#1 – Time for a Risk Tolerance Checkup
Before the 2008 market meltdown, you may have thought you had a handle on your investment risk tolerance. Now that you’ve lived through the worst financial storm in recent memory, your views may have changed. For example, you may have a different outlook on how much short-term volatility you can comfortably withstand. Talk to your financial advisor about how your risk tolerance may have changed, and decide how that should impact your investment portfolio.
#2 – Revisit Your Asset Allocation
The financial crisis may have made you question the level of risk you are willing to take. However, don’t let the great recession of 2008/2009 divert you from the fact that every portfolio needs diverse allocations to weather future storms. Your strategic asset allocation should be immutable to changes in the economy and the markets, but not to changes in your life. Some of those changes are gradual, such as aging or deteriorating health, some sudden, such as loss of a job, birth, death, divorce, unexpected dilemmas or windfalls. Talk to your financial planner and make sure that your asset allocation reflects your REAL risk tolerance.
#3 - Strengthen Your Retirement Plan
Although markets have shown signs of recovery, there’s a good chance that your portfolio has not rebounded to levels that will allow you to retire on schedule. The only way to know for sure is to ask your financial advisor to provide you with a lifetime cash flow analysis, to determine if your present and future needs will be met by the assets you have now. Make sure your advisor integrates their investment, insurance and tax advice with your overall financial plan. Now would be a great time to review your life insurance and long term care plan.
#4 – Adjust Your College Savings Plan
Taking an aggressive approach to college planning may have seemed like a good idea four or five years ago, but with portfolios now down substantially, you’ll have to revise your approach. If you have children in their early teens, now is the time to determine if you need to start saving more or invest your college fund differently. Your financial planner will guide you on how to balance the need for growth with a solid risk management strategy.
#5 – Consider a ROTH IRA Conversion
As of 2010, anyone, regardless of income, can convert all or a part of a traditional IRA to a ROTH IRA. A ROTH IRA can be a sensible move for someone who not only wants to see assets grow tax free, but be able to withdraw, or not, at will with no tax consequences. It is also a great vehicle for inheritance since it would provide your heirs a stream of tax-free income. To do the conversion, however, you must pay taxes on the entire amount converted, which can have a hefty price tag. It’s a big decision, and one that should be made together with your financial planner and estate attorney as well as your accountant. Ask to have a retirement income analysis run to help in your decision making.
#6 – Look Ahead on Income Taxes
In 2010 the Bush tax cuts are likely to expire. Although all tax brackets may not be affected, current government policy, such as health care reform, would indicate that people at higher income levels may have a significantly higher tax burden going forward. Talk with your financial advisor and your tax professional to plan income to the best of your ability for 2009 and 2010 — especially if you are self-employed or have executive compensation options to consider.
#7 – Get Ready for Changes in Capital Gains Taxes
The Obama Administration has been clear about its intention to increase capital gains tax rates. With this in mind, you might consider managing your portfolio appropriately. For example, suppose you have a large gain in a stock that you have held for more than a year and were considering selling at some point, and you do not have sufficient capital losses to offset the gain. You should consider selling that stock in 2009, when Federal long-term capital gain tax rates are as low as they are likely to be for some time. Make sure to talk to your tax professional on any state implications.
#8 - Update Your Estate & Gift Planning, Considering Changes in Estate Tax Laws
The estate tax laws are far from static. While the IRS is currently operating under “sunset provisions” that allow an estate to leave $3.5 million to other than a spouse tax free, if Congress does not act, the tax law expires on 1/1/2010 and will revert to the $1 million threshold on January 1, 2011. The best way to protect your children or other heirs from steep estate taxes: review your estate plan annually to ensure your documents incorporate the appropriate provisions to minimize the tax hit under current law if you and/or your spouse die. You should also periodically review your trustees, custodians and executors. Also, as many assets have declined, you may need to adjust the dollar amounts you are leaving to your heirs; you may want to consider replacing those amounts with percentages, so if your estate value goes up or down, it won’t affect how your assets are distributed. Or, you could consider a Wealth Replacement Trust for any short fall in bequests.
#9 – Explore Tax-Friendly Ways to Give
With interest rates low, there are innovative ways to gift assets using Grantor Retained Annuity Trusts (GRATs). GRATs are a financial instrument used to make large financial gifts without paying a US gift tax. There are other things to take advantage of, such as low-interest-rate loans to your children. Work with your financial advisor to see if any of these options or others will work for you and your family. And also consider a little used trust called a Chartable Lead Trust (CLeT) to retain future assets.
#10 – Complete a Due Diligence Review of Your Advisor
Given the financial scandals and market turbulence of the last 18 months, now is a good time to conduct a due diligence review of your advisor. You may think you know your advisor, but what could be damaging are issues you never thought to ask about. Sit down with your advisor and ask:
1) Where your assets are custodied. Be wary of an advisory firm that’s its own custodian, and be sure your assets are housed with an established third party.
2) How have your advisor’s clients done in the last down market. You want to ensure that your advisor is as focused on wealth preservation as it is on wealth accumulation.
Thursday, December 17, 2009
Friday, December 11, 2009
It time to review your Estate Planning Solution
One of the biggest Financial Planning mistakes made is the failure to review the total Financial Plan and parts of it. As tax laws change, markets rise and fall and people just change their mind; failure to review and make necessary changes in any Financial Plan can prove costly.
