Some reasons to review your estate documents.
There are many reasons why estate documents should be reviewed periodically. Life events are often a reason to review estate documents. These events may change circumstances, goals and priorities. Another reason is changes in the applicable laws. You may not be aware of the changes. Following area few changes that make it advisable to have your estate documents reviewed.
Privacy regulations were issued after the passage of the Health Insurance Portability and Accountability Act (HIPPA). There are situations when you want others to be able communicate with your employer, insurer or health care provider. A written authorization with specific language is required to allow such communications. You should have your estate documents reviewed if they do not include this authorization.
Changes in the federal estate tax in 2010 reduced rates and increased the exclusion. Provisions in estate documents to minimize and/or postpone the estate tax may no longer apply.
Estate planning documents for married couples prior to 2013 often had provisions designed to minimize and/or postpone the estate tax until the death of the surviving spouse. The cost of assets for purposes of determining gain for assets sold by the surviving spouse was generally the value at the death of the first spouse to die (“step-up basis”). This may not be the preferred strategy as a result of the above changes. There are new strategies that will allow a “step-up basis” at the death of the surviving spouse.
You should contact your estate planning attorney if you are sure if these changes apply to you.
The lessons learned from “the old Enron story” still apply.
The following is from Edward Mendlowitz’s Feb. 24, 2015 Blog.
“in his book Money: Master the Game, Tony Robbins dredges up the old Enron story, which I agree with, and want to call to your attention now. Here is a brief listing copied from Tony’s book of the lauds, Enron received right up until their bankruptcy filing.
Mar 21, 2001 Merrill Lynch recommends
Mar 29, 2001 Goldman Sacks recommends
June 8, 2001 J.P. Morgan recommends
Aug 15, 2001 Bank of America recommends
Oct 4, 2001 A G Edwards recommends
Oct 24, 2001 Lehman Brothers recommends
Nov 12, 2001 Prudential recommends
Nov 21, 2001 Goldman Sacks recommends (again)
Nov 29, 2011 Credit Suisse First Boston recommends
Dec 2, 2001 Enron files Bankruptcy
Millions of Investors trusted these venerable firms and followed their recommendations. A question I had at the time was, “How much work did they do before they made their recommendations?” I could not have been too much since every recommendation was wrong. Another observation is that many of the largest mutual funds has significant positions in Enron.
Now, lets fast forward to today. Has anything changed? Were lessons learned? Are more intensive analysis being done now? I suggest that nothing has changed. Examples are in the many recommendations to buy oil stocks a few months ago before a subsequent additional 35% drop. …Next, as Robbins points out, most actively managed mutual funds do not outperform the index they are trying to beat….
The principles in the book are easy to understand, digest and act on…. I have condensed them [his seven steps] and … restate as follows:
1. Commit to regular savings program
2. Know and understand why you are investing in
3. Develop a plan and, while at it, reduce spending, keep investment costs low and shed debt
4. Allocate your assets carefully and rebalance periodically
5. Create a lifetime income plan
6. Invest like the .001%, i.e. don’t be stupid and re-look at step 2
7. Be happy by growing and giving
All good advice you can start following today.
A helpful list for investors
It seems that everyone has a list on almost every topic, especially at year-end and the start of a new year. I sometimes wonder what to do with this information. Anna Prior’s Jan. 2, 2015 New York Times article, “The 15 Numbers Every Investor Needs to Know” is an exception. It provides an approach to planning. Following is a condensed discussion of the article:
- Know what allocation of stocks, bonds and cash is appropriate for you. Among the many factors to consider are: your financial goals, the value of your current investments, your health, your age, and your ability to withstand a drop in the value of your investments.
- Take advantage of your ability to contribute to your employers’ 401(k) retirement plan, if applicable, for your situation. The 2015 maximum contribution is $18,000 for a pretax traditional 401(k) plan and after-tax Roth 401(k) plan. Those 50 or older can contribute an additional $6,000. Understand the requirements and impact of taking distributions from your retirement plans.
- Be familiar with the general valuations of stocks. This will help you gage your investment risk. Compare the average price/earnings (PE) ratio of stocks to the current PE. The S&P 500 is commonly used as a proxy for the stock market.
- Some consider bonds as a source of safety for investors. It is difficult to predict how bonds will perform in the short-term. The yield on the 10-year Treasury note will give you an indication of what the yield on bonds will be in the next 10 years or so.
