October 2007
A Monthly Newsletter Source of Financial Sources
Don't miss this month's timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts!
ESTATE PLANNING & RETIREMENT
• 16 Strategies for Saving Estate Taxes -- #1 -- Credit Shelter Trusts
• A Small Business Retirement Plan Can Save You a Bundle at the Time of Sale, Even if You Do Not Regularly Contribute to It.
INVESTMENTS
• Nine Bad Habits of the Competitive Investor and Why They May Need to Change
New Book: “The Sleep Well At Night Investor” by Tim Decker
Media Review Copy of New Book Available Soon |
PERSONAL FINANCE
• How to Get A Financial Grip to Support What’s Important to You and Your Kids After Divorce
New Book: “We Need to Talk: Money & Kids After Divorce” by Linda Leitz
Media Review Copy of New Book Available Soon |
PRACTICE MANAGEMENT
• 401k Toolbox Retirement Planner is Delivered One-On-One, Becomes Effective Prospecting Tool for Advisors “It is the most effective advice program ever brought to market and the most effective tool for uncovering outside assets ever created,” Tim McCabe, 401k Toolbox.
• Strategic Planning Can Help an Advisor Create A More Prosperous Firm By Refining Their Client Niche and Raising Fees
• Non-Financial Issues for Clients Take Careful Thought
ESTATE PLANNING & RETIREMENT
16 Strategies for Saving Estate Taxes -- #1 -- Credit Shelter Trusts
Most couples looking at the end of their lives make plans leaving everything to each other. If they do not get advice about the importance of credit shelter trusts (CST), they lose vital tax credits at both the Federal and state levels. Credit shelter trusts make certain that assets are titled correctly to protect them from the public scrutiny of probate keeping information about a family's major assets very private.
A simple credit shelter trust has become a significant estate tax saving strategy for couples who do not want to lose the ability to protect up to $4 million of their assets from the Federal estate tax. Each state has its own tax credits that vary widely. The Federal estate tax is due upon the death of person who has assets that exceed $2 million. Current Federal estate tax credits allow individuals to leave assets free of the estate tax, but only up to certain limits of $2 million per person. If the Federal law is not changed, credit will be $1 million in 2011.
If a husband and wife own all of their assets jointly for instance, then on the death of the surviving spouse, that spouse has only their individual $2 million Federal estate tax free amount. So if the estate exceeds $2 million the children will pay a Federal estate tax.
If, however, each spouse had created a revocable trust during their lifetimes and funded the trusts with assets (no joint assets any longer), then at the death of the first spouse to die, his or her trust will shelter up to $2 million estate tax free amount for Federal purposes. In other words, the trust will allow the surviving spouse to be the beneficiary of the deceased spouse's trust, but the survivor will not “own” the trust and therefore there is no estate tax on these assets when the surviving spouse passes away. At that time the surviving spouse's trust will utilize his or her own tax free amounts - the $2 million for Federal (or whatever that amount may be in the year of the surviving spouse's death).
By using trusts to shelter the tax free amounts that are allowed under both Federal and state estate tax law, a couple can shelter $4 million from estate taxation and more under state law. In many cases doubling the tax free amount that can pass to the children eliminates all estate tax consequences.
Pearson Financial Services, Dennis, MA, is the author of "The Two Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925, seth.pearson@verizon.net.
A Small Business Retirement Plan Can Save You a Bundle at the Time of Sale, Even if You Do Not Regularly Contribute to It.
Many small business owners are worth a lot on paper but are cash-poor. If cash flow is tight they often do not think having a retirement plan is valuable, because they won’t be able to fund it much anyway. However, if their business is sold, having a retirement plan already in place can be a great weapon to keep the tax man at bay.
Consider the case of a mom-and-pop gas station in a resort town. They own the property housing their business. They both work full time at the business, netting about $75,000 in annual wages.
Not bad income, but the business is not a cash cow either. Contributing to a retirement plan is not a priority for the business owners because they never felt they had the disposable income to do so. But, they do have three loyal employees and they sponsor a 401k to help those employees save for retirement. The owners are actually in a good position for their own retirement, despite not making any deferrals into their own 401k accounts. Their gas station is in a very desirable location with a view of the ocean. In fact, they are entertaining offers from condo developers that could result in a sale with a seven-figure profit after taxes.
