, in retirement.
• You do not have funds available to pay the extra taxes from the conversion.
• You only have a short time frame to take advantage of potential tax-free growth before retiring.
• You have projected income needs equal to or greater than the required minimum distributions of the IRA.
Get Help Making your Decision
To help you understand how a Roth conversion will likely affect your financial scenario, ask a financial advisor to provide a customized Roth Conversion Analysis for you. This report explores your specific situation, factoring in such variables as the amount to be converted, the distribution year, your date of birth and where you are in the retirement planning cycle. Based on this input, the report shows the after-tax future value of an IRA balance, comparing the outcomes of a Traditional IRA with those of a Roth IRA. You’ll also be able to see the wealth planning advantages of “stretching” a Roth IRA over multiple generations. Finally, as with all tax related issues, you should also discuss your situation with your tax advisor.
Article is published for general informational purposes and is not an offer or a solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein. The appropriateness of a particular strategy will depend on an investor’s individual circumstances and objectives. GP11-00170P-N02/11
Article provided by Morgan Stanley Smith Barney LLC.
Arun Aggarwal, CFP, First Vice President- Wealth Management
Contact: 919.877.2431, arun.k.aggarwal@mssb.com
The primary purpose of life insurance is to provide financial protection for your family in the event of the death of the breadwinner. But some types of life insurance provide additional features. In addition to providing a death benefit, they can also serve as an estate and investment vehicle. For example, life insurance death benefits are generally paid income tax free. So life insurance can be an effective estate planning vehicle to protect one’s family or business by leaving an income tax-free benefit to heirs. Estate taxes, however, may apply.
Whole life insurance policies, particularly Variable Universal Life (VUL) policies, may offer the potential for tax-deferred growth to supplement retirement income. All potential earnings are income tax-deferred, so the cash value has an opportunity to grow. Further, the cash value can be accessed for a variety of needs—not just for retirement.
VUL insurance offers access to an array of investment options. Many VUL policies offer respected, brand name investment options, often from premier money managers, covering a variety of asset classes including stocks (both domestic and international), bonds, money markets and often a guaranteed interest option. *Many policies provide the freedom to choose the asset mix that best suits an individual’s tolerance for risk as well as one’s investment time horizon. In fact, many insurers have programs that can help determine a customized asset allocation for each client.
With greater growth potential comes greater risk. Having a wide range of investment opportunities can be beneficial as long as it’s done with a comfortable amount of potential risk. Poor investment performance can lead to increased premiums or even a policy lapse. The choice of investment options means more control, but also more investment risk than Whole Life or Universal Life.
VUL policies are highly flexible, in many cases allowing for adjustments to coverage and premium payment amounts. VUL policies also give access to cash value throughout the life of the policy as needs and objectives change. The flexibility to skip premiums and the risk of negative returns, however, can lead to policy funding problems.
As long as the policy remains in force, consumers can withdraw or borrow** money from the cash value when needed to help pay for college tuition or a down payment on a new home. The concept is similar to borrowing from a 401(k), except that, generally, the money doesn’t need to be repaid until the death of the insured or when the policy is surrendered. And unlike a 401(k) loan, borrowing against cash value can be done for any reason—you can use the money for a down payment on a child’s home or a grandchild’s education, for example.
For more information on how variable universal life combines life insurance, investment features and flexibility, contact your financial professional.
Stability and Income for Your Portfolio
Many individuals generally view bonds as conservative investments that may provide steady income and a higher degree of protection of principal. When the equity markets do exceptionally well, it may be tempting to increase your investment in equities. However, it’s important to maintain an even approach to investing to ensure your investments are well diversified at all times. Thus, bonds may merit consideration as a component of your portfolio.
Equity vs. Debt
When it comes to investing, you can be either an owner or a lender. If you own stock (or shares of a mutual fund that invests in stocks), you are a shareholder and literally own a part of a company. The company has no obligation to pay you back by redeeming your shares, and the value of your shares will rise or fall with the fluctuations of the market.
On the other hand, when you buy bonds, you are acting as a lender. That is, you are “lending” your money to an entity (e.g., a company, state, municipality, or the U.S. government) for its promise to pay, which takes the form of periodic interest and a return on your principal. The borrower does have an obligation to you (the bondholder), to repay. However, it is possible for the borrower to default on this obligation to pay interest and principal.
Bond Basics
One of the most common questions posed by potential bond investors is: “What is bond yield?” Yield is the investor’s original return on investment. When most people mention yield, they are referring to current yield (i.e., the current annual interest income divided by the initial price paid for the investment). Perhaps a better measure for investors is yield to maturity (YTM), which is the bond’s rate of return if it is held until its maturity date. YTM provides the most complete measurement of performance, taking into account the present value of future interest payments.