- High investment costs will reduce your returns The expense ratios of your funds can be found in the fund prospectus, the website of the fund company and other media sources.
- Be aware of your adjusted gross income (AGI). This is the amount at the bottom of page one of you individual U.S income tax return. The AGI will determine if other taxes or limitations will apply to you. Examples are the 3.8% surtax on investment income, Medicare Part B & D premiums, deduction of some retirement plans, and some itemized deductions.
- Estate-tax exemption of the states are often lower than the U.S. estate exemption. This must be considered in your planing for your family, heirs and charitable entities.
- The amount of your essential and discretionary costs should be reviewed periodically. This is important for: retirement planning, insurance planning and maintaining an adequate reserve fund for the unexpected and untimely expenditures.
- Understand your health-care expenses. This is need for; insurance planning, retirement planning and maintaining an adequate reserve fund.
- Be aware of the difference between replacement cost and fair market value. The difference to rebuilding a home can vary from what the home would sell for. Replacing the contents of you home may be more than the fair market of the items.
- The difference between owning and renting a home can have a major impact on your cash flow and quality of life. The impact maybe more significant when buying a first home and when retiring.
- How long you are likely to live has a significant impact on your investment planning and cash flow planning.
- Your approach to borrowing and repaying loans impacts your cash flow planning, investment planning and retirement planning.
- Be aware of current and anticipated mortgage rates. These impact planning relating to refinancing and debt repayment (cash flow planning).
There are many moving factors in planning. An understanding of the parts and the alternatives are essential to a successful plan.
New address effective January 1, 2015
Effective January 1, 2015 the mailing address will be:
1603 Orrington Avenue
Suite 600 Evanston, IL 60201
Meetings are available by appointment only at this new address as well as at:
9933 Lawler Avenue
Suite 440
Skokie, IL 60077
Appointments will continue to be available at you home or business
Phone number remains: 847-328-8011
Fax number remains: 847-780-7920
Email remains: joe@jasfinanciallc.com
Web page remains: www.jasfinancialllc.com
IRA rollover rules change in 2015
IRS previously held that the timing rules applied separately to all IRAs owned by an individual. They applied the rule to each IRA owned. The Internal Revenue Code allow a tax-free distribution if the distribution is rolled into an IRA within 60-days. The tax-free rollover is not allowed if you’ve already completed a tax-free rollover within the previous one-year (12-month) period. The Tax Court held a taxpayer may make only one nontaxable 60-day rollover within each 12-month period regardless of how many IRAs an individual owns (Bobrow v. Commissioner). The IRS will not apply the revised rule prior to 2015.
IRS issued guidance on how the revised one-rollover-per-year limit is to be applied (Announcement 2014-32).
The clarification includes the following:
1) All IRAs, including traditional, Roth, SEP, and SIMPLE IRAs, are aggregated and treated as one IRA when applying the new rule.
2) The exclusion for 2014 distributions is not absolute. Generally you can ignore rollovers of 2014 distributions when determining whether a 2015 rollover violates the new one-year-rollover-per year limit. This special transition rule will not apply if the 2015 rollover is from the same IRA that either made or received, the 2014 rollover.
The one-rollover-per-year limit does not apply to direct transfers between IRA trustees and custodians, rollovers from qualified plans to IRAs, or conversions of traditional IRAs to Roth IRAs.
In general, it’s best to avoid 60-day rollovers whenever possible. Use direct transfers (as opposed to 60-day rollovers) between IRAs, as these direct transfers aren’t subject to the one-rollover-per-year limit. The tax consequences of making a mistake can be significant. A failed rollover will be treated as a taxable distribution (with potential early-distribution penalties if you’re not yet 591/2) and a potential excess contribution to the receiving IRA.
2014 Year-End Charitable Giving
Two of the factors to consider in year-end tax planning are your own financial situation and the tax rules that apply. Congress is considering making changes before year-end that may impact your situation. Some changes may include reinstating all or some tax breaks the expired in 2013. If you wait to determine what changes may be passed for 2014 you may not have enough time to implement your year-end tax planning moves.
Start by identifying the charities you would like to make contributions to and the amount to each charity. Remember to consider the amounts you already contributed during the year.
