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A Monthly Newsletter Source of Financial Sources • Save Millions in Estate Taxes by Moving Your IRA into a Single Premium Immediate Annuity (SPIA). • What Financial Advisors Need to Know about
Retirement Lifestyle Planning • Recession and Divorce:
The Economy is Making an Already Difficult Decision Even Worse.
• Homeowners Looking to Refinance Now will be Constrained by Lower Home Values Leaving Them with Less Equity. • Variable Annuities with Income Guarantees: More Options Than Previously Thought ---------------------------------------------------------------------------------------------------------------------------- Media Alert:
As the season winds down and wind begins to chill the beaches and ponds, families are faced with who will put the house to sleep for the winter and who will pay for necessary maintenance and capital improvements. As families get larger and more people want access to a resort property, the actual management of the property becomes a problem, yet the owners really want to keep it in the family. Andrew J. Sohn, Sohn & Associates, Boxborough, MA, 978-263-3336,office or 978-501-1335, cell, is available as a source on this topic. He can address:
Please call him
when you plan an article on the issues around legacy planning for resort
property. Andrew J. Sohn, MBA, Sohn & Associates,
works with individuals, families and small business owners, to help them
achieve their financial objectives through a long-term relationship based
on knowledgeable advice. Sohn & Assoiciates offers financial strategies,
products and services -- and delivers them when, where and how you want
them. It's your choice.. The firm has offices in Boxboro, Massachusetts.
Sohn can be reached at ajsohn@gmail.com or 978-263-3336
x202. Save Millions in Estate Taxes by Moving Your IRA into a Single Premium Immediate Annuity (SPIA) A large IRA that is not thoughtfully positioned in a family’s estate planning can have a dramatic impact on total taxes that will be paid. For affluent families, an IRA left to beneficiaries can result in the payment of not only estate taxes, but also federal, and for many, state income taxes. This can amount to an erosion of up to 75% of the IRA account balance or more. There are a few advanced estate planning strategies that can help mitigate these taxes. One little-known strategy can be used to optimize the IRA, rather than shrink it, during the settlement of the estate. For example, if the IRA is shifted into a Single Premium Immediate Annuity (SPIA), assets can produce income yet still be moved out of the taxable estate. Income taxes are still paid, but because the value of the estate has been decreased, the estate taxes on the estate’s assets are lowered, and income taxes are paid during the investor’s life. Consider Ann and Robert Jones , who are both approaching their late 70s. They have an estate of $9 million of which $7.5 million is in real estate and $1.5 million is in an IRA. As their estate is currently structured, and assuming 2011 estate tax law, they would pay an estate tax of $3.5 million and an additional 50% personal income tax on the IRA account. The total shrinkage to their estate from taxes would be $4.25 million, a large part of their legacy. Because the estate and personal income taxes are so large, the family would be required to liquidate the real estate. In today’s commercial real estate market, this liquidation would amount to a fire sale, further reducing the estate left to their children. The family needs to reduce their estate and personal income taxes and most urgently to provide liquidity to preserve the real estate for the family. This can be done by reducing the value of the retirement account by taking $1.1 million from the retirement account to fund an SPIA. For the Jones family given their age and current interest rates, the SPIA generates $93,000 a year for the life of the clients, regardless of how long the last person lives. The Jones' can use this income to gift money to their three children and spouses, who in turn agree to use the gifts to fund a $3,000,000 irrevocable life insurance policy that is held outside their estate. When the second of the Jones' parents dies, payments from the SPIA stop, and the life insurance policy] of $3,000,000 is paid. Assuming the Jones both die in 2011, the estate is $7.9MM[rich] (less the $1.1 million used for the SPIA). The remaining $400,000 in the IRA account is reduced to $200,000 because of the approximate 50% income taxes due, reducing the estate to $7.7MM. Assuming the $1MM per person in estate tax exemptions scheduled for 2011, the taxable estate is $5.7MM. Rounding up the estate tax rate to 50%, $2.85MM is due for estate taxes. The $3MM life insurance is paid, covering the estate tax. Netting all these calculations, the beneficiaries, in this case the children, will share an estate totaling just under $8MM. This is significantly higher than the previous planning where these same beneficiaries would have netted $4.85MM. Like any advanced estate planning, a considerable number of matters would need to be vetted. Similarly, not all types of life insurance and SPIAs have the same features and tax treatment. All these matters need to be carefully considered when exploring this type of planning. For the Jones family, the bottom line is that the family has considerably lowered their tax bite, preserved the real estate, and the legacy to their children is protected. Rich
Arzaga, CFP® CCIM, is Founder and President, Cornerstone Wealth Management,
San Ramon, California, a life planning company. He is also an instructor
in the nationally-recognized financial planning certification program
at U.C. Berkeley. Rich can be reached at rich@cornerstonewmi.com or toll
free (888) 290-9900. Rich Arzaga is a registered representative with,
and securities offered through, LPL Financial Member FINRA/SIPC. What Financial