There are several factors that can affect yield. However, one of the more important considerations is credit risk. This is the risk that a bond issuer will go into default before a bond reaches maturity. Lower quality issues tend to pay higher yields to compensate for added risk. In addition, for bonds carrying similar credit ratings, it is typical that the longer the time until maturity, the higher the yield tends to be.
Bond investments are also subject to interest rate risk, so that when interest rate rise the prices of bonds can decrease and the investor can lose principal value.
What About Bond Funds?
Like stocks, successfully investing in bonds requires a great deal of knowledge and experience. For this reason, bond mutual funds can be a good way to incorporate bonds into your portfolio. A bond fund is run by professional money managers who use their knowledge and experience to purchase a variety of bonds that are consistent with the fund’s stated objectives. However, unlike individual bonds, a bond fund has no obligation to pay a stated interest rate or return your principal. As an investor, you should be aware that investment returns and principal values of bond mutual funds will fluctuate due to market conditions. Therefore, when shares are redeemed, they may be worth more or less than their original cost.
Many investors who understand bond yield may still have a difficult time accurately comparing the performance of bond funds when fund companies calculate and advertise yields in different ways. Fortunately, the Securities and Exchange Commission (SEC) has established an industry standard for computing yield in mutual fund advertisements and sales literature. The standard creates a fixed-yield quote requirement for bond mutual funds, making it easier for investors to decide which bond funds are most suitable for their individual investment portfolios. In addition, a funds prospectus, which can be obtained from a financial professional, can be consulted for a complete list and description of its holdings, as well as information on risks, fees, and expenses. Always read the prospectus and consider the charges, risks, expenses and investment objectives carefully before investing.
Before You Decide . . .
Bonds can be a valuable addition to your portfolio because of their ability to help maintain principal and provide income. However, the percentage of your portfolio you choose to invest in bonds should be determined by your overall goals and objectives. Despite the allure of potentially higher returns from equities, bonds may still deserve some of your investment attention.
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This article is not intended to provide legal, tax or investment advice. AXA Advisors and its affiliates do not provide legal or tax advice. For more information about establishing a financial plan, contact your financial professional.
Weathering Market Changes
The key to investing is consistency in all market types
Many people ask what steps they can take to help safeguard their financial well being through good times and bad. There are four basic steps.
1. Plan. In order to reach your financial goals, you have to know first where you’re going. For example, if you’re investing for retirement, you need to determine when you want to retire, how much you will need to live on in retirement, how much time your investments have to grow, and how much you can afford to save each year. Once you’ve answered these questions, you or your financial professional can develop the investment strategy that will help take you where you want to go. For each element of your financial future, you will need to plan. Your financial plan incorporates many elements, including investments, savings, insurance, and estate planning.
2. Prepare. Make sure that all your emergency needs are covered—including adequate life insurance and saving enough in a rainy day fund to tide you over during an unexpected run of bad luck. Once your emergency needs are covered, you can put your savings to work in a long-term investment strategy.
3. Diversify. Even if you’re an aggressive investor, it’s never a good idea to put all your eggs in one basket. Those who most successfully weather the market’s ups and downs are those who have a variety of investments—some fixed income securities along with a diversified stock portfolio that includes small and large cap, growth and value sectors. Asset allocation—the process of deciding which stock and bond sectors you want in your portfolio and what percentage of each—is important for two reasons. First, by spreading your bets among different types of stocks and bonds you are more likely to protect your assets on the downside—that is, when the market is falling. Second, since no one can predict what next year’s winners will be, having a piece of many types of securities makes it more likely that you will pick some winners. Your own asset allocation will depend on your age, your investment goals, and your tolerance for risk, your tax bracket, and other variables. Please be aware, however, that asset allocation does not guarantee a profit or protect against loss.
4. Re-evaluate. The most appropriate strategies and asset allocations will only serve you for so long. Life circumstances change: children and grandchildren are born and grow up; your earning power increases; you get closer to retirement; you inherit money, and so forth. As your life changes, you’ll need to re-evaluate your financial plan to make sure it still meets your changing situation and goals.
You also need to periodically rebalance your portfolio. As the market goes up and down, your portfolio’s allocation will change—a run-up in small cap value stocks, for example, will increase the percentage you own in that sector, putting your portfolio out of balance. When you rebalance, you sell some of your winning sectors and buy more of the sectors that have not yet performed as well—thus conforming to the classic investment advice of “buy low, sell high.” Rebalancing can help prevent your portfolio from taking on more risk than you had originally intended—and help you avoid possible losses when a formerly hot sector starts declining.