Check to see if you will be able to deduct the contributions if receiving a tax benefit is part of you motivation for making charitable deductions. In order to deduct your contributions you must file a tax return (Form 1040) and itemize your deductions. That is, you will not receive a deduction if your itemized deductions are less than the standard deduction. The 2014 standard deductions is: $12,400 if you are married and file a joint tax return, $9,100 if you qualify to file as head of household, $6,200 if you are single, and $6,200 if you are married filing a separate return. Both spouses filing a separate tax rerun must itemize their deduction if one spouse itemized their deductions. It maybe beneficial to postpone deductions to the next year if you receive a greater tax benefit in the next year.
The total deduction for contributions is limited to a percentage of your adjusted gross income (AGI). For example gifts to public charities are generally limited to 50% of your 2014 AGI. Other limitations, 30% or 20%, apply depending on the nature of the contribution and the type charity. Amounts not deductible may generally be carried forward over the next 5 years in years that you itemize your deductions , subject to the income percentage limitations.
Contributions can only be deductible if made to a qualified organization. IRS has a listing on their website, Exempt Organizations Select Check: https://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check
To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. Generally you can deduct the fair market value of property rather than cash or a check.
The above is not intended as a complete discussion of this subject. A tax professional, can help you evaluate your situation, keep you appraised of any legislative changes, and determine the best approach for your individual situation.
Now is the time to make 2014 charitable gifts of appreciarted assets.
Using appreciated assets for charitable gifts can be very beneficial. The ta x deduction, if applicable, is based on the fair market value on the date of the contribution. The appreciation is not subject to income tax. There are exceptions and special rules that may reduce or eliminate the benefit of the tax deduction.
The deduction limitations depend on the type of property given and the type of organization receiving the property.
Avoid using property that has depreciated in value. The loss on such property cannot be deducted if the property if donated. Sell the asset if you want to use it to fund a charitable contribution. You can deduct the loss, subject to limitations and restrictions, if you sell the property and donate the proceeds.
Capital tax rates are determined by the type of asset and the holding period. The appreciation will be taxed if the gain is does not qualify for capital gains (ordinary gain). Make sure you have held the property long enough for capital gain treatments.
Do not assume the information is the same as the last time you used appreciated assets to make a charitable contribution.
Contact the charitable organization before making the contribution. Verify that the organization is still a “qualified organization”. Determine what their current procedures are before you make the contributions. Make sure they will accept the property you want to donate. Some organizations will not accept property other than cash, checks, credit card, etc. Those that accept other forms of payment may only accept marketable securities.
Next check with your custodian to find out what their current procedures are. The forms required and the time to process the transaction may have changed. All custodians (for corporations, brokerage, mutual funds, etc.) procedures are not the same.
Obtain a “qualified appraisal” if the property is not a marketable security. The procedures are different depending on the type of property and the value of the contribution.
The above is not intended to be a complete discussion of this topic. Be sure to consult with you tax advisor to determine how the transaction applies to you.
You may not be able to complete the gift before year-end if you wait too long. Be sure to give your tax advisor adequate time to evaluate the planned transaction and see if the benefits are what you intend.
Market movements are often not based on fact.
Robert J. Shiller’s October 18th New York Times article, “When a Stock Market Theory Is Contagious” discusses the recent stock market fluctuation. In addition to being a professor of economics at Yale University, he has authored many books, writes columns, co-created the “S&P/Case-Shiller Home Price Indices” and was 1 of 3 recipients of the 2013 Nobel Prize in Economic Sciences.
The topic of the article ties into my comments about risk and volatility in my October newsletter.
“The problem is that short-term market movements are extremely hard to forecast. But we live in the present and must try to understand what’s driving the market now, even if it’s much easier to predict their behavior in the long run.” That is to say we do not know the future, but we can explain what happened in the past.
“…stock markets are driven by popular narratives, which don’t need basis in solid fact.” The article compares the narratives with the “Ebola virus: they spread by contagion.” The narratives causes investors “…to take action that propels prices…in the same direction.” That is, we do not know why the market fell but people and companies may respond by cutting spending resulting in the market falling further.
Recent stories attribute the current drop in the stock market to a “global slowdown”. The narrative can cause people and companies to spend less continuing the fall in the stock market. He concludes with the following. “The question may be whether the virus mutates into a more psychologically powerful version, one with enough narrative force to create a major bear market.”
Financial markets fluctuate
Discussions in articles, books, studies and commentaries from different sources have some common elements about investing. Investing is discussed in different contexts. Examples of the different discussions include: performance, risk, retirement, budgeting, goals and government policies.