Advisors Need to Know about Retirement Lifestyle Planning It’s a sure bet that your clients are going to ask what you think about their desire to sell their primary residence and move to something more manageable. They are tired of the lawn, the gutters, and snow, but they do not want to go to Florida. One of the pair has a medical condition that means they need good medical care wherever they move. Their instinct is to go to a residential community where they have no more maintenance, not as much driving, and where they have the possibility of finding a community of like-minded friends. You say, “OK, let’s look at the numbers.” That’s your first instinct. But all residential communities are not alike. Lifestyle possibilities, amenities and services have really improved in the past few years. It’s no longer a resigned “Gee, I guess we have to go,” but more a matter of “I can’t wait until I qualify,” because 24/7 concierge services are much more attractive to the 55+ set. Helping your clients choose a residential community starts with you becoming much more informed. They can be bright, contemporary and very busy places, with many residents working in their apartment/suites, a trend for many Americans. Others go to work from the residences every day. Have you noticed that your clients are keeping jobs longer, or finding new work as they age, either paid or volunteer? The key question you want your clients to ask is whether the community can help them craft the lifestyle they need now. But this is a two-part question: Can their residential community also meet their needs as they age and those needs change, without requiring another physical move? A community providing the widest possible combination of services is called a continuing care residential community and the good ones promote a healthy lifestyle philosophy. There are many communities that have a more limited menu of amenities and services. Costs and fees are only half of the story. The real story is what kind of lifestyle do your clients want and how can that lifestyle be crafted by the service provider they are thinking of choosing? You and they need to understand what kinds of services and amenities are available in the place they intend to move and will those services support them throughout the changes they can expect in the third stage of their lives. Clearly, they don’t want to move often, so you better get your facts straight the first time. Here’s a primer of choices your clients can make when they choose to “right-size” their lives:
Full Service: It’s important to find out what full service means at different communities. It can vary widely.
Assisted Living: The assisted living communities are often heavily medically-oriented and the residents have a certain level of daily living skill issues and need for medical assistance daily and as a result are more expensive than a full service community where you pay for what you need, when you need it, and not for services that you do not need.
Skilled Nursing: As the name implies, a skilled nursing organization is needed by those in short-term rehabilitation from a knee or hip replacement, other surgeries, or those with conditions requiring skilled nursing assistance daily. Most skilled nursing communities have activity directors and the activities are primarily passive, armchair travel, music, games, but few events that get the residents out of the community because of mobility and cognitive status. A community with an excellent aging-in-place philosophy promotes a healthier lifestyle and offers services that do not require a second move later when one partner needs to access necessary medical services. The top choice is a full-service, or continuing care residential community. Such communities provide the complete spectrum of services that meet the needs of residents ages 55+ and older. The services available now were not available when your parents or grandparents needed help. But now, these aging in place lifestyle communities meet the needs of many of your clients and you need to be well-informed about their unique qualities. Kevin Comick is Executive
Director for Seashore Point, Provincetown, MA, a full service, continuing
care residential community, the only such community on the Outer Cape
and the only one located in the nation’s oldest continuous art colony.
Seashore Point is one of five Deaconess Abundant Life Communities, headquartered
in Concord, MA, and is a not-for-profit organization. Comick can be reached
at kcomick@seashorepoint.org or 508-487-0771. Recession and Divorce: The Economy
is Making an Already Difficult Decision Even Worse. With the recession a fact and lingering, some marriages are headed for divorce that were made tolerable by financial convenience or had some rough spots that were easily overlooked during good financial times. There’s an old saying that if you marry for money, you earn every penny. The other side of that coin comes to the surface during an economic downturn. So divorce may be a recession-instigated event. Significantly, recession may influence financial negotiations during divorce in different ways than during an average or good economy. It’s common during most economic climates for spouses to argue about whether investments, real estate, and other assets are fairly valued. But in this economy, many of the assets are not truly in the best of conditions. Retirement Accounts Investment Accounts Real Estate Spousal Loss of Income, Real or Deliberate Inability to Pay Spousal Maintenance, Inability to Enter
Workforce Impact of Recession on Kids
of Divorce There are very few things in life more final than the final decree in a divorce. So it’s important to have a financial settlement that works for both people going forward. It’s difficult to make these decisions during the trauma of divorce during a “normal” economy – whatever that is. Making these life decisions when the future looks bleak for the economy, making decisions in your own miserable situation is even more difficult. The reality is that there is no perfect time financially to end a marriage, but a fair financial conclusion should be pursued – no matter what the economy is. Linda Y. Leitz,
CFP, EA, CDFA is a financial planner in Colorado Springs and the author
of We Need to Talk – Kids & Money After Divorce. linda@lindaleitz.com.