It may sound like a lot of work, but safeguarding your portfolio should be no different than safeguarding your car. Scheduling an annual meeting with your financial professional should be as routine as taking in your car for an inspection. And by taking precautions beforehand, you will be in a better position to weather the good times and the bad times.
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While neither CESA nor 529 plan contributions are tax-deductible, any earnings are tax-free and they may be withdrawn tax-free for qualified educational expenses, such as tuition, room and board, and fees. CESAs also allow tax-free withdrawals for qualified expenses related to primary and secondary school. The CESA thus offers one of the few tax-advantaged ways to save for pre-college educational expenses.
Section 529 Plans are named for the section of the Internal Revenue Code that created them. These plans are offered by individual states and eligible educational institutions. At this point, state sponsored plans are far more common so this discussion covers them. They are usually run by professional money managers, and generally offer several investment choices and features.*
An advantage of Section 529 Plans is that contribution amounts can be quite large—as much as $200,000 or more per child, depending on the terms of the plan selected. In addition, most plans allow contributions from out-of-state residents and permit you to contribute to more than one plan.
As with CESAs, contributions to Section 529 Plans are not tax-deductible, although some states offer state tax deductions to residents who participate in their own state’s plan. Like CESAs, investments in Section 529 Plans grow tax-free. Withdrawals from these plans are also tax-free.**
If you are selecting a state sponsored plan, keep in mind that different states have different types of plans. With most plans, you can use the value accrued in your plan for any accredited institution of higher learning in the U.S.—not just in the state where the plan is located. If you are investing in a 529 plan outside of your state of residence, you may lose available state tax benefits. Make sure you understand your state tax laws to get the most from your plan.
With both CESA and 529 Plans, if you withdraw money in the account for non-educational purposes, you may be subject to an additional 10 percent federal income tax penalty and potential state penalties. You may, however, change the beneficiary and there are no tax consequences as long as the new beneficiary is a member of the same family.
Wills and trusts make clear what your intentions are and make sure that your assets are directed to the appropriate parties. Benjamin Franklin pointed out that nothing is certain but death and taxes. While taxes are frequently discussed, most people prefer not to talk about death. But if you choose not to prepare for the inevitable, you could well jeopardize what you’ve worked for all your life. The scenario for the unprepared is not pretty.
Where there’s no will, there’s no way
Dying without a will means your property will be distributed according to the laws of your state of residence, not necessarily according to what you would have wished. For example, you may have siblings or step-children whom you would like to provide for, but without a will they might not qualify for inheritance under most state laws.
The court would appoint an administrator to manage the property in your estate and make distributions to surviving family members. Your surviving spouse might receive only a portion of your property, regardless of your wishes.
Your children would be treated equally regardless of their needs and would receive property outright, typically at age 18. The court could require that fees be paid by your estate to the administrator, reducing the amount available to your loved ones.
Where the surviving spouse is appointed guardian of the children, the State’s Probate Court will generally require an accounting of how, why and where he/she spent the child’s money.
Other negative consequences of dying without a will might include unnecessary estate taxes as well as not communicating any arrangements you might have wished to make for special family members, friends or charities.
To avoid these unintended consequences, it’s essential to have a will, no matter your age or the size of your estate.
Honoring your Wishes
A will is the first step in an estate plan. It declares the wishes of an individual in the disbursement of his or her estate, providing for the legal distribution of assets.
A properly drafted will enables an individual to select the beneficiaries and provides a line of successive beneficiaries who will inherit the property in the event of the death of the primary beneficiary. It can also help protect property for children by establishing trusts, naming trustees and empowering them to manage the property in the estate and distribute income and assets to the beneficiaries according to your wishes.
A will can help save on estate taxes by creating trusts that can bypass the estate of a surviving spouse, or provide bequests to charities, which are generally deductible from the taxable estate. Administrative expenses can also be saved through provisions in the will.
A will also prevents unnecessary emotional burdens on your family, by making clear what your intentions are and making sure that your assets are directed to the appropriate parties. You should consult a qualified attorney to discuss your specific situation and the laws of your particular state.
The Role of Trusts
A trust is generally used to provide for a spouse, dependents, charities and others through the naming of a trustee who holds and manages the assets for the benefit of the trust’s beneficiaries. Trusts are often established to minimize taxes in large estates or to provide for heirs who may not be able to handle the responsibilities themselves.
You determine the terms of the trust. For example, a trust can provide for the “sprinkling” of income and/or assets among all children according to changing needs, as decided by the trustee.
Distribution of trust assets could also be set aside for the children to be used upon attaining a specific age, or fractions of the principal can be distributed at different ages.
A trust can also protect inherited property from the creditors of a beneficiary. Most states have enacted “spendthrift” protection laws that generally prevent a creditor from attacking assets which are held in trust for a beneficiary.