If an agreement to sell their property is reached, one tactic that these business owners could employ is making maximum deferrals into the company 401k in anticipation of the sale. If both husband and wife are over 50, they can each make the maximum employee deferral into the 401k of $15,500 plus the catch-up contribution of $5,000. Doing so will effectively shelter $41,000 from income taxes between the two of them, not including the 3%-of-salary company match that is required to qualify the plan as a ‘safe-harbor’ plan. If they are in the 35% federal tax bracket as a result of the sale, they would save over $14,000 in taxes.
The future sale of valuable property is one reason that creating a 401(k) plan is a good strategy for small business owners, regardless of whether they plan to make it their primary funding vehicle for their own retirement or not.
John Scherer is a financial author, speaker and owner of Trinity Financial Planning, Madison, Wisconsin, john@trinfin.com, 608-829-1010
INVESTMENTS
Nine Bad Habits of the Competitive Investor and Why They May Need to Change
Take this test to see if your investment style characterizes you as a competitive investor. If you answer “yes” to two or more of these statements, you are a competitive investor who looks at the stock market as an opponent. If this is the case, you may benefit by considering the benefits of making changes to become a Sleep-Well-At-Night Investor.
1. You love the adrenaline rush of making decisions
Daniel Kahneman, winner of the 2002 Nobel Prize in Economics, says “all of us would better investors if we just made fewer decisions.”
2. You believe timing and active trading beats the market
Finance professors Terry Odean and Brad Barber studied 66,400 Wall Street Investment accounts and concluded, “the more you trade, the less you earn.” Passive investors beat active ones by 50 percent.
3. You rebalance your portfolio more than once a quarter
Various research studies tell us that the added costs and risks of frequent rebalancing actually lower returns.
4. You think that there is a reason for everything the market does.
Wharton economist Jeremy Siegel studied 120 of the big-up and big-down days in the stock market between 1801 and 2001 and found no reasons for 90 of them.
5. You think cheap online trading increases returns.
Odean and Barber found just the opposite. And Ameritrade founder, Joe Ricketts, adds: “Trading often and heavy is not something that makes you a lot of money.
6. You buy when the market is hot and sell when it cools
Morningstar research indicates fund investors are very bad timers, jumping in late and high, and panic selling at the bottom. Rational investors do just the opposite.
7. You’re confident that we are in a new bull market.
In Investment Madness, behavioral finance expert John Nofsinger warns that investors have an optimism bias: “Overconfidence causes people to overestimate knowledge, underestimate risks, and exaggerate their ability to control events.”
8. You believe active traders are making big buck
Unfortunately, even the best winning traders make little for all their efforts, risks and anxieties, averaging about $50,000. Most actually lose money, but deny it.
9. You know you’re an ‘above-average’ investor
Studies actually show that about 75 percent of investors think they are “above average.” Moreover, Boston research group Dalbar’s studies tell us that over the past 20 years the average investor’s after-tax returns are less than inflation.
Once you stop looking at the stock market as an opponent, you can begin to see it a vehicle for your journey to a life you imagine for yourself. Once that basic shift in perception happens, certain fundamental requirements come to light. These requirements make up the five building blocks a Sleep Well At Night
Financial Plan.
1.Know the resources available for investment.
2.Understand the long term spending objectives and obligations that will need capital
3.Recognize and ignore the temptations of the market as it moves up and down
4.Concentrate on figuring out the long-term investment plan most likely to achieve long-term objectives.
5.Know when to adapt your long-term plan to the important changes – changes in your resources or goals.
Believe what Wall Street wants you to believe… or believe the experts? The decision is yours.
Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He is the author of the soon to be released book “The Sleep At Night Investor”. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers.
Media review copies ot “The Sleep Well At Night Investor” are available by e-mailing beth_chapman@inkair.com with Sleep in the subject line. Provide a mailing address. Your copy will be mailed as soon as it is available from the publisher.
PERSONAL FINANCE
How to Get A Financial Grip to Support What’s Important to You and Your Kids After Divorce
Most people see life after divorce very differently one or two years away from the event. Often, major decisions taken immediately after the divorce are seen differently afterward as well. Some changes have to be made, such as buying or renting a new house if the marital property was sold. But if possible, avoid major financial changes. Here are some ideas on figuring out your values and how to assess the changes that will mean a great deal to you moving forward.
Make a list of what is important in your life. Make the following groupings:
• Top -- the core of who I am, my goals in life and who or what I want to support
• Important -- I would like to continue to support or experience these, but since Only I Control Me, if I had to choose between one of the Important items and one in my Top group, I would choose the Top.
• Nice to Have -- I would like to have these, but I could defer them for a very long time or do without them.
• Drop it -- After this prioritizing exercise, I now realize that these items I could do without indefinitely or do without completely.
