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December 2006 |
Capital Retirement Strategies, Inc.
Specializing in retirement plans
and personal investment management
In This Issue
Happy New Year! Every January gives us a fresh start. For many investors, this is the time of year to re-examine investment strategies, review portfolios and make new plans. As you make your financial "resolutions" for 2007, check out my article Boom or Bust: Top 10 Roadblocks to a Successful Retirement. Our guest contribution this month is from estate planning attorney, David Burbridge. Thanks to Dave for his informative article entitled, "Common Estate Tax Misconceptions." No end-of-the-year investment newsletter would be complete without predictions for the upcoming year. I hope you enjoy my tongue-in-cheek forecast for 2007. If you read something you like, please consider forwarding my newsletter to someone who may also find it of value. Thanks for reading! Best regards,
- The stock market will surely go up- and down. - There will be at least one unforeseen disaster. It could be a hurricane, a political scandal, a financial scam, an overthrown government or terrorist plot. We don’t know when or where, but you can count on it. Markets will drop and panicked investors will sell low. - Financial “experts” will continue to predict the bursting of the real estate bubble. They’ll tell you to look for a 20% drop in real estate prices; meanwhile prices remain steady or increase. - Oil prices will rise. Local television reporters will interview people at gas stations and ask how the prices are affecting their consumer behavior. People will complain about the greed of the oil companies as they speed off in their Expeditions and Range Rovers. AAA will predict that less people will drive over Memorial Day weekend due to the spike in gas prices. Despite this, it will still take 7 hours to drive the Cape. - There will be several new books about becoming a millionaire. They will all become bestsellers, making their authors instant millionaires. - After four years of solid gains in the stock market, scores of investors will fire their brokers and re-open their E-trade accounts. After subscribing to Barron’s and The Wall Street Journal and reading books by Jim Cramer and Peter Lynch, they buy shares of companies they never heard of and don’t know what they do. They somehow manage to lose money. - Two big US companies will merge. Analysts will applaud the move as good for the shareholders. The new CEO promises no job cuts. Once the deal is approved, there is a quiet announcement about “restructuring.” Thousands of employees will lose their jobs and the stock price finishes the year down 28%. - A big pharmaceutical company will announce a clinical breakthrough with one of their new medications that is still in the testing phase. The stock price will shoot up. - A big pharmaceutical company will announce that it is pulling a drug from further development. Its stock price will tank. - A large brokerage firm or mutual fund company will be investigated for allegedly giving kickbacks. Investors are shocked and dismayed. These are the same folks who switch their checking accounts to get the free Bruins tickets. The company is later relieved when they settle out of court with investigators for only $50 million. - Properly diversified long-term investors will sleep easier knowing that they have a solid financial plan in place that weathers market downturns and generates positive gains during bull markets. (This one I’m sure about.)
Common Estate Tax Misconceptions By David J. Burbridge, Attorney At Law There is much talk these days about Estate Tax reform and repeal. While Congress has shelved any meaningful overhaul, there remains two significant misconceptions regarding the current Estate Tax, which Congress passed in 2001. The first of these misconceptions is that the exclusion amounts, i.e. the amount an individual can pass tax free, will continue to grow for years to come. The second is that every married couple will enjoy the benefit of two exclusions. The first of these misconceptions stems from the fact that under the current system, the exclusions do reach significant levels. For years 2006 through 2008 the exclusion is 2 million; reaching 3.5 million dollars in 2009. As such an individual dying in 2009 can pass 3.5 million without incurring any Federal Estate Tax. Further, for individuals dying in 2010 there is NO Estate tax. What people typically fail to realize, however, is that the current law “sunsets” in 2011. The exclusion in essence reverts to 2001 levels. Accordingly, in 2011 the applicable exclusion drops to 1 million and the rate rises to 55%. So while the applicable exclusions do rise significantly, the rise might be short lived. The second misconception centers around the use of the exclusions by married individuals. In the typical scenario, a husband and wife own a significant amount of assets jointly. The assets owned jointly pass automatically to the survivor, and the remaining assets typically pass to the survivor through either a Will or Trust. All property passed to the surviving spouse either through joint ownership or left outright, qualifies for the Unlimited Marital Deduction. The Unlimited Marital Deduction generally allows for the “cancellation” of Estate Taxes on the first spouse’s death. There is a catch, however. At the second passing, the entire value of the first spouse’s property plus the value of the second spouse’s property is subject to taxation. As such, the use of the Unlimited Marital Deduction effectively trumps the individual Estate Tax exclusion for the first spouse. To illustrate, assume H and W have 4 million dollars in property, and that H dies in 2006. H passes all his property to W, some via joint ownership and the remainder through his Will. H utilizes the Unlimited Marital Deduction and no Estate Tax is due on H’s death. W dies in 2008, having maintained the 4 million in property. Because W now owns the property as an individual, under the current system, W can pass 2 million worth of property free of Estate Tax. The remaining 2 million, however, is subject to a tax of 46%, resulting in a tax bill of nearly $920,000. In this scenario, by using the Unlimited Marital Deduction, one spouse, has in essence, forfieted their exclusion. To solve this issue, clients need to ensure that their Estate Plan makes use of both exclusions. Through the use of Revocable Trusts (a commonly used Estate Planning device) and by allocating assets between Trusts, both exclusions can be claimed. In the above scenario, H and W would execute Revocable Trusts. (The trusts would be treated by the IRS as the “alter ego” of both H and W.) H’s Trust would “own” half the marital property, and W’s trust would “own” the other half. If H were to pass in 2006, H’s trust could claim his individual exclusion, and pass 2 million to W free of Estate Tax. When W dies in 2008, her trust could also use her individual exclusion and pass the additional 2 million free of Estate Tax. By constructing Revocable Trusts and by properly allocating assets between them, we have made use of both exclusions and H and W have saved $920,000. In summary, individuals must be aware that the current exclusions do not rise in perpetuity. They must also meet with qualified advisors and attorneys to determine how to most effectively and efficiently plan their Estate. David J. Burbridge is a partner in the Andover, MA law firm of Dalton & Finegold, L.L.P., where he heads the Estate Planning Department. He is a cum laude graduate of the Tulane University School of Law, and previously earned degrees in both Communications and Business at Syracuse University. Dave is a member of WealthCounsel, the National Academy of Elder Law Attorneys, the Boston Estate Planning Counsel, and the Massachusetts Bar Association. He and his wife Ruth have two sons, Aidan and Dylan. Dave can be reached at (978) 470-8400 or dburbridge@dfllp.com .