Be advised that this document is not intended as a legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. Consult your tax or legal advisor regarding your individual situation.
GE-45447 (12/08)
You’ve heard the get-rich-quick stories. How someone won the lottery, started a wildly successful business, or made a “killing” in the stock market. Is this how real people get money for retirement? The truth is, many people who retire in comfort build their nest egg with slow and steady care. Deciding to save regularly is a crucial first step. Sticking to a savings plan is certainly another. Starting early can help your money grow faster. Now, as we begin another new year, let these eight pillars be your guide.
1. Pay Yourself First - You’re probably already following this advice by participating in your company’s retirement savings plan. But are you contributing to the fullest extent allowable? Remember that you could live in retirement for 25 years or more without any salary income. It could take a substantial amount of savings to carry you through for that long. If you have contributed the maximum to your qualified retirement plan, talk to your financial professional about other types of automatic savings/investment plans.
2. Start Early - Compounded growth can work wonders for your savings—provided you give it time. Let’s say, for example, that you begin saving $100 a month at age 35. Compounded monthly at a hypothetical eight percent† per year, your savings can grow to $149,036 by age 65. Pretty good, right? You can do better. Begin saving ten years earlier and the same $100 a month can grow to $349,101 – twice as much!
3. Invest to Outpace Inflation - A common mistake is to play it too safe. Yes, it is relatively safe to invest in a guaranteed investment contract.* But inflation could steadily erode your earnings. Remember that saving for retirement is a long-term endeavor.
4. Diversify** - Professional investors allocate their money among different kinds of asset classes: money market funds, bonds and stocks. Within these asset classes, you may want to diversify further—for example, by investing in some stocks that have high growth potential and others that pay dividends, or some stocks of smaller companies and some blue chips. Your financial professional can help you determine the suitable amount to put into various asset classes, depending on your age, your risk tolerance, your time horizon and your goals. By sticking to an asset allocation plan***, you limit your risk of exposure to just one asset class and are positioned to take advantage of market shifts.
5. Invest According to Your Time Horizon - Growth oriented investments (such as small cap stock funds) tend to be more volatile over short periods. These are good investments to emphasize when you have many years ahead of you. As you get closer to retirement, you have less time to recover from dips in the market. You may want to shift some assets into investments that tend to be more stable. But don’t forget that you may need to live off your retirement funds for many years. Investing for some growth potential in your portfolio is usually a good idea.
6. Avoid Dipping Into Your Tax-Deferred Savings
You’ll net less than you think because the withdrawn funds become taxable income. And in many instances you could face an additional 10 percent federal tax penalty if you are not yet age 59 1/2. Plus, money you spend now is money you won’t have later. And you could miss out on years of compounded earnings. If you need the money temporarily, it may be a good to take a plan loan (if permitted) and repay it promptly.
7. Avoid Trying to Time the Market - When the market is hot, people are tempted to play the stock market with their retirement savings. If you’re one of them, consider setting aside a small amount that you can afford to lose and use this “allowance” to play the market. For the bulk of your retirement investments, stick to your asset allocation plan***. Don’t shift funds from one account to another simply because one showed higher returns. Performance in the immediate past is no indicator of the long-term future. The market frequently undergoes sudden, dramatic shifts. Last quarter’s hot investment fund often can cool off in the next quarter. Even if you are clever enough, or lucky enough, to switch out of stocks ahead of a downturn, you could very well be late in identifying the recovery. By the time your new choice is put into effect, you may have missed the benefits you’d hoped to reap.
8. Think Long Term - Don’t be alarmed by day-to-day swings in the stock market. For most of us, steady investing, compounded earnings and maintaining a planned asset allocation*** are the keys to successful retirement planning. Decide on an appropriate long-term mix of investments and try to stay the course. You may not build your nest egg in a day but Rome wasn’t built that way, either.
For more information about establishing a financial plan, contact your financial professional.
†This hypothetical rate does not reflect the performance of any specific investment. Individual investor results will vary.
*A Guaranteed Investment Contract is an insurance contract that guarantees the owner principal repayment and a fixed or floating interest rate for predetermined period of time.
**Diversification does not eliminate the risk of experiencing investment losses.
***Asset allocation is a method of diversification, which positions assets among major investment categories. This tool may be used in an effect to manage risk and enhance returns. However, it does not guarantee a profit or protect against loss. GE-28509
Planning for the future can help alleviate the worry. The most important item to consider is establishing a special needs trust (sometimes called a Supplemental Needs Trust or SNT). Most people with physical and mental disabilities depend on government assistance in the form of Social Security, Medicaid and other government benefits, such as continuing education and training programs available in some states. Establishing an SNT can help preserve their rights to continue receiving governmental assistance.