The challenge is to list qualities and people, not things. For qualities, include your values, emotions that you want to maintain, and goals you want to achieve. If you want to include important relationships with animals, do so. After you have had a few days to look at your list and are assured that the list is indicative of your feelings, have your children do a similar exercise, gauged to their age and emotional issues around the divorce. Be ready to ask open-ended, non-judgmental questions about each of their items. As with your list, there is no winner or loser. Make it clear that you are not asking them to do without what ends up on the bottom of the list, you are just hoping to find out what is important to them.
Once you have had a discussion with all your kids, have a family meeting. Share your list as well as what you are allowed to share from each of their lists. It’s great to point out where your children rank on your list, and if they are not quite high, examine why not.
The best result of this exercise is to develop a qualitative feel for what is important to you and your kids, and how that brings into clear focus the dollar and cents of your new situation. At this point, it may be realistic to ask for the help of a professional fee-only advisor who works specifically with divorcing and divorced clients. These professionals have experience with different household situations and may be able to give you some general rules of thumb and helpful hints without losing sight of your individual perspective. For a certified Divorce Financial Analyst (CDFA) go to www.institutedfa.com, The web site for the Institute for Divorce Financial Analysts
Linda Leitz, CFP and EA, is an author and financial planner working with divorced and divorcing couples in Colorado Springs, CO. She is the author of the soon to be published “We Need to Talk – Money & Kids After Divorce”. Her earlier book "The Ultimate Parenting Map to Money Smart Kids," published in 2006, was the first in a series of books planned by Leitz. She can be reached at Linda@brightleitz.com or 719-260-9800.
Media review copies of "We Need to Talk – Money & Kids After Divorce" by Linda Leitz, CFP, will be available to the media shortly. Please send an e-mail to beth_chapman@inkair.com with the word Divorce in the subject line and provide a mailing address. Your copy will be mailed as soon as it is available from the publisher
PRACTICE MANAGEMENT
401k Toolbox Retirement Planner is Delivered One-On-One, Becomes Effective Prospecting Tool for Advisors
“It is the most effective advice program ever brought to market and the most effective tool for uncovering outside assets ever created,” Tim McCabe, 401k Tollbox.
401k Toolbox, leading provider of advice to plan participants, announces its 401k Toolbox Retirement Planner – a true advance in advice for 401(k) participants and a new prospecting tool for advisors implementing advice programs for those participants.
401k Toolbox’s advice program for 401(k) plan participants is delivered by qualified financial representatives in one-on-one, brief meetings using the proprietary web-based 401k Toolbox Retirement Planner software.
A short analysis is done during an in-person meeting that shows employees what their future retirement income will look like based on their current savings, their current deferral, and time left to retirement. When the employee is not on track, the advisor can offer one or several ways to improve the retirement savings outcome, to include:
• Change the fund investments, that is, the asset allocation of the portfolios, accepting some risk, perhaps, to allow the portfolio to earn more;
• Increase the amount put aside (deferred) in every paycheck toward 401(k) plan savings, because costs in retirement rarely go down considerably;
• Postpone the age of planned retirement in order to save more, increase the social security benefit, and maintain health benefits with the current employer;
• Look at real numbers of what it is likely to cost to live in retirement and perhaps adjust the post-retirement spending budget by clearly understanding what projected savings, after taxes and inflation, will allow participant to live on and for how long.
• Integrate additional assets into retirement calculations, along with the 401(k) assets to provide a true picture of your financial security
The numbers are compelling and frequently elicit information about outside assets that the employee wants plugged into the calculations so they can get a better picture of their “real” situation beyond their 401(k) savings. Recently, during an retirement planning session with a 401k Toolbox financial advisor, an employee of a large manufacturing company who had $57,000 in his 401(k) plan, volunteered the existence of a $754,000 outside account that he wanted included in the calculations. It is the voluntary information about assets outside the 401(k) plan that provides advisors with information for follow up calls about those assets.
The 401k Toolbox Retirement Planner measures the success of a participant’s savings in the only way that matters – whether he or she is on track for a secure retirement. This service is meaningful to both participants and their plan sponsors, as well as to the advisor who will uncover outside assets. The participant’s report is an accurate evaluation of whether an employee is likely to be prepared for the financial issues of retirement, and completely overshadows the meaningless group statistics (participation rates) that fail to recognize whether an employee can enter retirement with the assets they need to ensure a secure retirement.