719-260-9800 x6. Homeowners
Looking to Refinance Now will be Constrained by Lower Home Values Leaving
Them with Less Equity. Many people may be disappointed that they can no longer qualify for a mortgage. A combination of lower home values and tighter loan standards makes qualifying more difficult. Many people have looked at their home as if it were an ATM. They would refinance their mortgage periodically to withdraw more equity banking on the home significantly increasing in value each year. People would often use the cash from a refinance to pay for other higher rate debt. Those days are not soon to return as the US housing market remains soft and the supply of existing homes remains high. Homeowners looking to refinance now will be constrained by lower home values leaving them with less equity. Enticed by lower rates, if a person can qualify for a new mortgage, hey may find significant expenses can come along with the closing. Some costs can be rolled into the new mortgage, but these costs will add to the long-term expenses of the loan. Some people may want to look at an adjustable-rate mortgage. These loans can be very risky if interest rates start going higher. The owner may find himself with a much higher monthly payment than anticipated. A fixed-rate loan may have a higher initial rate, but it has the benefit of being consistent over the life of the loan. People should also look at the rates and costs for both a 15-year and a 30-year mortgage. People should not necessarily be in too much of a hurry to get rid of a mortgage. With a 30-year mortgage, you will have lower monthly payments. If you have extra cash flow, you can make additional premium payments. If done regularly, these extra premium payments can cut years off the life of the mortgage. If presented with an opportunity to refinance, don't be seduced by the interest rate offered. Make sure you understand all the costs and all your obligations. Make sure you understand how much money the loan originator is going to get. They have great incentive to close as many loans as possible. It's one of the many reasons the housing market is so weak now. If the new loan doesn't help you with your current cash flow, it may not be a good move. The refinance has to work for you to make it worthwhile. Be skeptical and understand all the numbers. 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. 952-835-9000 - pfshim@usinternet.com. Variable Annuities with Income Guarantees: More Options Than Previously Thought Variable annuities (VA’s) have been around for many years in the financial services industry, yet there are still many misconceptions regarding their structure, usage and benefits in retirement planning. Many financial advisors see them as a benefit in structuring retirement income goals, particularly for clients with higher tax brackets. Variable annuities do not have annual contribution limits as many qualified plans such as 401(k)s and IRAs require. In cases like these, once the client has maxed out their qualified retirement plan contributions, variable annuities may be able to fit the bill, because the higher net worth clients still need tax deferral and need to contribute more savings to help meet their future lifestyle. With variable annuities you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take a qualified withdrawal out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. Variable annuities are long-term investment vehicles so it is important that if you invest in a VA, you hold on to it as a long-term vehicle. Most carriers charge surrender charges in the first several years, so you want to make sure you carefully assess the landscape of products and companies to make sure you are identifying the right fit for the investor’s goals. In this era of disappearing traditional pensions and concern about the financial stability of Social Security, variable annuities may be a good fit to help cover essential expenses in retirement, particular if the investor holds an annuity that provides features such as guaranteed minimum benefits. These types of features come at an additional cost to the investor, so again it is important to understand the client’s goals and make sure they are fully educated on the product they are considering. In terms of estate planning, most variable annuities offer a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments. Your beneficiary could obtain a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount. VA’s aren’t right for those who might have to rely on higher withdraw rates from their various retirement saving accounts to help meet expenses. Above all, variable annuities are an investment vehicle with a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination, and it is up to the investor and their advisor to make investment choices that are appropriate for the client’s age, risk tolerance and financial goals. If an investor does not have accessible lump sums of savings to dedicate to for unforeseen expenses such as health care, long-term care or other hardships, a variable annuity may not be the right fit in their portfolio. In summary, today’s portfolio of variable annuities offer more choices than previously thought. Stuart H. Armstrong, CFP®, CLU®, ChFC®, CLTC is a financial planner with Centinel Financial Group, LLC in Boston, Massachusetts. He is a frequent speaker and author on financial topics and strategies. Stuart can be reached at 509 Columbus Avenue, Boston, MA 02118. 617.424.0005. The material being presented is for informational purposes only. Although many of the topics presented may involve tax, legal, accounting or other issues, neither, Signator Investors, Inc. and its affiliated companies, nor any of its agents, employees or registered representatives are in the business of offering such advice and it may not be relied on for the purpose of avoiding any federal tax penalties. Individuals interested in these topics should consult with their own professional advisers to examine tax, legal, accounting or financial planning aspects of these topics and how it applies to their specific circumstances. The guaranteed product features are dependent upon the claims-paying ability of the issuer. Withdrawals of taxable amounts will be subject to ordinary income tax and, if taken prior to age 59 1/2, a 10% IRS tax penalty may apply. Registered Representative/Securities
and Investment Advisory Services offered through Signator Investors, Inc.,
Member FINRA, SIPC, a Registered Investment Advisor. Centinel Financial
Group, LLC is independent of Signator Investors, Inc. and any affiliated
companies. |
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