Without an SNT, your dependent could be inadvertently cut off from government assistance. The Federal law stipulates that a special needs individual cannot have assets of more than $2,000 in total. That means that this beneficiary should not be named directly in a will, life insurance, or retirement funds. Instead, all benefits should be assigned to the SNT.
An SNT should be drawn up by an attorney who specializes in this type of estate planning tool and it should be reviewed by the Social Security Administration for compliance with the special needs trust law. Such a trust will require a trustee who can be either an individual or an institution. The trustee will oversee the funds in the trust and determine how the money is to be used for the person’s benefit. If the special needs individual cannot make medical and lifestyle decisions for him or herself, then the caregiver must also appoint a guardian.
Funding for Special Needs dependents: Working with your financial professional and other professionals, you will need to determine how much money will be required to fund the SNT. While basic living and medical expenses may be provided by government benefits, the trust will provide quality of life items, including personal care attendants, out of pocket expenses, rehabilitation, as well as goods and services that can make life more pleasant. One way to determine how much funding is necessary is to estimate current expenses related to the dependent and projected future costs, along with his/her life expectancy.
After establishing the approximate size of the trust, the next question is how to fund it. One common way to fund an SNT is with life insurance. Your financial professional can help you decide the best type of policy for this purpose. For example, if there are two caregivers (a mother and father, for example), a second to die or survivorship policy, which only pays out when both named policyholders die, may be an appropriate choice for you to consider.
An SNT can also be funded with investments, retirement plans, real estate and other assets but you need to be careful not to drain assets that you may need yourself. It’s important to assure your own financial well-being for as long as you are alive, since you will continue to be the caregiver. However you fund the plan, you should review it regularly, particularly after major events, such as births, death, divorce and marriage.
In addition to your plan for your special needs beneficiary, it is also important to meet with your legal advisor and draft a letter of intent with instructions to trustees and guardians outlining such issues as health care, education, living arrangements and other items.
It is important to remember that in order to reach any financial goal, careful planning is required. For those who care for dependents with special needs, planning for the future is even more critical since failure to establish provisions could actually be detrimental to the person you want to help. That’s why planning now is a way to help ensure a brighter future for loved ones who are dependent on your care.
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Are you taking IRA distributions only because you have to? You’ve done such a great job of saving and planning for retirement that you feel that you won’t really need the funds you’ve saved in your Traditional IRA or some other type of qualified retirement plan. You may have earmarked it instead as part of the inheritance you would like to leave your heirs. However, once you’ve reached age 70 ½, the federal government says you are required to take a minimum amount annually from your IRA or qualified retirement plan. This amount is called the “Required Minimum Distribution” or RMD.
Keeping those funds in an IRA or other qualified retirement plan keeps them as part of your estate and that may create a greater tax burden for your estate and your heirs. Holding the funds in an IRA exposes them to additional taxes – estate taxes at transfer and ordinary income taxes upon distribution to your heirs. This last tax is known as “Income in Respect of a Decedent” or IRD. As a result of these taxes, your estate could be reduced by as much as 70 percent!
You will always have to pay the necessary taxes but you can seek to avoid additional or unnecessary taxes on the transfer of your estates. You might consider ways to reduce or eliminate the taxes your heirs or children may have to pay on their inheritance or consider ways to replace the funds lost to those taxes.
One way to ease the situation is to make use of those unneeded funds – the RMDs – to fund a permanent life insurance policy outside of your estate. Depending on your circumstances, it could be either an individual or joint survivorship policy. In most cases, it should be established outside of your estate and owned by adult children or an Irrevocable Life Insurance Trust.
What does this accomplish? Using the net RMDs or larger withdrawals from your IRA removes funds from your taxable estate thereby reducing it and the potential estate tax bill. The life insurance policy allows you to create a legacy for your heirs through its death benefit. And, you’re providing wealth replacement to cover assets lost to estate and/or income taxes. However, you should keep in mind that any assets remaining in your traditional IRA or other qualified retirement plan will be subject to potential estate taxes at the time of their transfer and income taxes when distributed to your heirs.
A qualified financial professional can help you conduct an in-depth analysis of your current estate arrangements and help you develop a strategy that would best meet your needs and intentions regarding the distribution of your estate. Contact a qualified financial professional to find out more. He or she can work with your tax and legal advisors who should always be consulted regarding the tax implications for your specific situation and for the drafting of all necessary documents.
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Business owners have a lot on their minds. There are all the administrative tasks a business entails – billing, collections, keeping accounts, payroll, taxes and so forth. There’s marketing and selling. Hiring and supervising employees. And a thousand more.