“It is the most effective advice program ever brought to market and the most effective tool for uncovering outside assets ever created,” says Tim McCabe, National Sales Manager, 401k Toolbox. “The ability of an advice provider to deliver effective one-on-one advice to participants has changed the way plan participants save for retirement. This service will become the prime differentiator for plan sponsors choosing a plan provider, and rightfully so,” says Scott Randolph, Vice President, 401k Toolbox.
Additional services from 401k Toolbox include “Manage-it-for-me” an option allowing employees to contract with a professional investment management company to handle all decisions about their 401(k) assets through 401k Toolbox’s parent company, PMFM, Inc., an investment management firm located in Watkinsville, Georgia, with nearly $1 billion in assets under management.
Tim McCabe is national sales manager of 401k Toolbox -- Direct: 706-583-5208 - Cell-706 254-4481 – tim.mccabe@401ktoolbox.com, Scott Randolph -- Direct: 706-583-5220 - Cell-706-614-8191 scott.randolph@401ktoolbox.com
PMFM offers separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) managed account and investment advisory services in the nation. As of 7/31/07, PMFM manages $1 billion. The firm has increased its assets under management by nearly 35 percent each year since 2003. The management team at PMFM includes experienced investment advisors with offices in Watkinsville, Georgia. PMFM offers 401k Toolbox, it’s investment advice and managed account service, via vendor partnerships with 401k providers and direct to large plan sponsors.
Strategic Planning Can Help an Advisor Create A More Prosperous Firm By Refining Their Client Niche and Raising Fees
Many financial planners struggle to grow a prosperous practice due to a lack of clarity and focus on how to run their firm. Without a clear sense of direction, they are less likely to achieve their goals, use resources inefficiently, be less profitable, or are more likely to fail.
Financial planners tend to be immersed in the day-to-day activities of their firm and focused solely on their own firm without regard for what is happening in the larger landscape. They may fail to anticipate changes in client priorities and the competitive landscape. As a result, their business practices may lag industry trends.
Strategic planning and management that aligns and focuses the firm’s ongoing activities and resources toward achieving its major strategies can create value and a competitive advantage. It simplifies the business by providing clarity and focus on the right strategic goals, helping the planner make informed decisions and more effective use of resources. A strategic plan increases effectiveness and prosperity by saving time and money, and generating a greater return on capital.
A typical strategic plan includes a vision statement, a mission statement, and a values statement, business objectives, key strategies, and major goals and actions for each of the next 5 years. The plan should evolve over time to reflect changes in the marketplace and changes in the business, with annual reviews and a comprehensive reinvention and newly developed strategies every 5 years.
Financial planners who complete the process often choose to develop a niche market and to increase fees. Doing so allows them to gain a competitive advantage by developing a greater understanding of their clients and their changing priorities, efficiently provide more services geared to their clients’ unique needs, and to command more money for their specialized expertise.
Susan Burns, CFP® is President and Founder of Snug Harbor Financial Planning, Inc. in Newton, MA. She also provides strategic planning and coaching services to financial advisors. 617-663-5760. sburns@snugharborfinancial.com
Non-Financial Issues for Clients Take Careful Thought
Not every client issue relates to investments. Sometimes advisors are required to deal with interpersonal relations not directly related to their training as financial professionals. The non-financial issues require proceeding with caution particularly to avoid giving legal or tax advice if you are not properly licensed in those areas.
For example, a client may come to you about conflicts with a tenant in a rental property. You may have some experience in this area, but you must be careful to limit your discussions so that your input cannot be classified as legal advice. The same would be true in discussing conflicts that occur between your financial advisory clients and their employees as you are unlikely to be expert in labor law or qualified to give advice about labor law.
Another danger area is divorce. It is simple if you just have one partner as a client. You protect their interests and only disclose information as instructed by the client or as required by law. If both parties in a divorce are your clients, you will need to be extremely clear about any numbers either party asks you to develop and to avoid playing the role of a divorce attorney.
Recently, a client's husband updated his will to removed our client, his wife, from it. She had recently raised the issue of getting a divorce with her husband. The client, needed to protect her interests particularly because the issue of her spouse's mental health was part of the scenario. This client needed to speak to both an estate planning attorney (independent of the one her husband used) as well as a divorce attorney to help establish her rights and options.
As advisors, we could have offered more, but because of the legal repercussions of divorce, we limited our services to providing our client with an accurate assessment of her own assets that she could share with an estate planning attorney or her divorce attorney.
There are fine lines that must be drawn by advisors to protect their client relationships and their practices. Personal friendships with clients and a desire to "do more" should not blur these lines.
Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfs@usinternet.com.
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