Boom or Bust: Top 10 Roadblocks to a Successful Retirement (and how to avoid them!) 1. Taxes There are many ways we can reduce our taxes legally. From an investment standpoint, consider contributing to an IRA or 401(k) plan. These help accumulate money for your retirement, while also reducing your taxable income today. Be careful when you sell securities or investment properties. Plan your transactions, so that you realize gains- and losses- when it makes the most sense. And finally, seek professional help. CPAs are not just to prepare and file your tax return. They are paid to give you tax advice and help you reduce your tax liability. 2. Poor investment decisions Whether it’s selling a stock when it’s down because they panic about bad news or buying a stock when it’s “red hot,” most investors tend to do the wrong thing at the wrong time. Discipline is imperative when it comes to investing. While people are, by nature, emotional, your investment decisions need not be. Try to avoid acting on hot “tips” or copying what your neighbor or friend does with his money. 3. Your kids Let’s face it- they’re expensive! Most parents want to help their children as much as they can, but avoid paying for their college education at the expense of your own retirement. They can get scholarships, loans, grants and part-time jobs. No one will be offering you financial aid when you’re ready to retire. 4. Being too aggressive Hopefully we learned our lesson during the last bear market of 2000-02. All stocks and no bonds make for a volatile portfolio. Consider investing part of your account in asset classes that have little or no correlation to the US stock market, such as bonds, real estate, commodities and foreign bonds. 5. Being too conservative While everyone should have an emergency fund in a savings account or certificate of deposit, these are generally not good vehicles for your long-term investments. Stocks should be a part of every portfolio, even if you are in retirement. While stocks can be volatile, these can be offset by more conservative investments. 6. Relying on Uncle Sam Many people are under the false impression that they will be taken care of by government programs when they retire. The truth is, social security was never designed to take care of all our retirement income needs. I encourage clients to think of their retirement plan as a three-legged stool: government programs, company retirement plans and personal savings and investments. All three are necessary for a balanced retirement. 7. Poor health Good health during your golden years will make them much happier- and less expensive. Start by taking care of yourself now. Start exercising, and if you smoke, get help to quit. Everything good should be done in moderation. 8. Too many eggs in one basket A Nobel Prize-winning study found that over 90% of the success or failure of an investment portfolio was determined by asset allocation, rather than other factors such as market timing or security selection. Properly diversified portfolios tend to ride out market downturns more smoothly and put more money in your pocket. 9. Not protecting your assets Even the best-laid plans can go awry when disaster strikes. Consider protecting your income with life and disability insurance. Once you’ve accumulated a sizeable nest egg, you can protect it with long-term care insurance. And don’t overlook wills, trusts and other legal agreements. See a qualified estate planning attorney for help. 10. Procrastination The longer you wait, the harder it is to catch up. These roadblocks won’t go away, but, for many of us, time is on our side. Planning can make all the difference in the world. Do it now!
- The Interface Financial Group recently expanded their North American operations with the addition of a new office in Acton, Massachusetts. The company has been assisting small businesses for over thirty-four years, providing working capital for expansion when traditional bank lending is unavailable. IFG services include invoice discounting, leasing, debt-restructuring, asset-based lending and a marketing service for entrepreneurs seeking "angel" investor capital. The new office is owned and operated by local businessman Mike Kaminski, also of Acton. For more information, please call Mike at 978-264-2993. - Edward Coykendall, the owner of Landscape Artisans, recently received his International Concrete Paver Institute Certification and the MCLP (Massachusetts Certified Landscape Professionals) designation. Congratulations Ed! If you've recently had something great happen in your life or in your career, I'd love to recognize you for it! Send an email to dave@capretirement.com and I'll try to get it in an upcoming issue of Capital Concepts.
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