As tough as it is to keep on top of all these matters, many women who own businesses have an additional set of responsibilities – caring for their homes and their families. So it’s no wonder that women often relegate the future to a back burner, saying “I’ll take care of it when I have the time.”
If you’re a business owner and haven’t made provisions for your retirement, it’s time to move it off the back burner. The recent changes in the tax law have created several new opportunities to save money for retirement while saving on taxes now. The sooner you start saving for retirement, the more you’ll have when the day comes. After all, you work hard to make your business a success—make sure your business works just as hard to make your retirement a success.
Retirement Planning Options for the Owner-Only Business
The bad news about a one-person business is that it will support you only as long as you continue to work. The good news is that there are several excellent retirement options that make sense for a one-person business, including SEP-IRA, SIMPLE IRA, profit-sharing and/or money purchase plans.
With an Owners 401(k) you can put away far more for retirement than with other types of plans. Because it combines a profit-sharing and 401(k) plan, the Owners 401(k) allows you to save up to the combined limit for each of these types of plans. This means you can save up to $46,000 per year in 2008 ($51,000 if you are aged 50 or over) for yourself, plus additional savings for a spouse or certain family members who may work for you. It covers only the owner(s), their spouse, and their family, so it is not appropriate if there are common law employees.
Example:
Sara S. is 47 and made $145,000 in salary in her interior design business in 2008. Her business is an S-corporation and she is the only employee. By using an Owners 401(k), she can save an additional $15,500 towards her retirement and defer taxes on the total amount. See the calculations on the next column.
Without Owners 401(k)
Maximum profit-sharing contribution
($145,000 x 25%) = $29,000
Total saved for retirement = $29,000
With Owners 401(k)
Maximum profit sharing contribution = $29,000
+ Maximum 401(k) contribution = $15,500
Total saved for retirement = $44,500
Not only does the Owners 401(k) enable you to save more for retirement, but it also further reduces your taxable income, saving you money now.
Choosing Among Different Types of Retirement Plans
If you have employees and wish to save for your own retirement, you will generally need to cover your qualified employees, as well, although some types of plans permit you to specify whether part-time or new employees are eligible. There are advantages and disadvantages to each type of plan, so you should talk to a financial professional as to which type of plan is most suitable for your situation. Here are some questions you may want to consider when you consult with your advisor:
• How complicated and/or expensive is this plan to set up and maintain?
Some plans require more paperwork than others, including annual filings. The simplest plans to administer include the SEP-IRA, SIMPLE IRA and Owners 401(k).
• Which plans allow me to contribute the most to my own retirement account?
The plans that allow the largest contributions include SEP-IRA, combined profit-sharing and money purchase plans and Owners 401(k).
• Can I borrow from my retirement account?
Some plans permit borrowing, depending on the terms of the plan agreement and up to certain limits. These include profit-sharing and money purchase plans, Owners 401(k) and regular 401(k).
Whatever the plan you establish, the important thing is to begin saving for retirement now. Put it at the top of your “to do” list and speak to your financial advisor today. AXA Advisors and AXA Network do not provide legal or tax advice. Consult your tax or legal advisor regarding your individual situation.
Is this type of investment right for you?
Annuities are tax-deferred investments, which include an insurance component to help protect from losses in capital and payout a guaranteed death benefit. They are long-term financial products designed for retirement purposes. In essence, annuities are contractual agreements in which payment(s) are made to an insurance company, which agrees to pay out an income or lump sum amount at a later date.
All earnings grow tax-deferred until withdrawn, and there is no cap on annual contributions. There are contract limitations and fees and charges associated with annuities, which include, but are not limited to mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. A financial professional can provide cost information and complete details.
An annuity contract that is purchased to fund a qualified retirement plan should be done so for the annuity’s features and benefits other than tax deferral. For such cases, tax deferral is not an additional benefit for the annuity. You may also want to consider relative features, benefits, and costs of the annuity with any other investment that you may have in connection with your retirement plan or arrangement.
There are two ways to fund an annuity: either all at once in a lump sum (Single Premium) or with a series of payments (Flexible Premium). If an annuity is used as just one component of a comprehensive retirement strategy, the owner may not be able to fund it all at once, and instead may opt to make a series of payments over time. It is quite common for the funding method to be dictated by the desired payout structure.
– Immediate vs. Deferred
Annuities come in two basic varieties: Immediate or Deferred. An immediate annuity begins paying out as soon as it is funded. This option works well for people who fund the annuity with a Single Premium and want to begin withdrawing the money right away. Those with a rollover or significant sum of money can buy this type of annuity to create an immediate & ongoing income stream. Alternately, a deferred annuity begins paying out years after the contract is issued. The Annuitant (the person who owns the contract) can either receive payments all at once or over time, and this type of contract can be funded with either a Single or Flexible Premium. Typically, a deferred annuity is a long-term investment vehicle intended to create guaranteed retirement income.
