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Advice
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Monday, January 07, 2013 23:11
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Tags: charitable giving | client communications | client education | client loyalty | financial planning | goals | legacy | philanthropy I recently and unexpectedly lost a dear friend. Not only was she a wonderful friend, a devoted wife and mother, she was also a “mover & shaker” in the community – in the best possible interpretation of that phrase. Gail Littman was the type of person who could make her visionary ideals become reality.
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Gail began her professional career as a graphic artist. She was shy, but soon realized she needed to push herself in order to accomplish more in her life and the lives of others. Gail became president of her local Jewish temple – and championed that role for 11 years! During her tenure, membership grew over twofold, budgets were balanced and the congregation was nationally recognized for its innovative programming. Yet, working with one local institution proved to be too confining for Gail and thus she moved on.
Gail became the Director of Adult Education at the Agency for Jewish Education in San Diego and later served as Vice President of Endowments and Communications at the Jewish Community Foundation of San Diego. It was in this latter position that Gail found her true passion: building legacies. Now, the concept of legacy giving was not a new one; universities had built legacies for generations. However, legacy building within the Jewish community was not commonplace. Without the requirement for “tithing”, Jewish organizations tended to suffer from funding issues. This often led to the unfortunate choice of either raising costs to members or decreasing services – just to survive! Gail thought beyond the now: if legacy gifts could be generated for endowments, then the capital would exist to fund Jewish organizations over the long term. With that idea in mind, Gail pioneered the Endowment Leadership Institute (ELI) to train organizations on the value of and solicitation of legacy giving.
Success in San Diego County led to requests from communities across the country. Success in communities across the country caught the attention of the Harold Grinspoon Foundation. And so, Gail’s final career achievement was overseeing the Life & Legacy™ program at the Harold Grinspoon Foundation to incentivize communities across the country encouraging organizations to secure legacy gifts and steward donors effectively.
So, how does this career life story impact our role as a wealth advisor? Quite simply, we need to provide advice to our clients on all aspects of their goals. This includes not only building a lifestyle for themselves and providing good futures for their kids, we also must address our clients’ wishes for future generations! Charitable giving planning goes beyond current donations of money or stock shares. Charitable giving through legacy bequests, charitable remainder trusts and other long-term strategies can benefit your clients now and in the future, while providing them with the satisfaction that they are ensuring that the institutions they believe in have the means to carry on their missions.
Helping our clients with a well-rounded financial plan gives them the ability to reach their goals and provides the “glue” to keep our professional relationships strong.
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Proposed Changes To The COLA Index Could Dramatically Impact Some Clients' Retirement Plans |
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Friday, January 04, 2013 22:29
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Tags: cola index | pensions | retirement planning | social security
A proposal to cut Social Security benefits is being kicked around Congress and gaining traction. Of course, Congress is not talking about directly cutting Social Security payments. They are talking about changing the cost of living index used to adjust benefits for inflation. The impact of even a fractional change in the inflaton adjustment can materially reduce Social Security benefits and retirement income of some clients.
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Currently, Social Security benefits increase with the rate of the Cost Of Living Adjustment (COLA) index. The COLA index used for Social Security is equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W) for a specific period. This index represents a basket of goods that only changes periodically.
However, there is discussion about changing the index used to the “chain-weighted” Consumer Price Index (CPI), which supposedly accounts for substitutions consumers make when prices of certain goods rise. Critics of the proposal, which inlcudes AARP, says the proposal to use chained CPI actually underestimates inflation costs for seniors, who spend more on health care than average Americans.
There are many flaws in the chain-weighted CPI methodology and some believe it is just one more way the government has understated true inflation and pushed more people into higher tax brackets. But the purpose of this article is not to dive into that political debate. I want to show how a reduction in the COLA used will impact a client’s retirement plan.
It is generally believed that the chain-weighted CPI runs about .25% below today’s COLA index for social security. Using my Retirement Planner app, here an illustration of the financial impact this would have on a couple’s retirement plan. Let’s start with some assumptions:
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Inflation (CPI and COLA)
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3.00%
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Current Age of Both People
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50
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Age Of Retirement
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65
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Age When Social Security Is Taken
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67
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Age When Both People Have Passed Away
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95
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Social Security at age 65 (combined)
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$45,000 per year
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I ran a scenario to see what happens if the federal government moves the COLA index to the chain-weighted CPI and the COLA index is reduced by 0.25% per year vs. the growth rate in their expenses. In this scenario I assumed their expenses grow by 3% per year and the COLA index grows by 2.75%. I found the following:
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Lifetime Cumulative Benefits
Before COLA Change (In Today's $)
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Lifetime Cumulative Benefits
After COLA Change (In Today's $)
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Difference
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$1,296,123
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$1,202,033
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$94,090
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Combined Average Annual Social
Security Payments Before COLA Change (In Today's $)
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Combined Average Annual Social
Security Payments After COLA Change (In Today's $)
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Difference
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$45,000
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$41,737
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$3,263
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Although the decrease of 0.25% in the COLA index might not sound like much, the compounding of this change over time has dramatic results.
The cumulative Social Security benefits that this couple can expect to receive declines by over $94,000 in today’s dollar terms. Their average annual Social Security benefit will decline by over $3,200 in today’s dollars.
This is a big change for many people and can mean the difference between retiring comfortably or putting off retirement for several years.
It's best to assume that Social Security benefits will be cut in the future, one way or another. I have recommended for some time now that people should be conservative with their assumptions when it comes to valuing lifetime Social Security benefits. This is one more reason why advisors should warn clients not to expect to receive what was promised.