Here is one of the current reasons to review your Estate or Financial Plan.
In 2010, when the estate tax is scheduled to “go away” at least for one year, it is replaced with an insidious carry-over basis system. Tracking tax-basis information for clients will require careful record keeping and revisions in estate-planning documents. Despite the overall negative impact of the changes, clients can still benefit with proper record keeping.
If a client dies before 2010, the basis of his assets for income tax purposes is stepped up to their value for federal estate tax purposes. These values are usually determined as of the date of your customer's death, but with an option to value assets six months after death. (The six-month option can be used only if it reduces both the gross estate value and estate taxes.)
So if your customer has an account with an aggregate, adjusted cost basis of $100,000, but a federal estate tax value of $1 million, the basis of the assets for heirs becomes $1 million. Heirs like this because their capital gains tax is lessened when they sell the property, and the person from whom they received the property never paid the capital gains tax ahead of death. (But dying is quite a price to pay to avoid capital gains taxes!)
All this changes in 2010. Heirs lose the advantageous step up in cost basis. In the above example, the heirs' cost basis will also be $100,000 — a horrific result.
We had this same system in 1976, and it was repealed in 1978 because it was too complex and unworkable. People died without basis information.
Those negatives aside, here's one benefit to the changes. For certain estates that qualify, the basis of assets passed to a nonspouse can be increased by the executor of an estate by up to $1.3 million (and that number is adjusted for inflation).
Applying this principle to our example would mean the executor could potentially adjust the basis by $1.3 million, so the heir's cost basis of $100,000 can be stepped up to $1 million. You cannot adjust cost basis higher than the value of the assets on the date of death, so there will be circumstances in which the $1.3 million cannot be fully utilized. Conversely, there will be cases in which the $1.3 million will not be enough to avoid the negative impact of the tax law because the value of the assets on the date of death is much higher than $1.3 million.
There is another wrinkle to this. Property left to a surviving spouse in a manner that qualifies (and there are very strict rules) gets a basis adjustment of up to $3 million (separate from the $1.3 million). This means the total adjustments can be $4.3 million. Under the right circumstances, the spouse could be allocated the entire $4.3 million basis adjustment, drastically reducing capital gains taxes.
However, qualifying for this significant basis adjustment could be negated because of current language contained in many estate plans. This can happen especially when gifts are made in trust for spouses, as opposed to outright gifts. In order to secure these increases to cost basis, estate-planning documents must be updated. This is something you can encourage clients to do now with the help of their estate-planning experts. Meanwhile, secure accurate cost-basis information on all your clients' assets. They may need it come 2010.
As with any tax law change; there are solutions and alternatives that are available and can make sense to you.
Remember; "wanting is not a solution".
Here is one of the current reasons to review your Estate or Financial Plan.
In 2010, when the estate tax is scheduled to “go away” at least for one year, it is replaced with an insidious carry-over basis system. Tracking tax-basis information for clients will require careful record keeping and revisions in estate-planning documents. Despite the overall negative impact of the changes, clients can still benefit with proper record keeping.
If a client dies before 2010, the basis of his assets for income tax purposes is stepped up to their value for federal estate tax purposes. These values are usually determined as of the date of your customer's death, but with an option to value assets six months after death. (The six-month option can be used only if it reduces both the gross estate value and estate taxes.)
So if your customer has an account with an aggregate, adjusted cost basis of $100,000, but a federal estate tax value of $1 million, the basis of the assets for heirs becomes $1 million. Heirs like this because their capital gains tax is lessened when they sell the property, and the person from whom they received the property never paid the capital gains tax ahead of death. (But dying is quite a price to pay to avoid capital gains taxes!)
All this changes in 2010. Heirs lose the advantageous step up in cost basis. In the above example, the heirs' cost basis will also be $100,000 — a horrific result.
We had this same system in 1976, and it was repealed in 1978 because it was too complex and unworkable. People died without basis information.
Those negatives aside, here's one benefit to the changes. For certain estates that qualify, the basis of assets passed to a nonspouse can be increased by the executor of an estate by up to $1.3 million (and that number is adjusted for inflation).
Applying this principle to our example would mean the executor could potentially adjust the basis by $1.3 million, so the heir's cost basis of $100,000 can be stepped up to $1 million. You cannot adjust cost basis higher than the value of the assets on the date of death, so there will be circumstances in which the $1.3 million cannot be fully utilized. Conversely, there will be cases in which the $1.3 million will not be enough to avoid the negative impact of the tax law because the value of the assets on the date of death is much higher than $1.3 million.
There is another wrinkle to this. Property left to a surviving spouse in a manner that qualifies (and there are very strict rules) gets a basis adjustment of up to $3 million (separate from the $1.3 million). This means the total adjustments can be $4.3 million. Under the right circumstances, the spouse could be allocated the entire $4.3 million basis adjustment, drastically reducing capital gains taxes.
However, qualifying for this significant basis adjustment could be negated because of current language contained in many estate plans. This can happen especially when gifts are made in trust for spouses, as opposed to outright gifts. In order to secure these increases to cost basis, estate-planning documents must be updated. This is something you can encourage clients to do now with the help of their estate-planning experts. Meanwhile, secure accurate cost-basis information on all your clients' assets. They may need it come 2010.
As with any tax law change; there are solutions and alternatives that are available and can make sense to you.
Remember; "wanting is not a solution".
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