Choosing between a Fixed or Variable Annuity depends on an individual’s risk tolerance. A Fixed Annuity is a conservative investment. Principal is guaranteed, as is the rate of interest over a designated amount of time. These types of annuities are best used as short-term investments since they experience little growth. True, owners are protected from interest rate decreases, but they do not benefit from increases since the interest rate is locked.
Variable Annuities are commonly misunderstood by those less familiar with the way these products work. True, Variable Annuities do bear higher risk and higher costs than their fixed counterparts, but they also offer more upside potential since they are, essentially, an investment portfolio.
The owner of a Variable Annuity chooses how to allocate their money across various managed portfolios. Neither principal nor interest rates are guaranteed, but often, for an additional fee, Annuitants can purchase riders to attach to their contracts such as a Guaranteed Minimum Income Benefit or a Guaranteed Minimum Withdrawal Benefit. These riders may help owners take advantage of the potential growth of the market while protecting themselves from the downside risk. Certain restrictions (e.g. minimum holding periods, limited investment portfolios) may apply to the purchase of a rider.
Protection when the market’s down:
In a down market, the principal in your Variable Annuity with Guaranteed Minimum Income Benefit is protected and your minimum income remains unchanged regardless of the losses the market may take.
When your investment portfolios are performing well and your account is enjoying significant growth, you can periodically re-lock your minimum income benefit based on the increased value of your account. This can result in a greater income stream for life.
When the time comes for an annuity to pay out, it can occur in a variety of ways. Depending upon what other investments and sources of income will be available to create a retirement cash flow, annuity owners should choose a product that will pay out in accordance with their anticipated needs. These are the options:
Other Things to Consider When Buying an Annuity
Annuities offer the benefit of tax-deferred growth potential and can offer a guarantees - guaranteed income for life, guaranteed rates of return even in a down market, and guaranteed preservation of capital. Guarantees are based on the claims-paying ability of the issuing insurance company. But, annuities may not be right for every investor. To learn more about annuities, visit www.variableannuityfacts.org – a useful online resource for information about annuities. To determine if an annuity may be a worthwhile complement to your retirement strategy, contact a qualified financial professional and be ready to ask questions.
Consider the charges, risks, expenses, and investment objectives carefully before purchasing a variable annuity. For a prospectus containing this and other information, contact a financial professional. Read it carefully before you invest or send money. Investments are subject to market risk, will fluctuate and may lose value. Be advised that this document is not intended as legal or tax advice.
Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or the marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.
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Here are some strategies you can use to prepare financially for potential disasters:
Protect your property. If you live in an area that is frequently hit by natural disasters, consider what you can do to mitigate potential damage to your property. Depending upon the type of disaster likely to strike, you may want to take steps such as anchoring the foundation and roof, installing hurricane shutters on windows and glass doors, adding fire-resistant siding, securing objects that could fall in case of an earthquake, moving electrical panels and furnaces to upper levels, installing smoke detectors, and clearing brush from around the house. If you are uncertain about what improvements might be most effective, ask a building inspector to recommend structural or other types of changes. By taking measures to protect your home, you may be able to negotiate a reduction in your homeowner’s insurance premiums.
These days, it is not unusual for many people to live 20 or more years beyond normal retirement age. When seniors reach their eighties and nineties, plans that were satisfactory at age 65 may require a second look. Some areas of special concern to older seniors and individuals with aging parents are asset management, health care, and living arrangements.
Managing Assets
Many older seniors may find themselves unable to continue managing their assets. A variety of arrangements are possible to transfer that responsibility to others, among them:
Revocable and Irrevocable Trusts. Seniors who wish to retain control over their property, while delegating the daily management to others, may want to consider a revocable trust. This arrangement would allow the senior to monitor the management of his or her assets, yet offers the flexibility to change the trust as needs and circumstances warrant. As added protection, a revocable trust may remain unfunded, as long as the senior is legally competent. Note that a revocable trust is subject to estate taxes. Alternatively, an individual who is willing to relinquish ownership of assets altogether could establish an irrevocable trust.
Durable Power of Attorney. This mechanism allows seniors to designate a trusted relative or friend to make legal and financial decisions for them in the event of disability or cognitive impairment. The powers granted may be limited or broad in scope, and their definition and limitation vary from state to state. Some financial institutions are reluctant to recognize durable powers of attorney, so it is worthwhile to thoroughly explore this option beforehand.
Informal Arrangements. Some seniors transfer property informally to their heirs—in many cases free of gift taxes—in exchange for being taken care of for the rest of their lives. This arrangement, however, should be approached with caution. Even well meaning adult children may unintentionally deplete assets through poor management, divorce, or creditor claims. Once the assets are gone, the senior could become dependent on the goodwill and financial assistance of relatives.