An example is an August 15th New York Times article:”Fears of Renewed Instability as Fed Ends Stimulus”. The article reflects a conversation with Jeremy Stein, who left the Fed’s Board of Governors at the end of May to return to Harvard’s economics department.
Many investors are getting nervous because of the length of good stock and bond performance. Recent fluctuations are a reminder that markets go down as well as up. Maybe the recent gyrations are signs of impending instability.
Referring to the Federal Reserve (Fed) actions the article discusses the possible unintended consequences of the Fed policies that have guided us through the recent financial crisis. The low rates have resulted in investors reaching for yield. The consequence of reaching for higher yield is increased risk. Some investors may not realize the increased chance of losses. The result could be further strain on our economy.
The author of the article, James B. Stewart, included the following:
The Princeton economist Markus K. Brunnermeier, an expert on asset bubbles and crashes, has identified what he calls “synchronization risk,” a phenomenon in which investors ride a wave of price increases even if they realize the assets are overpriced. “It’s what economists call a lack of common knowledge,” he said. “We may all know an asset price is too high, but we don’t know the others know it, too. Timing is everything. The danger is if you move too early and the market doesn’t follow up. So everyone waits on the sidelines watching and listening,” as long as asset prices keep rising. The danger comes when they all try to get out at the same time.”
“No one wants another crash, but a garden-variety correction may be just what’s needed to avoid one in the future.”
The discussion recognizes that the market fluctuates. Frequent and/or large fluctuations indicate concern about the future direction of the markets. No one thinks they know what direction the market will go when it fluctuates. Investors are cautious when the market gyrate. They become optimistic when the market continues to rally. This is when investors become confident and make mistakes.
Economists, journalists, regulators and politicians are all poor forecasters of the future movement of the markets.
Do you know if you will owe tax as a shareholder of a company that completes an inversion?
“Inversions” are the subject of Laura Saunders August 1, 2014 article in the Wall Street Journal, “An ‘Inversion’ Deal Could Raise Your Taxes”.
An “inversion” is when a U.S. company merges into a foreign company. Some U.S. companies (e.g. AbbVie, Applied Materials, Auxilium Pharmesuticals, Chiquita Brands International, Medtronic, Mylan, Pfizer, Salix Pharmaceuticals and Walgreen) have considered or are pursuing an “inversion” to reduce U.S. income tax.
It is expected that the “inversion” will be taxable to U.S. shareholders. Technically the U.S. company is being acquired in a taxable transaction. It is unlikely that the shareholders will receive any cash.
The tax consequences will vary based on each shareholder’s specific situation.
The net investment income tax (3.8%) will apply if your adjusted gross income (AGI) exceeds $200,000 if single and $250,000 if married filing jointly.
The long term capital gains rate is 20% if your AGI exceeds $400,000 if single and $450,000 if married filing jointly; 15% if your AGI exceeds $8,950 through $400,000 if single and $17,900 if married filing jointly.
The impact of the alternative minimum tax, itemized deduction phase-out and personal exemption are some of the other factors to consider.
Taxes will not be due if the stock is held in a traditional individual retirement account (IRA), Roth IRA, 401(k), or other tax-deferred vehicles.
Taxes are only on factor to consider, not the controlling factor, in deciding if the stock of a company considering an “inversion” should be bought, sold or held.
“Inversions” will be especially unwelcome for long-term investors who were planning to hold their shares until death for estate-planning purposes. At that point, there is no capital-gains bill, so some shareholders in firms doing “inversions” will owe taxes they would never have had to pay.”
The tax could be reduced if you have any unused losses from prior years.
Selling other stock or investments that have losses is a strategy to reduce tax from the “inversion”.
Gifting the stock to someone in a lower tax bracket (e.g. young child, grandchild, retired parent or grandparent) is another stragey to reduce the tax. The timing of the gift is important.
Contributing the stock to a charity is another approach if you have held the stock for more than a year and will have a gain. The gain will not be taxed and the value of the stock may be deductible as a charitable contribution, subject to limitations. Be sure to get a timely qualified acknowledgment. Allow enough time to complete the transaction before the “inversion”.
Among the other issues to be considered are: gift/estate taxes, “kiddie tax”, and possible retroactive legislation restricting “inversions”.
This is not intended as a complete discussion of all the factors and consequences to consider. You should consult with your personal advisers to determine what if any action is appropriate for you.