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Urgent 2012 Year-End Tax Planning Opportunity: Charitable Remainder Trusts And 3.8% Surtax |
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Monday, December 03, 2012 18:45
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Tags: charitable giving | estate planning | trusts
The U.S. Treasury Department Friday issued proposed regulations for the 3.8% surtax, creating an urgent and immediate planning opportunity for existing charitable reminder trusts (CRTs).
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Proposed. Regulation Section 1411-3(c)(2) addresses the application of the surtax to charitable remainder trusts. Under Internal Revenue Code Section 664, charitable reminder trusts are taxed under the four-tier accounting rules.
While CRTs are exempt from the new 3.8% surtax, distributions of post-December 31th, 2012 net investment income will be subject to the 3.8% surtax.
In other words,, distributions of income and capital gains realized and recognized before December 31th, 2012 will not be subject to the surtax.
Accordingly, harvesting gains and income in calendar year 2012 will likely reduce the surtax burden on future CRT distributions. Likewise, deferring losses and expenses until 2013 will also reduce the tax burden on distributions.
ACTION STEPs
- Harvest long-term capital gains in 2012
- Accelerate interest, dividends and other income into 2012
- Defer harvesting losses into 2013
- Defer expenses into 2013
EXAMPLE
The Smith CRT has a total value of $2,800,000; including accrued interest of $75,000 and unrecognized gains of $325,000 and unrecognized losses of $100,000. The total of the income, gain and losses totals $500,000 (on a gross basis). By harvesting the gains and income and by deferring losses the trustee shifts gain and income into 2012 and defers substantial losses into 2013. The net savings will be 3.8% of $500,000 for a total saving of $19,000.
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Don't Forget About Donor Advised Funds! |
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Tuesday, November 27, 2012 08:00
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Tags: charitable giving | philanthropy | tax efficient investing | tax planning | Tax-efficient investing | Taxes This year, we’re spending our time either congratulating our clients for sticking it out when the market goes up or reminding our clients to keep a long-term perspective when the market goes down. And, in between all of the hand holding, we’re dealing changing tax laws! So, why would I suggest that this might be the time to consider donor advised funds?
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Our clients are potentially facing higher taxable income this year because of Roth IRA conversions. Even if we’re harvesting tax losses, only $3,000 can be used to offset conversion income. Coming up with additional deductions might be helpful, but might also lead to Alternative Minimum Tax. How can we help our clients lower their tax bills? A donor advised fund (DAF) may be the answer.
A DAF works like a “charitable IRA.” The donor contributes cash or appreciated securities to the fund and receives an immediate charitable deduction equal to the fair market value of the contribution. The fund can invest the proceeds, which can earn income on a tax-free basis. The donor can then recommend grants from the fund to pay out to qualified charitable organizations. The benefits of a DAF are many:
• Immediate tax deduction upon contribution to the DAF
• Tax-free earnings within the DAF
• A pool from which the donor can make contributions currently or in the future
Establishing and making significant DAF contributions this year can offset Roth conversion income. And, better yet, charitable contributions are not subject to Alternative Minimum Tax! If you have a client that normally makes charitable donations and is in a high tax bracket this year (because of Roth conversion income), recommending a DAF could make you a hero! You might even be a super-hero if your client has appreciated securities to donate!
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Advisors And The Fiscal Cliff |
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Wednesday, November 14, 2012 19:27
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It seems that we're hearing about the fiscal cliff every day. Is disaster looming? Should our clients worry? Should we, as advisors, be concerned?
Anything that is covered by the media ad nauseum needs to be addressed. But, first, we need to understand what it is! The fiscal cliff refers to the potentially disastrous impact on the economy due to scheduled tax law changes combined with spending cuts required by the debt ceiling compromise in 2011. Higher taxes and reduced government spending would significantly cut the deficit, but could also cause a major slowdown at a time when the economy is already on shaky ground.
The fiscal cliff can be largely avoided if Congress can agree on limited tax increases and cuts in spending. Based on recent history, it is hard to imagine the two opposing parties agreeing on anything. However, times have changed. Compromise might be possible now that with the election behind us and neither side wants to take blame. However, a bi-partisan solution might be logistically impossible before year end. A retroactive decision occuring early 2013 is more likely.
So, how can we prepare? Our clients are nervous about the stock market and taxes. Communicating with clients is imperative - even if you only repeat the standard "stay the course" advice.
No matter what Congress decides to do, we can count on taxes going up. Congressional inaction will result in the expiration of the Bush tax cuts along with the Obamacare tax increases. Even with a compromise, tax hikes will certainly be a realtime and we can expect ordinary tax rates to increase for the wealthy, higher taxes to apply to investment income and capital gain rates to bump up for all.
The bottom line is that advisors need to pay attention to taxes more than ever. I am not a proponent of accelerating capital gains into 2012 - unless the client has a significant one-time gain, such as the sale of a business. It will be important to harvest tax losses on an ongoing basis, pay attention to location optimization (putting income-producing investments in IRAs and appreciating assets in taxable accounts), choose high cost tax lots on sales, and look at greater allocations to municipal bonds. Although permanent tax reduction is best, postponing taxes is a worthwhile goal. To the extent clients hold appreciated assets at death, the step-up will eliminate any tax.
The complexity of implementing and coordinating all of these strategies when managing hundreds of portfolios is difficult at best. To truly meet the ever-expanding needs of clients, automated portfolio management is essential. Just as CPAs no longer attempt to prepare tax returns by hand, advisors must embrace software. Rebalancing software's ability to rebalance at the household level, minimize numbers of transactions, avoid redemption fees, avoid short-term gains, automatically consider location optimization, and harvest tax losses instantaneously, will result in lower taxes for clients, greater efficiency for advisors and the elimination of trade errors.
Clients are becoming more educated and more demanding. To successfully compete and serve clients well, advisors must make tax considerations a material part of portfolio management.
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