Health Care
With health care costs spiraling upward and people living longer than ever before, seniors of advanced age should anticipate facing high medical costs. The federal government provides some health care benefits through the Medicare and Medicaid programs, but seniors need to understand the coverage those programs may provide and what costs they can expect to face.
Medicare Part A covers inpatient services at hospitals and other health care facilities. It is provided automatically, at no cost, for seniors age 65 and older who are eligible for Social Security, and at a substantial cost for those who enroll independently.
Medicare Part B provides additional health care coverage that is optional and must be paid for separately.
Eligibility for Medicaid, which covers long-term nursing home care, depends on financial need. Seniors may require professional assistance in managing their income and resources to meet Medicaid’s strict eligibility requirements.
Living Arrangements
Seniors who are able to care for themselves and have the means to do so, may wish to remain in their own homes. Public services may be available to help prolong the period of self-care.
However, elders who are unable to live independently have several alternatives to consider. Assisted living/residential care facilities provide a protected environment with a semblance of independent living. Generally, some daily meals are provided in a communal dining room and minimal assistance, such as with washing, dressing, or medication is available. Continuing care communities offer a combination of independent living and health care support. If family members work, senior daycare centers—either publicly or privately funded—can provide opportunities for socialization and activities to relieve boredom. In some cases, bringing in outside help may be the solution.
Periodically Review Plans
It is wise for aging seniors and/or family caregivers to periodically review existing financial, health care, and living arrangements. In the transition to the later stages of life, fresh needs and concerns may call for revisiting plans made at an earlier age.
Be advised that this document is not intended as a legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. Consult your tax or legal advisor regarding your individual situation.
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There are two classifications of annuities—deferred and immediate. If you are not yet retired, you will probably want to consider deferred annuities, which are a two-phase retirement planning tool. In phase one, the accumulation phase, you pay money (either in a lump sum or in installments) and earn a rate of return. During phase two, the annuitization phase, you receive monthly or yearly income. Any growth on your contributions is tax-deferred until you begin receiving payments. Should you pass away before annuitization, a death benefit provides your beneficiary with either the current value of the annuity or the amount you have paid into it (adjusted for any withdrawals), depending on which is greater. Some annuities have optional death benefits that give your beneficiary the potential to receive a greater death benefit.
The composition of your investments is determined by many factors, including your ability to tolerate the risk of losing money. Every investment portfolio is different because everyone has different goals, time frames and financial circumstances. While you may want to seek advice from friends and family, you should avoid imitating their investment decisions without considering your unique situation. Sometimes, to make sure the information you get is objective and focused, it is helpful to seek the guidance of a financial professional who can provide information on the different investment categories and help you determine an investment strategy that closely reflects your goals and circumstances.
Some factors you should consider when choosing how you’ll invest include:
• Your investment objective (whether retirement, children’s education or other specific goals)
• Your investment time horizon, or how long your money can stay invested before you will need to start withdrawing it
• Your financial situation or how much you can put aside, how regularly you can do so and the likelihood you will need the money before your objectives are reached.
In addition to these objective criteria, there are also subjective factors: how comfortable are you about your knowledge and ability as an investor and how much risk can you tolerate? Basically, there are three general risk tolerance categories: conservative, moderate or aggressive.
The Conservative Investor
The conservative investor is usually more comfortable with a portfolio that aims for capital preservation and a low degree of risk. This type of investor is usually most comfortable with investing in fixed income investments that promise to repay the amount invested if held to maturity. Conservative investors generally have a short time horizon, are in or near retirement and are highly averse to risk.
The Moderate Investor
The moderate investor is generally comfortable with a diversified portfolio that seeks a balance between stocks, bonds and fixed income investments, and is usually comfortable with accepting a moderate degree of risk in exchange for potentially higher returns. Moderate investors tend to avoid risks inherent in international investments and seek to preserve and grow capital.
The Aggressive Investor
The aggressive investor is generally comfortable with a portfolio that focuses on maximum growth and can tolerate the risk associated with investing heavily in equities, including international equities, in exchange for potentially greater returns. This approach is best suited to individuals with a substantial time horizon (ten years or more) who are willing to risk short-term losses in order to benefit from the equity markets’ potential long-term historical growth.
Investments are subject to market risk, will fluctuate and may lose value. International securities carry additional risks, including currency exchange fluctuation and different government regulations, economic conditions or accounting standards. For more information or to help you determine the type of investment strategy most appropriate for you, contact your financial advisor.
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This article is not intended as legal or tax advice. Accordingly, any tax information provided here is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the tax payer.
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